Overcon dence ?

Many studies have shown that people display an apparent overcon…dence. In particular, it is common for a majority of people to describe themselves as better than average. The literature takes for granted that this better-than-average e¤ect is problematic. We argue, however, that, even accepting these studies completely on their own terms, there is nothing at all wrong with a strict majority of people rating themselves above the median. Keywords: Overcon…dence; Better than Average; Experiments; Irrationality; Signalling Models. Journal of Economic Literature Classi…cation Numbers: D11, D12, D82, D83 When it comes to overcon…dence, there is a consensus on a consensus: writers agree that researchers have found overcon…dence to be common. Typical comments include “Dozens of studies show that people...are generally overcon…dent about their relative skills”(Camerer, 1997), “Perhaps the most robust …nding in the psychology of judgment is that people are overcon…dent” (DeBondt and Thaler, 1995), and “The tendency to evaluate oneself more favorably than others is a staple …nding in social psychology”(Alicke et al. 1995). While the study of overcon…dence originated in the psychology literature, the phenomenon has migrated into the economics and …nance literature, taking its place in the growing list of “irrational”aspects of human attitudes and behaviour that were once on the fringes but are now on the forefront of mainstream thinking.1 We thank Stefano Sacchetto for his research assistance. We also thank Ariel Rubinstein, Rafael Di Tella, Federico Echenique, Emilio Espino, PJ Healy, Richard Lowery, Henry Moon, Don Moore, Nigel Nicholson, Luís Santos-Pinto, and Madan Pilutlla for their comments. yemail: [email protected] 1Papers on overcon…dence in economics include Camerer and Lovallo (1999), Garcia, Sangiorgi and Urosevic (2007), Hoelzl and Rustichini (2005), Koszegi (2006), Menkho¤ et al. (2006), Noth and Weber (2003), Van den Steen (2004), Zabojnik (2004). In …nance, recent (published) papers include Barber and Odean (2001), Biais et al. (2005), Bernardo and Welch (2001), Chuang and Lee (2006), Daniel, Hirshleifer and Subrahmanyam (2001), Kyle and Wang (1997), Malmendier and Tate (2005), Peng and Xiong (2006), Wang (2001).