An Evolutionary Justification for Overconfidence

Abstract

This paper provides an evolutionary justification for overconfidence. Players are pairwise matched to compete for a resource, and there is uncertainty about who will win the resource if they choose to compete. Players have different confidence levels about their chance of winning, although in reality they have the same chance of winning. Each player may or may not know her opponent’s confidence level. We characterize the evolutionarily stable equilibrium, represented by players’ strategies and distribution of confidence levels. Under different informational environments, a majority of players are overconfident—i.e., they overestimate their chance of winning. We also characterize the evolutionary dynamics and the rate of convergence to the equilibrium.

Keywords: overconfidence, evolutionary game

JEL Classification: C73, D83