The overconfident pay-off for the costs

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I was in Beijing sipping a three-yuan beer and playing poker with collegians I had recently met. There weren’t any poker chips so we took rocks from the hotel ashtray.

I felt like Jenny from the Block looking at all the rocks that I got. I was coming off a high from winning with a strong hand, so people actually thought I knew how to play despite my very sincere question, “what’s a straight?”

By the next hand I had a three of spades, a five and six of clubs, a king of hearts and a two of something I can’t even remember. I didn’t even stop to think — I wagered all my little rocks, assuming my boastful confidence would scare away my cohorts.

Sometimes, “faking it till you make it” doesn’t get you as far as you hope, since confidence has everything to do with the makeup of a decision.

On Sept. 14, National Geographic News reported similar findings: people typically feel overqualified. Journalist Christine Dell’Amore writes:

“But positive self-delusion can also lead to faulty assessments, unrealistic expectations, and hazardous decisions, according to the study — making it a mystery why overconfidence remains a key human trait despite thousands of years of natural selection, which typically weeds out harmful traits over generations.

Now, new computer simulations show that a false sense of optimism, whether when deciding to go to war or investing in a new stock, can often improve your chances of winning.”

Rocks from a hotel ashtray aren’t backed with the gold standard when you are just playing poker for fun and empty gambles can be taken with any level of confidence. But when true risks are involved, it’s a trickier task to weigh the costs with the benefits.

A study in Nature magazine further explains that, “overconfidence pays off only when there is uncertainty about opponents’ real strengths, and when the benefits of the prize at stake is sufficiently larger than the costs.”

With guts and game theory, the well-informed prosper and the strategic always seem to come out with intended success. So the question “what do you have to lose” really isn’t that hypothetical.

Image source: maorix through Creative Commons