How Do Judgmental Overconfidence and Overoptimism Shape Innovative Activity?

Abstract

Recent field evidence suggests a positive link between overconfidence and innovative activities. In this paper we argue that the connection between overconfidence and innovation is more complex than the previous literature suggests. In particular, we show theoretically and experimentally that different forms of overconfidence may have opposing effects on innovative activity. While overoptimism is positively associated with innovation, judgmental overconfidence is negatively linked to innovation. Our results indicate that future research is well advised to take into account that the relationship between innovation and overconfidence may crucially depend on what type of overconfidence is most prevalent in a particular context.

Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics

“…While overplacement, overestimation, and optimism all lead to positively biased perceptions of expected returns and hence should foster entrepreneurial entry, the effects of overprecision are less clear. Herz, Schunk, and Zehnder (2014) look at the effect of overprecision on the trade-off between exploration and exploitation, one of the key features of the innovative process that also underlies entrepreneurial activity (Kerr, Nanda, and Rhodes-Kropf, in this symposium). They argue that overprecision, the tendency to underestimate variance of own information, can reduce the perceived option value of exploration and therefore actually reduce incentives to engage in entrepreneurship.…”

How do risk attitudes affect measured confidence?

“…For example, findings of overconfidence in own performance relative to that of others (e.g., Svenson 1981) has motivated many studies by experimental economists on the relationship between relative confidence, relative ability, and willingness to take risks in strategic environments (e.g., Camerer and Lovallo 1999;Hoelzl and Rustichini 2005;Moore and Cain 2007;Niederle and Vesterlund 2007). Confidence about own abilities has been shown to affect many important spheres of economic behaviour including consumer decision making (Grubb 2015), trading in financial markets (Biais et al 2005;Kent and Hirshleifer 2015), innovative activity (Herz et al 2014), investment in education (Dunning et al 2004), and decision making among managers and CEOs (Malmendier and Tate 2015). Given this, it is not surprising that economists have shown interest in developing theoretical models to examine the implications of biases in confidence (e.g., Compte and Postlewaite 2004;Dubra 2004;Gervais et al 2011;Ludwig et al 2011).…”

The Strength of Weak Leaders - An Experiment on Social Influence and Social Learning in Teams

“…On the other hand, it is well-known that many people are often overconfident, i.e., they report much too small confidence intervals when asked about a region where they expect the true answer with a certain probability (a usual way is to ask where they expect the answer in 90% of their guesses; see, e.g., Soll and Klayman (2004); Moore and Healy (2008) ;Herz et al (2014). In phase I of our experiment, we asked participants to provide such regions.…”

“…In contrast, teams with random leaders more equally weight each other's opinions with the consequence of a higher performance. On top of these effects, we assess how team performance is affected by (judgmental) overconfidence, which is the tendency to provide too narrow confidence intervals for one's estimates (e.g., Soll and Klayman (2004); Moore and Healy (2008); Herz et al (2014)). It turns out that both over-confident leaders and over-confident other team members undermine performance, while over-confident leaders are worse.…”