The Causes of Overconfidence: Belief-bias or Ambiguity Attitude

In many human activities where success depends on own abilities and skills, many people are overconfident. The traditional explanation is that this overconfidence is caused by a bias in beliefs. However, empirical research has shown that decisions under uncertainty depend both on beliefs and ambiguity attitudes. This raises the question what causes overconfidence: belief bias or ambiguity attitude. This paper explores this question. We perform an experiment in which subjects have to bet on their performance in an ability test. We have three treatment groups. The positive information group received positive feedback about their absolute score and their relative rank in the ability test, the negative information group received negative feedback about their score and rank, and the control group received no feedback. We observed that overconfidence was related to a bias in beliefs: subjects in the positive information group had too optimistic beliefs and subjects in the negative information group had too negative beliefs. This held both for score and for rank. The effect of information on ambiguity attitudes was mixed: for score we observed evidence that positive information made subjects less ambiguity averse, but for rank we did not observe this. Interestingly, we found that for an endogenous source of ambiguity (their performance in the ability test), subjects were more ambiguity seeking than what has commonly been observed for exogenous sources of uncertainty.