Never underestimate your opponent: Hindsight bias causes overplacement and overentry into competition

Abstract

This study investigates a source of comparative overconfidence, or overplacement, which occurs when people overestimate themselves relative to others. We present a simple application of information projection (Madarász, 2012) to show that hindsight bias can lead to overplacement and excessive willingness to compete. We run an experiment in which subjects choose between a competitive tournament and piece-rate compensation after observing some of their competitors' past performance. We exogenously manipulate whether subjects have ex post information about their competitors' past tasks (hindsight) or not (no hindsight). We find that hindsight bias generates overplacement and increases subjects' valuation of tournament participation by 19%. In line with theory, the additional tournament entry in the hindsight setting is driven by low-performing participants who should not have entered the tournament.