Do you suffer from the Overconfidence Effect?
Why you systematically overestimate your knowledge and abilities.
What is the overconfidence effect?
According to a Psychology Today article written by Rolf Dobelli MBA, Ph.D. and author of The Art of Thinking Clearly, the overconfidence effect does not deal with whether single estimates are correct or not. But rather, it measures the difference between what people really know and what they think they know.
The thing that is most surprising is that experts suffer even more from the overconfidence effect than laypeople do. According to Dobelli, if an economics professor is asked to forecast oil prices in five years, his projection will be as wide as a zookeeper’s projection. However, the professor will offer certainty with his projection.
Who suffers from the overconfidence effect?
Dobelli writes that in a survey, 93% of U.S students estimate that they are “above average” drivers. In another study, 68% of the University of Nebraska faculty rated themselves in the top 25% for their teaching ability. In the entrepreneurial world, business owners who wished to marry one day, also deemed themselves to be different. According to Dobelli, “They believed they can beat the odds.”
Interestingly enough, research has shown that entrepreneurial activity would be a lot lower if the overconfidence effect did not exist. Furthermore Dobelli explains, “For example, every restaurateur hopes to establish the next Michelin-starred restaurant. Even though statistics show that most close their doors after just three years. The return on investment in the restaurant business lies chronically below zero.”
Why is the overconfidence effect so prevalent?
Dobelli says, what makes the overconfidence effect so prevalent and its effects so surprising is that, “It is not driven by incentives; it is raw and innate. And it’s not counterbalanced by the opposite effect of under-confidence, which doesn’t exist.”
This might not be surprising to some, but according to Dobelli, the overconfidence effect is more pronounced in men. Women tend not to overestimate their knowledge and abilities as much. Something that could be even more troubling Dobelli says, is “optimists are not the only victims of the overconfidence effect. Even the self-proclaimed pessimists overrate themselves — just less extremely.”
How to handle overconfidence?
Firstly and most importantly, according to Dobelli, be aware that you tend to overestimate your knowledge. Secondly, be skeptical of predictions, especially if they come from so-called experts. Lastly, with any plan, favor the pessimistic scenario. This way you have a chance of judging the situation a little bit more realistically.
Tackling MBA applications for the typical type-A business-school hopeful seems easy. Just be careful you don’t make the greatest mistake - overconfidence. It can kill your MBA application.
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