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Never underestimate your opponent: Hindsight bias causes overplacement and overentry into competition

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  • Danz, David
Abstract
This study investigates a source of comparative overconfidence, or overplacement, which occurs when people overestimate themselves relative to others. We present a simple application of information projection (Madarász, 2012) to show that hindsight bias can lead to overplacement and excessive willingness to compete. We run an experiment in which subjects choose between a competitive tournament and piece-rate compensation after observing some of their competitors' past performance. We exogenously manipulate whether subjects have ex post information about their competitors' past tasks (hindsight) or not (no hindsight). We find that hindsight bias generates overplacement and increases subjects' valuation of tournament participation by 19%. In line with theory, the additional tournament entry in the hindsight setting is driven by low-performing participants who should not have entered the tournament.

Suggested Citation

  • Danz, David, 2020. "Never underestimate your opponent: Hindsight bias causes overplacement and overentry into competition," Games and Economic Behavior, Elsevier, vol. 124(C), pages 588-603.
    • Handle: RePEc:eee:gamebe:v:124:y:2020:i:c:p:588-603
    DOI: 10.1016/j.geb.2020.10.001
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    2. Holger Herz & Deborah Kistler & Christian Zehnder & Christian Zihlmann, 2022. "Hindsight Bias and Trust in Government," CESifo Working Paper Series 9767, CESifo.
    3. Vincent Laferrière & David Staubli & Christian Thöni, 2023. "Explaining Excess Entry in Winner-Take-All Markets," Management Science, INFORMS, vol. 69(2), pages 1050-1069, February.
    4. Lili Kang & Fei Peng, 2024. "Star power as quality signal or marketing effect? A path analysis on China's motion‐picture industry," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 3639-3655, July.
    5. Herz, Holger & Kistler, Deborah & Zehnder, Christian & Zihlmann, Christian, 2022. "Hindsight Bias and Trust in Government: Evidence from the United States," FSES Working Papers 526, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.

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