The Role of Overconfidence ? An Experiment on Attitudes Toward Two Types of Ambiguity

Many decisions vulnerable to overconfidence involve considerable ambiguity, making it challenging to disentangle ambiguity attitude as a behavioral outcome and overconfidence as a decision bias. Through an incentivized lab experiment, we investigate the role of overconfidence on individual attitudes toward ambiguity generated from chance and ambiguity generated from individual performance. Although in both chance and performance conditions participants exhibit likelihood dependent attitudes, we find significantly more likelihood insensitivity for performance-generated ambiguity. For performance-generated ambiguity only, overconfidence is associated with more ambiguity seeking, which is not universal, as also overconfident decision makers exhibit ambiguity aversion at high likelihoods. Our results reconcile previous mixed findings on the relation of overconfidence and ambiguity attitudes. Further, based on likelihood dependence, we provide a unifying interpretation of the ambivalent nature of overconfidence as a good and as a bad bias. Last but not least, we show that ambiguity attitudes, reflecting decision makers' beliefs as an antecedent of choice, may have stronger prediction validity than overconfidence, which requires ex-post assessments. We link our experimental findings with entrepreneurial rewards and CEO compensation and the role of overconfidence as an intrinsic incentive mechanism in strategic decision making. We discuss our contribution to the micro-foundations and behavioral strategy literature. Submitted to DRUID, Copenhagen, 2019 The Role of Overconfidence? An Experiment on Attitudes Toward Two Types of Ambiguity (Authors’ names blinded for review) Entrepreneurial and managerial decisions, often vulnerable to overconfidence involve considerable ambiguity, making it challenging to disentangle ambiguity attitude as a behavioral outcome and overconfidence as a decision bias. Through an incentivized lab experiment, we investigate the role of overconfidence on individual attitudes toward ambiguity generated from chance and ambiguity generated from individual performance. Although in both chance and performance conditions participants exhibit likelihood dependent attitudes, we find significantly more likelihood insensitivity for performance-generated ambiguity. For performancegenerated ambiguity only, overconfidence is associated with more ambiguity seeking, which is not universal, as also overconfident decision makers exhibit ambiguity aversion at high likelihoods. Our results reconcile previous mixed findings on the relation of overconfidence and ambiguity attitudes. Further, based on likelihood dependence, we provide a unifying interpretation of the ambivalent nature of overconfidence as a good and as a bad bias. Last but not least, we show that ambiguity attitudes, reflecting decision makers’ beliefs as an antecedent of choice, may have stronger prediction validity than overconfidence, which requires ex-post assessments. We link our experimental findings with entrepreneurial rewards and CEO compensation and the role of overconfidence as an intrinsic incentive mechanism in strategic decision making. We discuss our contribution to the microfoundations and behavioral strategy literature.