This work examines the relationship between education and excessive confidence in situations of uncertainty. For this purpose, a questionnaire with 10 pseudo general knowledge questions was designed, whereby their degree of difficulty exceeds the knowledge of an average student by far. It was investigated whether subjects (N = 535) would acknowledge this condition and its associated nescience. If that is the case, they will answer the 10 questions within an extremely wide confidence interval in order to meet the predefined 90% accuracy requirement. The focus of investigation was in Southern Germany, as the school system regularly receives top marks in national educational rankings. The data analysis resulted in the stochastic proof that there are significant differences between the various educational institutions in accuracy and overconfidence.
In addition to the empirical study the paper defines the distortion of judgment and identifies its relevant factors. It gives a detailed explanation of the German education system and states the criticism of the concept of overconfidence. The paper concludes with a recommendation for action and ventures a look ahead.
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Diese Arbeit untersucht den Zusammenhang zwischen Bildung und übermäßigem Selbstvertrauen in Situationen von Ungewissheit. Dazu wurde ein Fragebogen mit 10 Quasi-Allgemeinwissensfragen entwickelt, wobei deren Schwierigkeitsgrad das Wissen eines durchschnittlichen Schülers bei Weitem übersteigt. Es wurde untersucht, ob die Probanden (N=535) diesen Zustand und ihre damit verbundene Unwissenheit anerkennen und zur Beantwortung der 10 Fragen, innerhalb eines vorgegebenen 90% Konfidenzintervalls, jenen Vertrauensbereich möglichst weit wählen, um die Anforderungen zu erfüllen. Der Fokus der Untersuchung lag in Süddeutschland, da das dortige Schulsystem regelmäßig Bestnoten im nationalen Bildungsvergleich erhält. Die Datenauswertung resultiert in der Erbringung des stochastischen Beweises, dass es zwischen den Bildungseinrichtungen einen signifikanten Unterschied beim Schätzverhalten und der damit verbundenen Vertrauens-Hypertrophie gibt.
Neben der empirischen Untersuchung definiert die Arbeit den Begriff des übermäßigen Selbstvertrauens und benennt die relevanten Einflussfaktoren. Das deutsche Bildungssystem wird dabei ebenso beleuchtet, wie die Kritik am Konzept der Heuristik. Die Abhandlung endet mit einer Handlungsempfehlung und einem Ausblick in die Zukunft.
I Table of Contents
II List of Graphs
III Abbreviations
IV Abstract
1 Overconfidence: The Harmful Optimism
1.1 Background and Motivation
1.2 Definition: Overconfidence
1.2.1 Unrealistic Optimism
1.2.2 Better-Than-Average Effect
1.2.3 Illusion of Control
1.2.4 Illusion of Knowledge
1.2.5 Self-serving bias
1.2.6 Summary
1.3 Structure
2 Methodology
3 The German Education System
3.1 Federal Differences
3.2 Influences of the Bologna Process
4 Review of Literature
4.1 Confounders of Overconfidence
4.1.1 Gender
4.1.2 Age
4.1.3 Mental Health
4.1.4 Euphoria
4.1.5 Education
4.2 Criticism
5 Empirical Research
5.1 Hypothesis
5.2 Process of Primary Data Collection
5.3 Findings
5.4 Interpretation
6 Conclusion
V Bibliography
VI Appendix. A
II List of Graphs
Figure 1: Five Factors of Overconfidence
Figure 2: German Education System
Figure 3: Bavarian Education System
Figure 4: Development of Erasmus Students per Year
III Abbreviations
illustration not visible in this excerpt
IV Abstract
FH Kufstein
Degree program: International Business and Management FT-10
Overconfidence – A Matter of Education?
Student: Dominik Piehlmaier
Disclaimer: In the interest of a reader-friendly flow of text, gender-neutral terminology has been used wherever possible. If a non-neutral form appears, it automatically refers to both genders.
This work examines the relationship between education and excessive confidence in situations of uncertainty. For this purpose, a questionnaire with 10 pseudo general knowledge questions was designed, whereby their degree of difficulty exceeds the knowledge of an average student by far. It was investigated whether subjects (N = 535) would acknowledge this condition and its associated nescience. If that is the case, they will answer the 10 questions within an extremely wide confidence interval in order to meet the predefined 90% accuracy requirement. The focus of investigation was in Southern Germany, as the school system regularly receives top marks in national educational rankings. The data analysis resulted in the stochastic proof that there are significant differences between the various educational institutions in accuracy and overconfidence.
In addition to the empirical study the paper defines the distortion of judgment and identifies its relevant factors. It gives a detailed explanation of the German education system and states the criticism of the concept of overconfidence. The paper concludes with a recommendation for action and ventures a look ahead.
Kufstein, July 10, 2012
FH Kufstein
Studiengang: Internationale Wirtschaft und Management VZ-10
Ist Vertrauens-Hypertrophie bildungsabhängig?
Student: Dominik Piehlmaier
Hinweis: Die in dieser Arbeit gewählte männliche Form bezieht sich gleichermaßen auf weibliche Personen. Eine Doppelbezeichnung wurde ausschließlich aufgrund einfacherer Lesbarkeit nicht gewählt.
Diese Arbeit untersucht den Zusammenhang zwischen Bildung und übermäßigem Selbstvertrauen in Situationen von Ungewissheit. Dazu wurde ein Fragebogen mit 10 Quasi-Allgemeinwissensfragen entwickelt, wobei deren Schwierigkeitsgrad das Wissen eines durchschnittlichen Schülers bei Weitem übersteigt. Es wurde untersucht, ob die Probanden (N=535) diesen Zustand und ihre damit verbundene Unwissenheit anerkennen und zur Beantwortung der 10 Fragen, innerhalb eines vorgegebenen 90% Konfidenzintervalls, jenen Vertrauensbereich möglichst weit wählen, um die Anforderungen zu erfüllen. Der Fokus der Untersuchung lag in Süddeutschland, da das dortige Schulsystem regelmäßig Bestnoten im nationalen Bildungsvergleich erhält. Die Datenauswertung resultiert in der Erbringung des stochastischen Beweises, dass es zwischen den Bildungseinrichtungen einen signifikanten Unterschied beim Schätzverhalten und der damit verbundenen Vertrauens-Hypertrophie gibt.
Neben der empirischen Untersuchung definiert die Arbeit den Begriff des übermäßigen Selbstvertrauens und benennt die relevanten Einflussfaktoren. Das deutsche Bildungssystem wird dabei ebenso beleuchtet, wie die Kritik am Konzept der Heuristik. Die Abhandlung endet mit einer Handlungsempfehlung und einem Ausblick in die Zukunft.
Kufstein, 10. Juli 2012
1 Overconfidence: The Harmful Optimism
The ability to expect a rosy future and solidly trust in our skills empower us to create monuments of human capability and push mankind toward unexpected technological findings. Marie Curie and her husband Pierre found the fission products radium and polonium and developed the first methods to isolate them in order to use both for further research (Nobel Lectures, 1967). The Chinese Ming Empire finished the Great Wall of China, the biggest man-made structure ever built, in 1620 (UNESCO World Heritage Centre, 2011). Every year millions of people start their own business all around the world; others get married and start a family. Every person who makes such a decision does it because of their faith in their own actions. It is, however, uncertain whether Marie Curie would have continued her intensive research with radium if she had known that radiation causes severe illnesses. It can be seen as certain that the Ming Emperors would not have reconstructed the Great Wall if they had been informed that it would not protect them from being replaced by the Manchurian Qing Dynasty.[1]
This is not only true for historical events, but also for modern decision making. If US Americans decide to get married, most do not take into account that they could be the one out of three couples that divorce (U.S. Census Bureau, 2012). In 1993, when the U.S. divorce rate was close to 50%, a study tested whether people are aware of these numbers before they tied the knot. Although the subjects knew the facts, not one of them thought that this would happen to their relationship (Baker and Emery, 1993). This was unexplainably optimistic and on average not true for almost every second couple. Startup owners tend to share the same view of their business ideas. In a well-known survey, entrepreneurs rated their expected business success. 81% of the 2,994 participating founders thought that their chances of success were 70% or higher. Every third person stated that his chances were not less than 100% (Cooper et al., 1988). These expectations seem unrealistically high compared to research showing a different picture. 34% of all U.S. firms do not get through the first year, and half of the companies go out of business before the end of the second year. 60% do not survive the third year (Wiklund, 2006). A HBS article paints an even worse scenario: 30 to 40% of investors lose most or all of their assets; 70 to 80% of all startups do not achieve the expected return on investment and 90 to 95 of them fall short of meeting their declared goal. In other words “failure is the norm” (Nobel, 2011).
This might be one of the best examples of the discrepancy between unrealistic optimism and reality. The too rosy estimation of their own abilities and the business environment foils many startup founders. At the same time, some companies survive and contribute to society for exactly the same reasons. In that sense, overconfidence is often but not always harmful. There are other examples of this psychological phenomenon showing its destructive side. Dozens of nuclear power plants (NPPs) were built in earthquake risk areas especially in Japan, India and the State of California. In the aftermath of the 2004 Tsunami which destroyed huge coastal areas in Indonesia, Sri Lanka, India and Thailand, the Japanese Nuclear and Industrial Safety Agency (NISA) launched a study to assess the risk of a tsunami for Japanese NPPs. There was a special interest in those plants which face the Pacific without any protective islands off the coast. Two years later the results suggested that “'there is a possibility that power equipment could lose functions if a 14-meter-high tsunami hits the Fukushima plant, with seawater flowing inside the (reactor) turbine buildings” (Kyodo News, 2012). NISA officials saw no need of action “because a total power failure was not seen as an imminent threat” (Sunaoshi et al., 2012). On March 11, 2011 Japan was hit by a magnitude 9 earthquake, which was followed by several tsunamis with a maximum height of 38.9 meters (IAEA Expert Mission, 2011). 20,896 lives were lost (USGS, 2012). The combined catastrophe led to a long-lasting, complete power loss at the Fukushima Daiichi nuclear station which resulted in a meltdown at three of six reactor units as well as a hydrogen explosion at reactor nos. 1, 3 and 4 (Masaya, 2012). This was the second INES 7 accident in history.[2]
1.1 Background and Motivation
The Fukushima meltdown is one of many disastrous events that can be attributed to unexplainably optimistic forecasts. In April 2010, the petrol company BP had no effective method to stop the oil leak caused by the explosion of their offshore drilling platform Deepwater Horizon in the Gulf of Mexico. There was no worst-case scenario plan because it was considered costly and unlikely to happen (Steinberg, 2011). Similar behavior can be seen on a number of other occasions such as the Bhopal disaster in 1984.[3] The public seems to be aware of the human misjudgment but fails to prevent it. One reason might be that, although scientists have contributed a lot to understanding the nature of overconfidence, there are still some “blank spots on the map”. The interdisciplinary field of behavioral economics is younger than the established neo-classical approach and requires further long-term investigation to understand all aspects and conditions of irrationality in economical behavior. This research examines whether there is a statistically provable connection between the level of overconfidence and the educational achievement in a certain school system. Due to the given framework of this paper, it was not possible to extend the research to several international systems. Nevertheless, the outcome should help prevent the harmful aspects of overconfidence. It aims to support the development of a suitable strategy against future misjudgments.
Before continuing with an explanation of the research methodology, a detailed definition of overconfidence is needed. Due to the importance of this word, the terminology discussion is part of the first chapter.
1.2 Definition: Overconfidence
There are several definitions of overconfidence in the standard literature. They all follow the basic idea of irrational behavior and its roots in psychology. With even the first research in this field, scholars have been able to prove irrationality in decision making. In an experiment the test subjects were given two scenarios (A and B) each with two choices:
(A) Would you prefer $ 100 today or $ 110 tomorrow?
(B) Would you prefer $ 100 thirty days from now or $ 110 thirty-one days from now?
Many subjects gave different answers for A and B (Diamond and Vartiainen, 2007). This shows an inconsistent and irrational decision-making process and conflicts with the neo-classical view and the idea of rational decision makers, who should always behave in their best interest given all relevant information and their own preferences.[4] In that experiment, all subjects should have chosen the same answer for A and B. A completely rational person would have calculated the present value (PV) for both scenarios at the exact same discount rate.[5]
As mentioned before, overconfidence is one factor that can explain such irrational behavior. The following terminology is designed to establish a suitable hypothesis as well as to support the empirical research.[6] The phenomenon is commonly referred to as the overestimation of one’s own abilities, knowledge, and future prospects, but it does not occur as one single bias (Barber and Odean, 2001). Numerous psychological mechanisms lead to overconfidence. They will be defined separately and will be discussed in a final overview.
1.2.1 Unrealistic Optimism
Too rosy expectations are closely linked to other relevant biases in this chapter. The effect can be described as an overestimation of the likelihood of a desirable event to happen or the prediction of a future event to be more positive than it will be (Müller, 2007). Unrealistic optimism can be both a cause and a consequence of overconfidence. If an investor is too optimistic about the future price increase of a certain stock, he will not be able to consider that a decrease in value is equally possible. His bright expectation convinces him that his actions will lead to further gains. In that case, unrealistic optimism serves as a heuristic[7] and causes overconfidence. If, however, a couple is absolutely sure about their ability to maintain a stable marriage, their overconfidence and unrealistic optimism will lead them to disregard the chance of being one out of three couples that divorce.
1.2.2 Better-Than-Average Effect
The BTAE is a major component of overconfidence. In many cases, people use their own characteristics as benchmark for others. This is either caused by a lack of alternatives or by an undefined peer group. When subjects have to rank their performance, they frequently state it is above average compared to their peers (Guenther, 2009).[8] In a well-known study Svenson could prove the BTAE by asking subjects to assess their driving skills. 77% of the participating Swedish drivers felt that they drive safer than average (Benoit and Dubra, 2009). Although this would be desirable, it is impossible. The majority cannot be above average. This bias is closely connected to the representativeness heuristic. People have a systematic misconception about probabilities and distribution (Kahneman et al., 1982).
The flattering self-evaluation leads to overconfidence, because decisions are made under the impression of an unrealistic assessment of one’s own capabilities. A startup owner who thinks that his management skills are above average could ignore important business actions of his competitors which might have a negative impact on his own company.
1.2.3 Illusion of Control
The concept of the IOC describes the human belief of being able to have an influence on random future events. When IOC is present, people are more likely to take risks. In an often-cited experiment subjects “participated in a lottery where they had choice or no choice of a familiar or unfamiliar lottery ticket”. Then they had an opportunity to exchange their ticket with a ticket from a lottery with better odds, namely, a lottery with a smaller amount of tickets to be drawn from (Harvey et al., 1978). Clearly all subjects should have taken advantage of this opportunity to increase their chance of winning, but it turned out that precisely those with a chosen or familiar ticket rejected the offer. IOC made them believe they would be better off with their first choice.
Furthermore, IOC is present if the outcome not only depends on luck but also involves a certain skill level (Grömminger, 2011). Poker and roulette are examples of skill and luck. It has been shown that poker players systematically underestimate the role of luck in their game (Shead et al., 2008). Extrinsic incentives such as money or other rewards fuel the IOC. In their absence, only subjects with a high desire of control acted according to previous tests with money incentives (Burger and Schnerring, 1982). The illusion of having control over uncertain events leads to overconfident decisions. While a rational thought process would include the possibility of a negative or positive outcome, an IOC-biased decision making process underestimates the chance of an undesired result or even completely ignores it. A good example is a private investor who mistakenly believes that his own selecting of stocks will automatically lead to higher future profit than stocks selected by anybody else. In this case, the IOC is responsible for his overconfidence.
1.2.4 Illusion of Knowledge
There is a common belief about the connection between the amount of information available and the quality of decisions made. The more input a person gets, the better his judgment will be (Schwartz, 2005). Scientists found that in many cases exactly the reverse is true. In an experiment subjects were asked to predict the results of randomly chosen National Basketball Association (NBA) games of one season. They received statistics about the teams’ records and halftime scores. In addition, half of all participants were told the team names (eg. Dallas Mavericks vs. Chicago Bulls) while the others did not know these names (Team A vs. Team B). Basketball fans insist that knowledge of team names will increase accuracy of their prediction because they are able to connect the information with other significant facts about each team (e.g. injuries). The study showed that the opposite happened. Participants with the additional cues relied less on statistical odds. They bet on more familiar teams and earned on average less than those without the team names (Hall et al., 2007). This phenomenon is called illusion of knowledge.
The core message is that additional information does not ultimately lead to higher accuracy in decision making. Even though our cognitive system needs a certain amount of knowledge to make a decision, more knowledge goes along with a higher confidence level but not better judgment. This is called the “less-is-more effect”. Similar findings were made when the available knowledge exceeded the required amount of information (Iyengar and Lepper, 2000). This can be referred to as the “more-is-less effect” (Hall et al., 2007). This is the reason why experts are affected by the overconfidence bias. Their specific knowledge increases their confidence level but not their accuracy.
[...]
[1] In fact the cost of maintenance and defense for the Wall were one reason for the decline of the Ming Dynasty.
[2] The first mayor accident (INES 7) happened in 1986 in Chernobyl, Ukraine. INES 7 is the highest category of nuclear disasters with severe impact on people and environment (IAEA, 2010).
[3] For further information about the toxic contamination of the Indian city of Bhopal caused by a chemical explosion see: (Bryan, 2003)
[4] These standards follow the model of “Homo economicus”. For a short overview and criticism see: (Krugman, 2007)
[5] The PV shows the value of future inflows at the time of investment. For detailed information see: (Tietze, 2011)
[6] Other concepts and criticism are presented in chapter 4.
[7] In behavioral science a heuristic is a short decision-making process that excludes some relevant information and/or stochastic facts.
[8] Researchers found out that the phenomenon increases on questions regarding moral or subjectively construed characteristics.
- Quote paper
- Dominik Piehlmaier (Author), 2012, Overconfidence - A Matter of Education?, Munich, GRIN Verlag, https://www.grin.com/document/203901
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