Article: Does overconfidence lead to poor decisions? A comparison of decision making and judgment under uncertainty Journal: Journal of Business and Management (JBM) 2003 Vol.9 No.1 pp.33 - 43 Abstract: Two within-subject studies of business executives indicate that overconfidence in judgment is reduced when actual decisions are made. Subjects projected quarterly earnings for 50 firms based on reported earnings from the previous 12 quarters. They stated their confidence in forecasts, were given a $10 allocation and were allowed to invest in any, all or none of their forecasts. Subjects chose to act on a relatively small portion of their forecasts but were more accurate and better calibrated when making investment decisions than when making forecasts. The relatively more accurate subjects made more investment decisions and riskier decisions than the relatively less accurate subjects. This suggests that subjects had a sense of whether their knowledge was appropriate for decision making, and acted accordingly. Improved calibration for decision making (investments) compared to judgments (forecasts) appears to have been the result of an additional evaluation stage which occurred between making a forecast and acting upon it. Most subjects tended to 'think twice' before acting, which may have lead to more thorough information processing and improved calibration. Inderscience Publishers - linking academia, business and industry through research

Title: Does overconfidence lead to poor decisions? A comparison of decision making and judgment under uncertainty

Authors: Ed Bukszar

Addresses: Author address listing can be found in the "About the Authors" section at the end of the article.

Abstract: Two within-subject studies of business executives indicate that overconfidence in judgment is reduced when actual decisions are made. Subjects projected quarterly earnings for 50 firms based on reported earnings from the previous 12 quarters. They stated their confidence in forecasts, were given a $10 allocation and were allowed to invest in any, all or none of their forecasts. Subjects chose to act on a relatively small portion of their forecasts but were more accurate and better calibrated when making investment decisions than when making forecasts. The relatively more accurate subjects made more investment decisions and riskier decisions than the relatively less accurate subjects. This suggests that subjects had a sense of whether their knowledge was appropriate for decision making, and acted accordingly. Improved calibration for decision making (investments) compared to judgments (forecasts) appears to have been the result of an additional evaluation stage which occurred between making a forecast and acting upon it. Most subjects tended to 'think twice' before acting, which may have lead to more thorough information processing and improved calibration.

Keywords: Overconfidence; decision making; judgment; uncertainty; calibration.

DOI: 10.1504/JBM.2003.141099

Journal of Business and Management, 2003 Vol.9 No.1, pp.33 - 43

Published online: 05 Sep 2024 *

Title: Does overconfidence lead to poor decisions? A comparison of decision making and judgment under uncertainty

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