Talking the talk, not walking the walk: The co-evolution of overconfidence and loss aversion

Resumen

A puzzle for evolutionary theory is the coexistence of two seemingly offsetting behavioral “biases”, overconfidence and loss aversion. Overconfidence is a call to action and loss aversion curbs initiative. The most prominent evolutionary explanation of overconfidence, due to Robert Trivers (1976), is that self-deceit arises the better to deceive others. Missing from this account is why even sincere messages are believed, especially as self-deception is widespread. We propose a signalling theory. Since the decision error associated with overconfidence is less burdensome for the more able, as are the benefits of being thought able, hardwired overconfidence is a credible signal of true ability. Evidence supports this interpretation. A further implication of signalling is that loss aversion is part of the equilibrium. It partially ameliorates the decision costs of overconfidence but as it is usually hidden, does not eliminate its signalling role. “Biases” are thus symbiotic—the payoff to agents from an integrated set of biases are higher than would be the case in their absence. From this perspective, Kahneman’s advice that individuals eliminate both overconfidence and loss aversion is not well founded.

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Cómo citar (APA 7)

Dawson, C., & de Meza, D. (2023). Talking the talk, not walking the walk: The co-evolution of overconfidence and loss aversion. https://doi.org/10.31234/osf.io/gsdcv