Information and Confidence : "The Chicken or the Egg"?

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Abstract

One of the most intriguing errors in judgment and decision-making under uncertainty is biased confidence. We review some important contributions to economic theory that tackle the problem of biases in confidence, with emphasis on applications to financial economics. In our survey, we focus on the interplay of confidence and information ; we critically examine the assumptions of over- and underconfidence in various informational settings and ask whether there is a relationship between the two issues, and if so, investigate its very nature. In particular, this paper argues that errors in confidence-miscalibration-may stem from a particular structure of the economy, especially from the generated information. Information available in an economy is usually incomplete, noisy, scattered around various sources, often misleading. We examine different aspects of information and how this information can influence confidence and indirectly or directly cause biases in confidence.

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