Bluffing promotes overconfidence on social networks.
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ABSTRACT:
PROVIDER: S-EPMC4074791 | BioStudies | 2014-01-01
REPOSITORIES: biostudies
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Project description:Resources are often limited, therefore it is essential how convincingly competitors present their claims for them. Beside a player's natural capacity, here overconfidence and bluffing may also play a decisive role and influence how to share a restricted reward. While bluff provides clear, but risky advantage, overconfidence, as a form of self-deception, could be harmful to its user. Still, it is a long-standing puzzle why these potentially damaging biases are maintained and evolving to a high level in the human society. Within the framework of evolutionary game theory, we present a simple version of resource competition game in which the coevolution of overconfidence and bluffing is fundamental, which is capable to explain their prevalence in structured populations. Interestingly, bluffing seems apt to evolve to higher level than corresponding overconfidence and in general the former is less resistant to punishment than the latter. Moreover, topological feature of the social network plays an intricate role in the spreading of overconfidence and bluffing. While the heterogeneity of interactions facilitates bluffing, it also increases efficiency of adequate punishment against overconfident behavior. Furthermore, increasing the degree of homogeneous networks can trigger similar effect. We also observed that having high real capability may accommodate both bluffing ability and overconfidence simultaneously.
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Project description:Overconfidence has long been considered a cause of war. Like other decision-making biases, overconfidence seems detrimental because it increases the frequency and costs of fighting. However, evolutionary biologists have proposed that overconfidence may also confer adaptive advantages: increasing ambition, resolve, persistence, bluffing opponents, and winning net payoffs from risky opportunities despite occasional failures. We report the results of an agent-based model of inter-state conflict, which allows us to evaluate the performance of different strategies in competition with each other. Counter-intuitively, we find that overconfident states predominate in the population at the expense of unbiased or underconfident states. Overconfident states win because: (1) they are more likely to accumulate resources from frequent attempts at conquest; (2) they are more likely to gang up on weak states, forcing victims to split their defences; and (3) when the decision threshold for attacking requires an overwhelming asymmetry of power, unbiased and underconfident states shirk many conflicts they are actually likely to win. These "adaptive advantages" of overconfidence may, via selection effects, learning, or evolved psychology, have spread and become entrenched among modern states, organizations and decision-makers. This would help to explain the frequent association of overconfidence and war, even if it no longer brings benefits today.
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Project description:<h4>Objective</h4>This study aims to connect two strands of the psychology and economics literature, i.e., behavioural finance and agent-based macroeconomics, to assess the impact of managerial overconfidence at the micro and macro levels of the economy as a whole.<h4>Method</h4>We build a macroeconomic stock-flow consistent agent-based model that is calibrated for the specific case of Poland to explore whether the overconfidence of top corporate managers in the context of their initial capital structure decisions is detrimental for the firms being managed in this way, the financial market dynamics, and the selected macroeconomic indicators. We model heterogeneous firms with different capital structure decision criteria depending on their degree of managerial overconfidence. Our model also includes a complete macroeconomic closure with aggregated households, capital producers, banking, and a public sector.<h4>Results</h4>We find that firms with overconfident managers outperform in terms of investment and size but are also more fragile, thereby making them more likely to default. Finally, we run policy shocks and show that while investors' flight to liquidity creates financial turmoil and increases the probability of default.<h4>Conclusions</h4>This paper contributes to the knowledge base by linking behavioural corporate finance and agent-based macroeconomics. In general, the excess overconfidence on the micro level, either an increase in the proportion of overconfident firms or a higher degree of overconfidence among managers, has a strong destabilizing impact on the economy as a whole on the macro level.
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Project description:Confidence and overconfidence are essential aspects of human nature, but measuring (over)confidence is not easy. Our approach is to consider students' forecasts of their exam grades. Part of a student's grade expectation is based on the student's previous academic achievements; what remains can be interpreted as (over)confidence. Our results are based on a sample of about 500 second-year undergraduate students enrolled in a statistics course in Moscow. The course contains three exams and each student produces a forecast for each of the three exams. Our models allow us to estimate overconfidence quantitatively. Using these models we find that students' expectations are not rational and that most students are overconfident, in agreement with the general literature. Less obvious is that overconfidence helps: given the same academic achievement students with larger confidence obtain higher exam grades. Female students are less overconfident than male students, their forecasts are more rational, and they are also faster learners in the sense that they adjust their expectations more rapidly.
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