Theory-Experimental Seminar

Luis Santos-Pinto

HEC Lausanne

4-Dec-2023

seminar – 14:30

Abstract

This paper studies the role of overconfidence on pairwise elimination contests with two semifinals and a final. An overconfident player overestimates his probability of winning at each stage of the contest. We uncover two effects of bias on the overconfident player’s effort provision. First, overconfidence has a discouraging effect by lowering the overconfident player’s marginal perceived probability of winning in the final and semifinal. Second, overconfidence has an encouraging effect since it raises the overconfident player’s perceived continuation value in the semifinal. We show that in a final between an overconfident player and a rational player but players exert lower effort than if both were rational with the overconfident player exerting the lowest effort. In a semifinal between an overconfident player and a rational player, the overconfident player can exert more or less effort than the rational player depending on the magnitude of the discouraging and encouraging effects. We show that the encouraging effect prevails when the prize spread is large and the bias of the overconfident player is moderate, otherwise, the discouraging effect prevails. When the encouraging effect prevails, an overconfident player is more likely to win the semifinal than a rational player. Finally, we provide conditions under which overconfidence can improve a player’s chances of winning an elimination contest. This finding sheds light on how differences in confidence at the start of a career could lead to differences in promotions later on.

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