Overconfidence and underconfidence: When and why people underestimate (and overestimate) the competition.

This 2006 paper by Don A. Moorea and Daylian M. Cainb* shows another possible reason for growth in income inequality in a knowledge-based society.

People underestimated others’ performances on simple tasks but overestimated them on difficult tasks, leading them to enter with confidence on simple rounds despite the fact that they accurately forecast numerous other entrants.

Yet in difficult-rank rounds, people decided not to enter: They overestimated others’ performances, leading them to stay out of the competition despite the fact that they accurately forecast few other entrants. Thus, skill based tasks do not always elicit overconfidence; instead, confidence and entry rates depend in part on how difficult potential entrants see the task.

This probably means that in a skill-oriented economy, competition for easy jobs is higher, therefore pay is lower than its psychologically "rational" level. On the other hand, competition for difficult jobs is lower, therefore pay is much higher.

* Don A. Moore, Daylian M. Cain, Overconfidence and underconfidence: When and why people underestimate (and overestimate) the competition, Organizational Behavior and Human Decision Processes, Volume 103, Issue 2, July 2007, Pages 197-213, ISSN 0749-5978, 10.1016/j.obhdp.2006.09.002. 

tags: psychology, economics, creativity