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SUMMER 2005
Decisions, Delusions & Debacles
by Judy Purdy

To make a decision — any decision — requires a certain amount of confidence in our understanding of the risks and benefits. But overconfidence, and the illusion of control, can add up to bad decisions and big losses, according to UGA psychology professor Adam Goodie. “Confidence is your subjective probability of getting it right,” he said, “and most people are overconfident most of the time.”

Goodie is among a growing number of psychologists whose research challenges a centuries-old cornerstone of decision theory — that the “expected value” of an uncertain prospect is simply an objective function of arithmetic. He and his colleagues believe that this straightforward calculation, based on the probability of each possible outcome and the magnitude of its gain or loss, is valid as far as it goes. But it leaves out people’s subjective nature. “I tackle the issue of whether the whole field has missed a basic component of decision making,” Goodie said. “People’s approach to risk changes when they are betting on something they think they can control.”

Paradoxical Betting
Volunteers in Goodie’s experiments display the greatest willingness to bet when their confidence is highest, even if their actual long-term odds of winning are least favorable. But when their confidence is low they avoid risk, rejecting bets — including favorable bets — more often. These findings, true for people with normal personality traits, are exaggerated among problem gamblers and individuals at the high end of normal narcissism, or self-aggrandizement. Goodie has coined the phrase “paradoxical betting” to describe such behavior.

Paradoxical betting may help explain why people’s behaviors often don’t square with the facts. Take, for example, a preference to drive rather than fly, even though the record confirms that flying is significantly safer. Or consider the decision to start a new business, despite statistics from the U.S. Census Bureau that 50 percent of new ventures close within the first four years.

At the heart of Goodie’s research is the notion that people can improve their decisions and more favorably influence outcomes by acquiring information, assessing their confidence and developing what they believe is a realistic sense of control. But when a person’s perceived level of confidence is in conflict with his or her actual degree of control, results can be dreadful.

Goodie’s conclusions are based on experiments involving many hundreds of college students. These volunteers take trivia tests, having first estimated their confidence to supply correct answers. (The seven levels of confidence range from 50 percent to 52 percent up to 98 percent to 100 percent.) A typical trivia question might be “Which state has a larger population: New York or Wyoming?” While not all trivia questions are so easy, they do generally induce overconfidence, Goodie said. (See sidebar on page 27 for sample trivia questions and the assessing of narcissism and gambling.)

During a test, essentially a “bet,” correct answers earn points while wrong ones cost points. Unlike casino bets, Goodie’s bets are fair — favoring neither the “house” nor the player — as long as players’ confidence levels match their record of supplying correct answers. However, bets are favorably weighted toward players whose accuracy exceeds confidence levels, and bets favor the house when players are overconfident.

For example, if you assess your confidence at 99 percent, then a correct answer — in the sample question above, that New York is more populous — earns you 100 points, but if you pick Wyoming, you lose 9,900 points. That’s because out of 100 questions you would win 100 points 99 times and lose 9,900 points once; in other words, if your confidence assessment is correct and the bet is fair, you break even.

But if you answer such questions correctly only 95 percent of the time — that is, if you were overconfident — then you would win 100 points 95 times and lose 9,900 points 5 times. Your net loss would be 40,000 points [(95 x 100) – (5 x 9,900) = 40,000].

Over the course of Goodie’s hour-long experiments, therefore, overconfidence usually leads to substantial losses. While the average volunteer loses 30,000 points, some have lost 100,000 to 200,000. For narcissists and problem gamblers, the losses can be far greater.

“I didn’t think people’s overconfidence, combined with their risk taking, would lead to such disastrous outcomes,” said Goodie, whose findings were published in the July 2003 issue of the Journal of Experimental Psychology: Learning, Memory and Cognition.

“People are overwhelmingly willing to bet at confidence levels of 99 percent. The problem is they may be only 95 percent accurate,” he said. “They risk losing enormous amounts more often than they can justify.”

Overconfident Narcissists
One doesn’t have to look far to find parallels in the corporate world. Overconfident CEOs provide prime examples of high-risk judgment errors that have caused huge financial losses. “From what we know of them, people at Enron thought they could control the world,” Goodie said.

Such blatant lapses in judgment and their associated undue risk taking have led him to team up with fellow UGA psychology professor W. Keith Campbell and UGA doctoral student Joshua Foster to study decision making among people with high levels of narcissism. Such people have overblown opinions of their intelligence, power and confidence and they demonstrate little sensitivity or caring toward others, said Campbell, who has studied narcissists’ behavior for more than a decade.

“They feel entitled; they feel special,” he said. “If you think you’re better than everybody else thinks you are, then you have to do lots of things to maintain that belief. You have to dismiss negative feedback. You end up adjusting your whole life to maintain the positive sense of self.”

Using Goodie’s experimental procedures involving trivia questions and estimated levels of confidence, the psychologists added a narcissism assessment without volunteers’ awareness. The findings presented no surprise: While no more accurate than others, narcissists were even more overconfident and more willing to bet, losing significantly more points. “Narcissists end up performing terribly because they don’t readjust their self-beliefs in the face of feedback,” said Campbell. “They take too many risks. They don’t pay attention to their failures.”

The researchers’ narcissism finding was published in the October 2004 issue of the Journal of Behavioral Decision Making.

Campbell readily connects such findings with real-world applications. “From an organizational or business perspective, make sure you’ve got checks and limits on the people in charge and don’t listen to their self-reports,” he said. “If they are narcissistic, not only are they going to be overconfident but they are also going to be charming, self-promoting, perhaps manipulative. If you don’t develop strategies to counteract narcissism, you can get into real trouble.”

Tyco’s former chief executive Dennis Kozlowski is a case in point, Campbell said. “When things started going bad, rather than readjust, Kozlowski denied it and did things that appear fraudulent. If you put money into a company, you want someone like Warren Buffett sitting there doing all the numbers.”

Gamblers’ Illusions
Goodie found many similarities between narcissists and gamblers, with pathological gamblers on average scoring off the charts for narcissism.

He recruited gamblers by asking for volunteers who like to gamble more than once a week. Students were characterized as pathological gamblers (an impulse-control disorder), problem gamblers (people with signs of heightened risk) and non-problem gamblers.

In his preliminary studies, Goodie found that all three groups bet equally as often, and with similar levels of accuracy. But problem and pathological gamblers’ losses mounted quickly because both groups exhibited higher levels of over- confidence, which set up worse odds. Both groups also accepted bets more often. “They process information, [manifest] confidence, and [perceive] control differently from non-problem gamblers,” Goodie wrote in a paper he expects to publish in the Journal of Gambling Studies.

While the UGA Research Foundation has funded his recent decision research, last July Goodie received a $442,000 grant from the National Institute of Mental Health to continue the gambling studies. Instead of points, volunteers in this round of experiments can win cash, up to $20. People who gamble for money rather than points may make decisions differently, said Goodie, who began his latest research segment last August with college students. Eventually, he plans to cast a wider net that will include people of different ages and backgrounds.

“Pathological gambling is a huge problem with addictive properties,” he said. “It would be nice if we could use this research to help pathological gamblers see that they are not really in control of the things they are betting on.”

For more information, contact Adam Goodie at goodie@uga.edu or Keith Campbell at wkc@uga.edu or access http://www.uga.edu/psychology/faculty/agoodie.html

Judy Purdy is director of the UGA Research Communcations Office and the editor of UGA Research Magazine.
 
Maria Anderson contributed to this article.