In a paper published today in Nature, my friend and colleague Dominic Johnson and his collaborator James Fowler report the results from a model that sought to understand the conditions under which humans should be overconfident. They found that under a wide range of conditions, engaging in a strategy where actors over-evaluated their ability to compete for a resource out performed a strategy where actors had unbiased assessments of the likelihood that they would successfully obtain that resource. In a line it works when the benefit of the resource is typically greater than the cost of fighting which is likely to be a common finding in nature.
So, why is this an important finding? It suggests that it's rational to be over-confident about one's abilities. Thus, traders are behaving rationally when they bet on low performing stocks to do well or take what look like huge risks with large sums of other people's money. Or people buy homes when they know they're in a speculative bubble betting that they'll still be able to cash out. But such rational behavior may ultimately lead to market crashes as we've seen over the past few years. We get into wars rationally because we over-estimate our abilities to win them (Dominic's written extensively about this). And, we allow environmental degredation to march on because we over-estimate our ability to solve the problems at some point in the future.
Here's the rub. With each passing year of NOT addressing our carbon addiction we're making the problem so much harder to solve. With each additional chemical we pump into the atmosphere we make it more difficult to figure out their true costs and make it more difficult to eliminate their costs. And all of this may be rational behavior?
How do we temper our over-confidence? How do we build this into our policy making process? Dominic suggests in his book on Overconfidence and War that we need to put more emphasis on evaluating the true costs. I agree.