Good decision making required more than knowledge of facts, concepts, and relationships. It also requires metaknowledge — an understanding of the limits of our knowledge. Unfortunately, we tend to have a deeply rooted overconfidence in our beliefs and judgments. Because metaknowledge is not recognized or rewarded in practice, nor instilled during formal education, overconfidence has remained a hidden flaw in managerial decision making. This paper examines the costs, causes, and remedies for overconfidence. It also acknowledges that, although overconfidence distorts decision making, it can serve a purpose during decision implementation.
1. Linguists distinguish between language competence (the ability to produce coherent statements) and metalanguage (the ability to state the rules of the language). Such a clear distinction does not always exist between primary knowledge and metaknowledge. Early in the century, U.S. Weather Service forecasters simply predicted whether or not it would rain (a statement of their primary knowledge). Now they provide an explicit probability of rain, making uncertainty assessment an explicit part of their primary knowledge.
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3. G.N. Wright and L.D. Phillips, “Cultural Variations in Probabilistic Thinking: Alternative Ways of Dealing with Uncertainty,” International Journal of Psychology 15 (1980): 239–257.
4. All claims made about differences or trends are statistically significant at the .05 level or lower. The sample sizes for the percentages in Figure 1 range from a low of 122 when relevance = 1 to a high of 270 when relevance = 7, with the unrelated percentage based on all 1,440 unrelated questions.
5. J.E. Russo and P.J.H. Schoemaker, Decision Traps (New York: Simon and Schuster, 1990).
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8. A. Tversky and D. Kahneman, “Availability: A Heuristic for Judging Frequency and Probability,” Cognitive Psychology 4 (1973): 207–232;
B. Fischhoff, P. Slovic, and S. Lichtenstein, “Fault Trees: Sensitivity of Estimated Failure Probabilities to Problem Representation,” Journal of Experimental Psychology: Human Perception and Performance 4 (1978): 330–344.
9. G. Keren, “Facing Uncertainty in the Game of Bridge: A Calibration Study,” Organizational Behavior and Human Decision Processes 39 (1987): 98–114.
10. P. Slovic and S. Lichtenstein, “Comparison of Bayesian and Regression Approaches to the Study of Information Processing in Judgment,” Organizational Behavior and Human Performance 6 (1971): 641–744;
A. Tversky and D. Kahneman, “Judgment under Uncertainty: Heuristics and Biases,” Science 185 (1974): 1124–1131.
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12. D. Griffin and A. Tversky, “The Weighing of Evidence and the Determinants of Confidence” (Waterloo, Ontario: University of Waterloo, working paper, 1991).
13. P.J.H. Schoemaker, “Scenario Thinking” (Chicago: Graduate School of Business, University of Chicago, working paper, 1991).
14. For a review, see Lichtenstein, Fischhoff, and Phillips (1982).
15. J. Mahajan and J.C. Whitney, Jr., “Confidence Assessment and the Calibration of Probabilistic Judgments in Strategic Decision Making” (Tucson: University of Arizona, working paper series #12, 1987).
16. S.J. Hoch, “Availability and Inference in Predictive Judgment,” Journal of Experimental Psychology: Learning, Memory, and Cognition 10 (1984): 649–662.
17. Fischhoff, Slovic, and Lichtenstein (1978).
18.L. Dubé-Rioux and J.E. Russo, “An Availability Bias in Professional Judgment,” Journal of Behavioral Decision Making 1 (1988): 223–237. In this study, six of the twelve listed causes in a branch of a fault tree (see Figure 3) were removed. If people, in this case hospitality industry managers, were properly aware of all the major causes, then all of the probability of these six unlisted causes should show up in the last, “all other” category. In fact, very little did, strongly suggesting that what is out of sight is out of mind; i.e., the availability bias operates.
19. Fischhoff, Slovic, and Lichtenstein (1978).
20. Dubé-RiollX and Russo (1988).
21. P. Wack, “Scenarios: Uncharted Waters Ahead,” Harvard Business Review, September–October 1985, pp. 73–89;
P. Wack, “Scenarios: Shooting the Rapids,” Harvard Business Review, November–December 1985, pp. 139–150.
22. Schoemaker (1991).
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24. J.A. Sniezek and T. Buckley, “Level of Confidence Depends on Level of Aggregation,” Journal of Behavioral Decision Making 4 (1991): 263–272.
25. We wonder how many traffic fatalities are caused by alcohol-induced overconfidence. Certainly driving skills are impaired by alcohol, but this may be only part of the story. A more deadly aspect is that the drinker’s confidence is not reduced nearly as much as the ability itself This confidence gap between the skill levels drivers believe they possess and the reduced levels they actually have seems to be a primary problem with drunk drivers.
26. Despite a presumption that “two heads are better than one,” groups do not always make better decisions than individuals. The phenomenon known as groupthink is one serious problem. Whether groups are superior seems to depend on whether conflict is articulated or swept under the rug. See:
I.L. Janis, Groupthink, 2nd ed. (Boston: Houghton Mifflin, 1982.)
27. R.T. Clemen and R.L. Winkler, “Unanimity and Compromise among Probability Forecasters,” Management Science 36 (1990): 767–779;and
J.A. Sniezek and R.A. Henry, “Accuracy and Confidence in Group Judgment,” Organizational Behavior and Human Decision Processes 43 (1991): 1–28.
The authors acknowledge Janet Sniezek and Ilan Yaniv for their constructive comments and Jack B. Williams for his editorial advice.