To follow the Herd or break away? Overconfidence and Social Learning

Abstract

We experimentally study the effects of overconfidence in a sequential social learning setting. We allow subjects to form beliefs about their own and others’ information by tying the accuracy of their signal to their score on a trivia quiz. Their beliefs on the expected scores allow us to measure and study the effects of confidence about their relative and absolute performance on welfare and belief updating behavior. Our results show that overconfidence can improve welfare in this social learning setting. We find distinct effects of confidence on welfare that depends on whether the subject exhibits relative or absolute overconfidence. Relative overconfidence improves welfare and absolute overconfidence worsens it after realizing their true performance. Lastly, we find that these results are facilitated through changes in the subjects’ belief updating behavior.

(Joint with Jason Tayawa)

Mir Adnan Mahmood

PhD Candidate, Department of Economics

My research interests include Experimental Economics, Economics of Information and Microeconomic Theory.