Overconfidence in Judgements: the Evidence, the Implications and the Limitations

This paper examines the degree to which individuals tend to be overconfident in their judgements and identifies the implications for those trading in prediction markets. The findings from laboratory-based psychological studies of overconfidence are compared and contrasted with those from financial market studies. The broad conclusion from this literature survey is that overconfidence is a widespread phenomenon which is influenced by a number of factors, such as, the difficulty of the judgement task, the amount and nature of outcome feedback, and the gender and culture of the decision maker. It is also clear that there are a number of limitations of the existing research and a suggested methodology for further research in this area is examined.