People overestimate their ability to handle unknown situations

New research suggests that people tend to be overconfident in their ability to handle unknown situations, which has implications for business and entrepreneurship. A team of international researchers has shared findings on what they describe as overconfident behaviour, which can lead to negative outcomes in business and personal decision-making. Professor Mohammed Abdellaoui, lead researcher and professor at HEC Paris, and colleagues including Han Bleichrodt from the University of Alicante, Spain, and Cédric Gutierrez from Bocconi University in Italy, revealed that our own attitudes to uncertainty play a role in how we assess our own abilities.

The research, which has been published in the journal Management Science, was conducted through a series of experiments. It reveals the key role of ambiguity attitudes in decisions that involve self-evaluation. Ambiguity attitudes are people’s attitudes to unknown events. When people are confident about their ability to handle these unknown situations, they are more likely to be very optimistic about their own abilities, which leads to overconfident behaviour. This is known as “betting on oneself”.

Researchers carried out experiments where more than 400 participants took a reasoning test that assessed their performance, their beliefs, and their attitude to ambiguity. The results showed that some 83 percent of decisions are based on a very optimistic assessment of subjects’ own attitudes, which is the result of their own beliefs and an overestimation of probabilities. This has real-world applications in environments such as business and entrepreneurship.

The study dissects responses to uncertain scenarios to reveal the nuances of different types of uncertainty, shedding light on how people deal with ambiguity in decision-making processes. Experimental tasks probe participants’ beliefs and attitudes, providing new insights into the relationship between subjective probabilities and actual performance.

The methodology examined diverse academic backgrounds to identify attitudes toward performance and overconfidence. Participants were subjected to rigorous testing before being assessed subjectively on their abilities and beliefs about uncertain outcomes. The findings revealed intriguing patterns of ambiguity-seeking behaviour and instances of underconfidence, demonstrating the complex interplay between uncertainty attitudes and overestimation tendencies. This study represents a significant step forward in understanding human decision-making, with important implications for fields ranging from psychology to economics.

Professor Mohammed Abdellaoui says: “Our research has implications for real contexts. For example, a CEO who is considering the acquisition of another business is faced with ambiguity and uncertainty. Similarly, a student who hasn’t revised at all for an exam may turn up to sit the exam anyway. The student may be at the same time underconfident about the chances of getting a good mark but still be willing to take the risk because of the optimistic attitude we uncovered in our study.”

“This also applies to people who have taken out a large bank loan and must pay it back after a set time, because you are betting on yourself that you will pay it back. These examples may lead to people overestimating their own skills and failing to meet their obligations because of this overconfidence and optimistic attitude,” he adds.

Main image: The Fall of Icarus by Jacob Peeter Gowy, Museo del Prado, Madrid