Two Flawless Articles on Overconfidence
Well, they’re very good, anyway. The first is a 1999 gem by Philip Tetlock: “Theory-Driven Reasoning About Plausible Pasts and Probable Futures in World Politics: Are We Prisoners of Our Preconceptions?” (American Journal of Political Science 43(2): 335-66). The second is a 2005 piece by Erik Hoelzl and Aldo Rustichini: “Overconfident: Do You Put Your Money on It?” (Economic Journal 115: 305-318).
Tetlock’s piece explores the overconfidence of foreign policy experts on both historical “what-ifs” (“Would the Bolshevik takeover have been averted if World War I had not happened?”) and actual predictions (“The Soviet Union will collapse by 1993.”) The highlights:
One thing Tetlock didn’t do was make his experts put their money where their mouth is. Hoelzl and Rustichini’s paper strongly suggests that he should have. H-R re-ran a fairly standard experiment on overconfidence. Ordinary subjects took vocabulary tests (which could be easy or hard). They then got to vote for one of two options:
Option #1: You win if you are in the top 50% of distribution.
Option #2: You win with 50% probability regardless of your performance.
Notice: Option #1 must be worse for half the subjects!
In one version of the experiment, subjects were asked to imagine there was a $10 reward. In the other version, there actually was a $10 reward.
The big result: “Choice behaviour changes from overconfidence to underconfidence when the task changes from easy and familiar to non-familiar. This effect is significant when monetary payments are at stake and weak when they are not.” Percentage of subjects who voted for Option #1:
Richard Thaler and other behavioral economists have argued quite aggressively that stronger incentives do not make people back away from their irrational beliefs. Hoelzl and Rustichini is a nice counter-example. In fact, they seem to show that people over-shoot! And at risk of sounding over-confident, if Tetlock’s experts had to bet real money on their predictions, I’m sure they too would have moderated their positions.
Oh wait, you want me to bet actual money on that? Then I’ll give it 75%.