Overconfidence Can Improve an Agent's Relative and Absolute Performance in Contests

Abstract

This paper suggests a potential rationale for the recent empirical finding that overconfident agents tend to self-select into more competitive environments (e.g. Dohmen and Falk, 2006). In particular, it shows that moderate overconfidence in a contest can improve the agent's performance relative to an unbiased opponent and can even lead to an advantage of the overconfident agent in absolute terms.