Joris Amin 10677038 BSc Economie & Bedrijfskunde Universiteit van Amsterdam 29-06-2016 R. van Hemert Statement of Originality This document is written by Student Joris Amin who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents. 1 Abstract Prior research has proven that people are subject to the self-serving attribution bias. This means that people tend to attribute success to internal factors such as skill and effort and failure to external factors such as difficulty and luck. Furthermore, Libby & Rennekamp (2012) argue that this leads people to become overconfident. An experiment was conducted in which participants answered two rounds of trivia questions. Between these rounds, participants indicated their attributions to internal vs. external factors and their confidence in improving in the second round. It was confirmed that people indeed engage in self-serving attribution. Additionally, this study aimed at finding a way of debiasing. Sufficient evidence was found to state that people do not show overconfident behavior regarding an upcoming task when they are able to compare the difficulty of the tasks. 2 Inhoudsopgave Introduction .............................................................................................................................................4 Theorethical Framework .........................................................................................................................5 Bounded rationality ..............................................................................................................................5 The self-serving attribution bias ...........................................................................................................6 Overconfidence ....................................................................................................................................8 The self-serving attribution bias & overestimation ..............................................................................9 Information about task difficulty ..........................................................................................................9 Methods ................................................................................................................................................ 11 Testing H₁ ........................................................................................................................................... 12 Testing H₂........................................................................................................................................... 13 Post-hoc testing ................................................................................................................................. 13 Results ................................................................................................................................................... 14 Descriptive statistics .......................................................................................................................... 14 Support for H₁ .................................................................................................................................... 15 Support for H₂ .................................................................................................................................... 16 Post-hoc analysis ............................................................................................................................... 18 Discussion & Conclusion ....................................................................................................................... 18 Conclusion ......................................................................................................................................... 18 Limitations ......................................................................................................................................... 19 Suggestions ........................................................................................................................................ 19 Appendix ............................................................................................................................................... 20 References............................................................................................................................................. 25 3 Introduction Economic science, like science in general, uses a wide variety of models. Models are idealizations that are used to represent reality for specified purposes (Giere, 2004). Some of these models are created to value stocks, others try to identify the perfect style of leadership. In order to function and give a good representation of reality, many models rely on assumptions. A variable in many economic models is human behavior. To account for human behavior in models in economic science, John Stuart Mill proposed the theory of the ‘economic man’ (Persky, 1995). This theory assumes that the economic man’s goal is to maximize his utility. He therefore always acts rational, considers all options in decision-making, is not biased towards certain alternatives and does not satisfice (Simon, 1955). Yet this economic man has endured quite some criticism concerning his rationality. Research has uncovered consistent deviations from the predictions of this theory (Henrich et al., 2016). To enhance this theory and give a more realistic representation of the behavior of economic agents, psychologists, sociologists and anthropologists help improve the characterizations of economic behavior (Thaler, 2016). Due to the notion of bounded rationality, economists have a more realistic view concerning the behavior of economic agents. “The notion of bounded rationality was proposed in the mid- 1950s to connect, rather than to oppose, the rational and the psychological” (Gigerenzer & Selten, 2002, p. 1). In economic terms, bounded rationality refers to the manager’s limits in their ability to process and interpret a large volume of information in their decision-making activities (Simon, 1979). In general, this implies that people have cognitive limitations and other constraints that hinder them from being rational. Since people are subject to these cognitive limitations, it is argued that people are biased. This means that human cognition portrays a version of reality that is systematically distorted compared to some aspects of the objective reality (Haselton, Nettle, & Andrews, 2005). One of the cognitive limitations that people are subject to is the self-serving attribution bias. The self-serving attribution bias is a phenomenon that has received much attention in psychology and economic literature. This bias causes people to attribute their success to their own dispositions and failure to external forces (Miller & Ross, 1975). The implications of the self-serving attribution bias are widespread. It is argued that the bias affects employees in their attributions as to why they did, or did not, get the promotion (Shepperd, Malone, & Sweeny, 2008). Further, Shepperd et al. (2008) argue that athletes are the victim of this bias in their attribution to their performance and drivers are biased in their explanations of accidents. Often, examples can be found of the bias affecting the issuance of management forecasts (Libby & Rennekamp, 2012), organizational planning 4 (Larwood & Whittaker, 1977), relationships (Sedikides, Campbell, Reeder, & Elliot, 1998), self-esteem (Schlenker, Weigold, & Hallam, 1990) and many more cases in human decision making (Evans, 1989). According to Libby & Rennekamp (2012), the self-serving attribution bias is a cause for overconfidence. Research literature defines the manifestation of overconfidence in three ways: overestimation of one’s actual performance, overplacement of one’s performance relative to others and excessive precision in one’s beliefs (Moore & Healy, 2008). The consequences of overconfidence are important considering that the bias causes one to overestimate the extent to which their internal characteristics contribute to a better performance. It is argued that overconfidence affects for example income prospects and business failure (Camerer & Lovallo, 2016), clinical psychologists’ judgement (Oskamp, 1965), investment decisions and corporate investment distortions (Lambert, Bessière, & N’Goala, 2012; Malmendier & Tate, 2005), driving ability (Svenson, 1981). Numerous studies address the causes and consequences of both the self-serving attribution bias and overconfidence. Yet little research has been devoted to successfully reducing the effects of these biases, or debiasing. This research focuses on the relationship between the self-serving attribution bias and overconfidence. Furthermore, it aims to find a way of debiasing. The first part of this research aims to replicate the study conducted by Libby & Rennekamp (2012) to test whether performance is explained through the self-serving attribution bias and whether this indeed leads to overconfidence. The purpose of the second part is to test whether information about the difficulty of a task leads to debiasing. The following section consists of a theoretical