Overconfidence bias

Overconfidence bias refers to people’s tendency to overestimate their abilities and knowledge, which often leads to poor decision-making, overestimating outcomes, and underestimating risks and uncertainties. 

How to define overconfidence bias

Overconfidence bias is a cognitive bias that causes individuals to incorrectly assess their skills, talent, or intellect. In other words, it is an egotistical tendency and belief that causes people to have more confidence in their abilities and judgments.

This type of bias is pervasive and powerful, as it can have severe consequences in many areas of life, including business, personal relationships, and politics. 

Overconfidence bias can manifest itself in many different ways. 

For instance, overestimating one’s chances of success in a given endeavor, overestimating one’s knowledge or expertise, and underestimating the risks involved in particular situations. 

What is the overconfidence effect?

The overconfidence effect is a specific manifestation of the overconfidence bias. The effect occurs when people’s subjective confidence in their abilities is greater than their actual abilities, based on objective performance measures. 

Generally, the overconfidence effect can have serious consequences in many different areas.

Here are a few examples: 

• In business: It can lead to poor decision-making and a failure to assess risks properly. Such consequences can lead to financial losses and other negative outcomes.
• In politics: It can lead to a failure to accurately gauge public opinion, resulting in a loss of support – and, ultimately, defeat. 
• Personal relationships: This can lead to misunderstandings and conflicts because people overestimate their abilities to communicate effectively or understand others’ perspectives.

Different types of overconfidence

Several types of overconfidence can play out differently in the real world. Below is a list of the most common types that illustrate the overconfidence effect.

1. Over ranking

Over ranking occurs when someone rates their own personal performance as higher than it is in reality. 

For example, a salesperson might believe they are their team’s best salesperson, even if that is not objectively true. This overconfidence is also problematic in investing decisions, as it can result in risky investments.

2. Timing optimism

Timing optimism refers to being overly optimistic about how quickly you can complete a task or a project. 

This tendency often leads to underestimating the time and resources required to complete the task, often resulting in missed deadlines or poor-quality work.

3. Desirability effect

The desirability effect occurs when people overestimate the likelihood of positive events occurring and underestimate the possibility of negative events occurring.

This effect is an example of the availability heuristic, as people tend to overestimate the likelihood of positive events because they are more easily accessible in their memories. It is also often referred to as “wishful thinking”.  

For example, someone might believe they are more likely to win the lottery than to get into a car accident – even though the opposite is true.

4. Illusion of control 

Illusion of control is the belief that individuals have more control over events and outcomes than they do. Unfortunately, this often leads people to take unnecessary risks or failure to take necessary precautions, which can be dangerous.

For example, someone thinking they have control over the outcome of a gambling game or the stock market when they are about to invest.