Overconfidence, Incentives and Digit Ratio

Abstract

This paper contributes to a better understanding of the biological underpinnings of overconfidence by analyzing performance predictions in the Cognitive Reflection Test with and without monetary incentives. In line with the existing literature we find that the participants are too optimistic about their performance on average; incentives lead to higher performance; and males score higher than females on this particular task. The novelty of this paper is an analysis of the relation between participants’ performance prediction accuracy and their second to fourth digit ratio. It has been reported that the digit ratio is a negatively correlated bio-marker of prenatal testosterone exposure. In the un-incentivized treatment, we find that males with low digit ratios, on average, are significantly more overconfident about their performance. In the incentivized treatment, however, we observe that males with low digit ratios, on average, are less overconfident about their performance. These effects are not observed in females. We discuss how these findings fit into the literature on testosterone and decision making and how they might help to explain seemingly opposing evidence.

Gender Differences in Performance Predictions: Evidence from the Cognitive Reflection Test

“…The protocol also included a short questionnaire on life satisfaction questions and digit ratio measurement. Evidence obtained on the relation between overconfidence scores and digit ratios from this experiment is reported in Neyse et al (2016).…”

Experimental and Self‐reported Measures of Risk Taking and Digit Ratio (2d:4d): Evidence From a Large, Systematic Study

“…Note also the recent study by Neyse et al. () that shows that low digit ratio subjects were more likely to exhibit overconfidence, but this only held for hypothetical rewards: Once real payoffs were used, the evidence of overconfidence of low digit ratio subjects was not statistically significant.…”

“…Previous digit ratio studies provide evidence that prenatal testosterone exposure is associated with several types of important economic and financial behavior. Economic experiments show significant correlations between digit ratio and dictator game giving (Brañas‐Garza et al., ; Galizzi and Nieboer, ), cognitive reflection (Bosch‐Domènech et al., ), contributions to a public good (Cecchi and Duchoslav, ), overconfidence bias under incentivized conditions (Dalton and Ghosal, ; Neyse et al., ), and effort provision (Neyse et al., ). In the domain of finance, low digit ratio individuals achieve higher trading profits (Coates and Herbert, ; Coates et al., ), are more likely to self‐select into the financial services profession (Sapienza et al., ), bid more competitively (Pearson and Schipper, ; Schipper, ), and are more active and risk‐taking traders (Cronqvist et al., ).…”

‘Born this Way’? Prenatal Exposure to Testosterone May Determine Behavior in Competition and Conflict

“…Taking risks is a feature of many competitive situations, and gender differences have been observed for both preferences over risk (Charness and Gneezy, 2012;Croson and Gneezy, 2009;Eckel and Grossman, 2008) and preferences for competitive situations (Niederle and Vesterlund, 2007). With respect to other factors that may influence competition behavior, we also note that L DR individuals, contrary to expectations, appear to be less likely to exhibit overconfidence, at least in tasks where overconfidence is maladaptive (Dalton and Ghosal, 2018;Neyse et al, 2016).…”