Miscalibration

Miscalibration is the technical term used to desribe overconfidence. One of the most notable studies showing miscalibration was coordinated by Stuart Oskamp in 1965. The purpose was to show the possible consequences of perfect information. Oskamp's study examined the responses of a panel of expert psychologists when presented with a sample case study.

Dr. Stuart Oskamp

In the initial stages, the psychologists were provided with a short summary detailing the condition of one of Oskamp's patients, an army veteran named Joseph Kidd. After reading this summary paragraph, the experts were asked to diagnose Kidd's condition and answer a short questionnaire. In addition, they were also asked to predict their own performance on the questionnaire.



After this stage was complete, Oskamp provided the members of the panel with two pages of additional information about Kidd and asked them to repeat the process.  After this stage, another two pages of information were provided and then finally the whole patient file.



Logically, you would expect that the more information an expert is provided with, the more accurate their results. However, Oskamp found that, over all stages of the process, the performance of the experts on the diagnosis questionnaire improved by a mere 1% from 25% to 26%. This suggests that we are mislead in the value of additional information when attempting to solve a difficult problem.



Another interesting discovery was the change in the experts' prediction of their own scores - 25% initally, then 40%, then 50% and finally, closer to 100% when the whole patient file was available. The moral of the story is that additional information does not improve the results of experts when confronted with a difficult problem but does improve experts' confidence in their results.



In a world were we have access to more information than ever before, overconfidence is rife among experts in the financial sector. And when these experts are then given a podium and are allowed to broadcast to the nation, they are given the opportunity to sell their idea, which could spread through the population until it reaches a tipping point and becomes a commonly held belief. An example of this came in 1997 when Chancellor of the Exchequer, Gordon Brown stated in a budget statement that "Britain will not return to the boom and bust of the past".   This statement would later enforce the belief that the UK property market was not experiencing a bubble and would continue to rise in the future. This was overconfidence at the time and in retrospect, it just seems outright ridiculous but it's entirely plausible that it had a part to play in further inflating the UK property bubble. I think it's also worth noting the importance of confirmation bias in re-enforcing a belief like that.