The Overconfidence Effect in Marketing Management Predictions

Abstract

Estimating the likelihood of future events is a critical aspect of making a variety of marketing management decisions. Prior research has shown very robust patterns in the probability assessments of individuals, the predominant finding being that individuals are overconfident. The author theoretically investigates why overconfidence occurs by drawing on prior work on how cognitions are used in decisions. Specifically, the effects of evaluative feedback, counterfactual reasoning, and expertise are explored in two experiments in the context of making strategic marketing predictions. The findings provide some novel insights on overconfidence and accuracy of predictions. They suggest that (1) “humbling” feedback increases accuracy and lowers overconfidence, (2) overconfidence from being “blind sided” can be reduced by counterfactual reasoning, and (3) “richness” of experts’ mental representations results in higher overconfidence. The author concludes with a discussion of these findings and managerial implications.

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