Strategic Competition and Self-Confidence

Abstract

We test the hypothesis that strategic interactions foster overconfidence. We experimentally compare an environment where players have an incentive to overstate their own ability to deter competitors, with one where this incentive is removed. We find that overconfidence persists in the former environment but vanishes in the latter. The persistence of overconfidence in the strategic environment is driven by three mechanisms. First, players who win uncontested update their confidence as if they had won in actual competition. Second, in contrast, individuals who do not compete do not update their confidence, thus creating an asymmetry in updating. Third, inflated confidence signals of ability are “contagious” because they affect how their receivers update their confidence. We provide empirical evidence that these mechanisms can explain stylized facts on overconfidence such as the Dunning–Kruger effect. We also discuss implications for organizational design and management.