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Estimating the Relationship between Skill and Overconfidence

Author

Listed:
  • Feld, Jan

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

  • Sauermann, Jan

    (Research Centre for Education and the Labour Market (ROA), Maastricht University. c Swedish Institute for Social Research (SOFI), Stockholm University d Institute for the Study of Labour (IZA), Bonn)

  • De Grip, Andries

    (Research Centre for Education and the Labour Market (ROA), Maastricht University and Institute for the Study of Labour (IZA), Bonn)

Abstract
The Dunning–Kruger effect states that the low skilled are overconfident while the high skilled are more accurate in assessing their skill. In apparent support of this effect, many studies have shown that low performers overestimate their performance while high performers are more accurate. This empirical pattern, however, might be a statistical artifact caused by measurement error. We are the first paper to consistently estimate the Dunning–Kruger effect using an instrumental variable approach. In the context of exam grade predictions of economics students, we use students’ grade point average as an instrument for their skill. Our results support the existence of the Dunning–Kruger effect.

Suggested Citation

  • Feld, Jan & Sauermann, Jan & De Grip, Andries, 2015. "Estimating the Relationship between Skill and Overconfidence," Working Papers in Economics 627, University of Gothenburg, Department of Economics.
    • Handle: RePEc:hhs:gunwpe:0627
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    File URL: http://hdl.handle.net/2077/40536
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    References listed on IDEAS

    as
    1. Krajc, Marian & Ortmann, Andreas, 2008. "Are the unskilled really that unaware? An alternative explanation," Journal of Economic Psychology, Elsevier, vol. 29(5), pages 724-738, November.
    2. Ehrlinger, Joyce & Johnson, Kerri & Banner, Matthew & Dunning, David & Kruger, Justin, 2008. "Why the unskilled are unaware: Further explorations of (absent) self-insight among the incompetent," Organizational Behavior and Human Decision Processes, Elsevier, vol. 105(1), pages 98-121, January.
    3. Jan Feld & Nicolás Salamanca & Daniel S. Hamermesh, 2016. "Endophilia or Exophobia: Beyond Discrimination," Economic Journal, Royal Economic Society, vol. 126(594), pages 1503-1527, August.
    4. Jan Feld & Ulf Zölitz, 2017. "Understanding Peer Effects: On the Nature, Estimation, and Channels of Peer Effects," Journal of Labor Economics, University of Chicago Press, vol. 35(2), pages 387-428.
    5. Feld, Jan & Sauermann, Jan & de Grip, Andries, 2017. "Estimating the relationship between skill and overconfidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 68(C), pages 18-24.
    6. Schlösser, Thomas & Dunning, David & Johnson, Kerri L. & Kruger, Justin, 2013. "How unaware are the unskilled? Empirical tests of the “signal extraction” counterexplanation for the Dunning–Kruger effect in self-evaluation of performance," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 85-100.
    7. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
    8. Ryvkin, Dmitry & Krajč, Marian & Ortmann, Andreas, 2012. "Are the unskilled doomed to remain unaware?," Journal of Economic Psychology, Elsevier, vol. 33(5), pages 1012-1031.
    9. Marian Krajc, 2008. "Are the Unskilled Really That Unaware? Understanding Seemingly Biased Self-Assessments," CERGE-EI Working Papers wp373, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    10. Dan Lovallo & Colin Camerer, 1999. "Overconfidence and Excess Entry: An Experimental Approach," American Economic Review, American Economic Association, vol. 89(1), pages 306-318, March.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Miklánek, Tomáš & Zajíček, Miroslav, 2020. "Personal traits and trading in an experimental asset market," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 86(C).
    2. Feld, Jan & Sauermann, Jan & de Grip, Andries, 2017. "Estimating the relationship between skill and overconfidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 68(C), pages 18-24.
    3. Yomna Atef Ahmed & ElHassan Anas ElSabry, 2024. "Evaluating the Performance of Foresight Studies: Evidence from the Egyptian Energy Sector," Foresight and STI Governance (Foresight-Russia till No. 3/2015), National Research University Higher School of Economics, vol. 18(1), pages 69-79.
    4. Gignac, Gilles E., 2024. "Rethinking the Dunning-Kruger effect: Negligible influence on a limited segment of the population," Intelligence, Elsevier, vol. 104(C).
    5. Kovacs, Roxanne J. & Lagarde, Mylene & Cairns, John, 2020. "Overconfident health workers provide lower quality healthcare," Journal of Economic Psychology, Elsevier, vol. 76(C).
    6. Gerardo Sabater-Grande & Nikolaos Georgantzís & Noemí Herranz-Zarzoso, 2023. "Goals and guesses as reference points: a field experiment on student performance," Theory and Decision, Springer, vol. 94(2), pages 249-274, February.
    7. Feld, Jan & Sauermann, Jan & de Grip, Andries, 2017. "Estimating the relationship between skill and overconfidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 68(C), pages 18-24.
    8. Yao, Zheying & Rabbani, Abed G., 2021. "Association between investment risk tolerance and portfolio risk: The role of confidence level," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    9. Bonaccorsi, Andrea & Apreda, Riccardo & Fantoni, Gualtiero, 2020. "Expert biases in technology foresight. Why they are a problem and how to mitigate them," Technological Forecasting and Social Change, Elsevier, vol. 151(C).
    10. Ramzi Boussaidi, 2022. "Implications of the overconfidence bias in presence of private information: Evidence from MENA stock markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 3660-3678, July.
    11. Noemí Herranz-Zarzoso & Gerardo Sabater-Grande, 2020. "Monetary incentives and overconfidence in academic performance: An experimental study," Working Papers 2020/14, Economics Department, Universitat Jaume I, Castellón (Spain).
    12. Wookjae Heo & Abed G. Rabbani & Jae Min Lee, 2021. "Mediation between financial risk tolerance and equity ownership: assessing the role of financial knowledge underconfidence," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 26(3), pages 169-180, September.

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    More about this item

    Keywords

    Overconfidence; judgment error; measurement error; instrumental variable;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions

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