An Experimental Analysis of Over-Confidence

Abstract

The purpose of this paper is to experimentally demonstrate the existence of the bias of over-confidence as a human psychological bias. This bias was measured by three methods: the estimation interval, the frequency estimation method and the method of question with two answer choices. The estimation interval method finds a very wide bias compared to the other two methods, but overconfidence persists in the other two methods at lower levels. In the first experiment, monetary incentives have exacerbated the over-confidence because of the given compensation. This system has demonstrated that there is a strong link between over-confidence and risk taking. The second experiment that used the method of question with two answer choices was given a different pay system and it was expected that overconfidence will be reduced by monetary incentives but the results show that the bias is not significantly reduced by these new monetary incentives. Similarly, the iteration that was made during the first experiment did not significantly reduce the bias.