A nice experiment was presented at NIBS last week – Zahra Murad, "Confidence Snowballing in Tournaments". (No paper available yet.)
The talk started from a psychological idea: people are sometimes overconfident about their own performance, and get more overconfident after a few successes. This might explain, say, the overweening confidence of CEOs and "Masters of the Universe" bankers.
In the experiment, subjects competed, in pairs, on a task which could be either easy or difficult. Then winners were matched with other winners and played again – like a football tournament. (Losers were matched with other losers.) The winners of the second round played each other again, and so on.
Before each round, subjects had to bet on their own performance. Fro this, we can learn what chance they gave themselves of winning the round.
The beauty of this design is that having won a round tells you nothing about your chance of winning the next one, because you will be playing someone else who has also just won! So, a reasonable person would not get more confident after winning a round.*
In fact, on easy tasks, winners did get more confident. On difficult tasks, losers got less confident, also wrongly and for much the same reason.
What's good about this experiment?
- It is real "behavioural economics"
- It uses the lab to create an elegant simplification
In experiments, just as in formal models, "it's realistic" is a terrible reason to add a feature. These guys put in only what was needed.
- It makes a nice parable...
Greek parables, like that of Icarus flying too close to the sun, have survived the centuries because they tell us about recurring patterns, helping us to recognize them in life and history. The Icarus myth's pattern is: hubris, insane arrogance, leads to nemesis, divine revenge. Hubris and nemesis are still all around us (hullo neo-cons! hullo Eurozone!) You would not expect them always to happen – imagine a foolish political scientist estimating the per cent prevalence of hubris in international relations – but it is useful to know that they can.
Experiments can be modern parables. Zimbardo's prison guards and Milgram's torturers have entered the folklore. They don't always apply, but they are things that can happen. (Hence "existence proof": an experiment shows, irrespective of external validity, that something has happened at least once.)
- ... and fleshes it out
I see a lot of experiments and think either "this was obvious", or "I don't know what behaviour here tells us about the real world". This work passes these hurdles.
* Nerd note: there could be some set of priors for which a Bayesian updater would get more confident. So, increasing confidence is not necessarily irrational in the technical sense, just "unreasonable" in a common-sense way.