David R. Henderson  

Overconfidence: Category Missing?

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Timothy Taylor, over at Conversable Economist, has a post today titled "Overconfidence: Ancient Evil." It's about a 3-article symposium in the latest issue of the Journal of Economic Perspectives. In their introduction to the section, he and his co-author, Ulrike Malmendier start with a quote from Adam Smith about overconfidence:

The over-weening conceit which the greater part of men have of their own abilities, is an ancient evil remarked by the philosophers and moralists of all ages.

He then gives a brief summary of each of the three papers. They deal with overconfident consumers, overconfident CEOs, and overconfident investors.

Can you think of a fourth category that's missing, one that is probably more important than any of the other three and possibly more important than all of the other three combined? I can.

Here's Adam Smith on that fourth category, in The Theory of Moral Sentiments:

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

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COMMENTS (2 to date)
Alexandre Padilla writes:

The short answer is policy makers' overconfidence. The literature on paternalism or libertarian paternalism illustrates this point.

Fred Anderson writes:

I wonder if this isn't an occupational hazard of being in politics.

Many who enter politics hope to accomplish something useful -- to solve the world's problems (or at least their school district's problems). But this hope is likely facilitated by under-estimating the problems and over-estimating one's ability to solve them. Those without this proclivity would be less likely to enter this field.

Over time, if they stay in politics, they may learn that the problems were tougher than they looked. But they also learn that voters want optimistic leaders -- people who will promise them brighter futures (i.e., problems solved) and who seem confident that they can engineer such futures. Such self-confidence is probably easier to display if you believe in it.

That is, voters may require that -- for a politician to survive -- he/she must at least appear self-confident. And, as a practical matter, to appear so, you probably must actually be unrealistically overconfident.

The young politician who learns that the problems are tougher than they looked can either;
(1) stop trying to solve them (and drop out of politics), or.
(2) keep it a secret and pretend to a self-confidence he/she doesn't actually feel. But if you waiver in pulling off that act, the voters will likely elect someone else.

Of course, it's even easier to be foolishly self-confident if you're a fool -- unable to comprehend failure even when it slaps you in the face. Or you're vain enough that you never see your mistakes (because you think you couldn't make one and you don't waste your time looking for the impossible). You will likely be aided in your cluelessness if you have surrounded yourself with sycophants and yes-men (and women).

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