Overconfidence Biasness in Decision Making

INTRODUCTION Overconfidence Biasness in Decision Making
Overconfidence bias is tendency of individuals to overestimate correctness of their

answers. It is over inflated belief in skills. When an individual thinks that he knows everything and there is nothing to learn more, it means he suffers from overconfidence bias .As in overconfidence bias individual has high belief in his own skills, so he becomes overconfident and makes wrong and biased decisions. A confident person makes accurate decisions while overconfidence leads to wrong decisions. Overconfidence effects our judgments (Joshua klayman, Jack B.Soll ,Claudia Gonzalez Vallejo and Sema Barlas) Under overconfidence individuals overestimate their knowledge and under take the risks . It shows biasness in which an individuals subjective confidence in his decisions is more greater than his objective accuracy in different decisions. Overconfidence effects the performance of individuals and their judgments(Richard F. West and Keith E. Stanovich). We have given references of different articles to support our research and our main focus is on Telecommunication Sector of Pakistan. The reason we have chosen this sector is that managers become overconfident and make wrong decisions. Another reason is that competition is highly increasing , purchasing power of customers is decreasing and operating cost is increasing but still mobile operators are offering lower costs every day So to effectively compete managers have to make right decisions. Ufone is bringing innovativeness in its products and trying to establish its unique image. So managers are trying to avoid overconfident biased decisions. (Mr. Abdul Aziz, CEO & President of Ufone) Telecommunication sector has witnessed significant growth during last 5 years and still its rapidly growing. Initially their focus was growth rather than profitability but now they are focusing on both profit and cost. Telecommunication industry is contributing 110 billion in year 2007-8. Despite this rapid growth in telecommunication sector , sometimes managers become overconfident about their skills and make bias decisions. To remain in high competition , companies have to make accurate decisions because wrong decisions will drag down the company.(Mr. Abdul Aziz, CEO & President of Ufone) We have tried to explain these issues arising in telecommunication sector of Pakistan. We have focused on overconfidence bias as dependent variable and observed its relationship with other demographic variables i-e age, gender and IQ. While Core Self Evaluation is our moderator.
So our decisions should not be based on biased thinking because decisions based on biased thinking are always wrong. We should avoid our biased thinking and improve our decision making ability.
Objective: We have basically focused in our research study that how overconfidence bias
effects on decisions made by managers and how managers sometimes make wrong decisions by overestimating their abilities , especially in telecommunication sector of Pakistan.
Literature Review:
When managers overestimate their knowledge and under take the risks , its Overconfidence. So it means that overconfidence itself is a decision making bias. According to many studies overconfidence is an cognitive bias, so it does not vary across different individuals. The major research question is to determine how core self-evaluation establishes relationship between overconfidence and our demographic variables.
AGE: Age is an important factor which is influenced by overconfidence. According to studies

, there is correlation between age and overconfidence bias, while age is demographic variable of OCB. First there is positive relationship because older individuals are more confident about their responses than younger and as experience increases with age so older adults become more overconfident. Older individuals have greater insight into limitation of their knowledge. Second there is negative relationship between age and OCB because cognitive abilities decreases with age, so younger adults are more confident about their decisions.(Wandi Bruine De Bruin, Andrew M. Parker and Baruch Fischhoff). Age difference effects on our judgments. Problems in judgments and decision making are seeking attention of researchers and they are now identifying which age group is overconfident and overestimating its abilities (Crawford J.D and Stankov). Studies suggest that older employees are not willing to learn as compared to younger employees. So there is significant effect of age on overconfidence bias(Frank, Michael J, Kong ,Lauren) Experiments were made and two populations were taken, one were individuals with average age 82 while others were younger students with average age 20 years. Findings indicated that older and younger individuals have similar confidence level and decision making ability. Moreover in some cases decision making behavior suggested that elder individuals are less biased than younger individuals (Kovalchik S. Camerer CF Grether, DM Plott CR & Allman JM). So results showed that age has correlation with overconfidence.
Hypothesis No:1
Age has positive as well as negative relationship with overconfidence bias.
Gender:
Studies showed that individually men are usually more confident than women, while in group women are more confident than men. Women are usually not different from men in terms of risk behavior. They can handle risk more efficiently than men. While when it comes to decision making men are more overconfident and they overestimate their abilities(Andrew Healy & Jennifer Offenberg) Research shows in some areas men are more overconfident then women. Such as in finance men are more overconfident about their decisions then women. Men can trade more efficiently than women and men are more overconfident about their investment decisions than women .As finance is men dominated field mostly all investors are men so they are more overconfident about their abilities (Brad M. Barber and Terrance Odean) Studies have showed that men who are overconfident about certain areas such as finance have positive relationship with core self evaluation as compared to women who are not overconfident about male dominated fields(Beyer Sylvia) Stockholm university made research to see either men are more confident than women or not. Test was conducted and male and female students were asked five questions. Finally after analyzing the result of test they concluded that men are more overconfident then females(claes Bengtsson, Mats Persson , Peter Willenhag) `Some studies has showed that trading is not affected by gender so both men and women can be good traders but trading is affected by overconfidence level. Traders who are over confident make different decisions(Richard Deaves , Erik Luders and Guo Ying Luo) So the results show in some areas male are more overconfident and women are less while in some other areas they are equal. Men who are more confident about their decisions have positive relationship with core self evaluation while women who are less confident have negative relationship with core self evaluation.
Hypothesis No:2
Men can trade more than women and their performance will be more poor than women due to excessive trading.
IQ:
Today intelligence is considered as an individuals ability to learn from experiences and to solve different problems.IQ is their ability to solve different problems efficiently(Myers handbook) People wih high IQ level consider that they are more overconfident than others. They think themselves better than other average people(Jean-Pierre Benoit , Juran Dubra & Don A. Moore 2009) Its also demographic variable and studies showed that individuals with higher IQ level do not made overconfident and biased decisions rather their decisions are always appropriate. Individuals with higher IQ are more accurate about their judgments. Investors as well as Entrepreneurs who have higher IQ level made more accurate decisions. Studies have showed men with higher IQ cannot make better decisions and their performance is also lower then women because women have higher level of social sensitivity. We can get better performance by using collective intelligence. if many people with higher IQ work together it gives better performance.
Woolley and Malone said that collective intelligence is at work on a family, company, and city or country level, and given the ability of technology to unite large groups of people its possible to increase the collective intelligence of the world.
So IQ is our general ability which helps us to quickly analyze, learn and solve the problems. As competition is highly increasing so employees have to make effective decisions to remain in competition. Emotions and intelligence have positive impact on decision making processs (Goreti Marreiros , Carlos Ramos and Jose Neves) If organization brings change in technology it affects on IQ and decision making. Technology changings effect three things: quality ,timeliness of intelligence and decisions of individuals(George P. Huber) Quality of decisions improves with higher IQ. There is direct relationship of IQ with decision making. Some individuals does not understand this relationship . These reults vary with different industries(Srinivasan Raghunathan)
Hypothesis No:3
People with higher IQ level are more overconfident about their decisions.
Core Self Evaluation:

CSE is a personality trait which is about an individuals own abilities. Studies showed that people with high CSE think more positive about their abilities and about themselves , while individuals with low CSE think negative about themselves. CSE is necessary for effective decision making. So people with high CSE make more effective decisions. CSE plays the role of moderator in our research. So in case of gender male have positive relationship with core self-evaluation while female have negative relationship and male are more confident as well than female. In case of age, young adults have positive relationship with core self-evaluation than older employees. People with higher IQ level also positive relationship with core self-evaluation.
Overconfidence Bias, Core Self Evaluations & Demographic Variables:
Demographic variables
Age Gender IQ
Overconfidence Bias
Course self Evaluation
These are our three demographic variables: age Gender IQ
We have studied impact of these dependent variables on our moderator and dependent variable. Core Self Evaluation is our moderator while Overconfidence bias is Dependent Variable.

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INTRODUCTION Overconfidence Biasness in Decision Making

Overconfidence bias is tendency of individuals to overestimate correctness of their

AGE: Age is an important factor which is influenced by overconfidence. According to studies

Core Self Evaluation:

Overconfidence Bias, Core Self Evaluations & Demographic Variables:

Course self Evaluation

These are our three demographic variables: age Gender IQ

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