Overconfidence and preferences for competition

In the recent publication of The Journal of Finance, Volume 79, No. 2 (April 2024), Reuben, Sapienza, and Zingales examine the interplay between overconfidence, preferences for competition, and income disparities among high earners, particularly among individuals with a Master's in Business Administration (MBA). Read here: https://doi.org/10.1111/jofi.13314

This research seeks to clarify when competitiveness is a beneficial trait in economic contexts and how it relates to the gender income gap.

Key findings include:

The study reveals that, at graduation, MBA participants who prefer competitive environments earn, on average, 9% more than their less competitive counterparts. However, this difference is not sustained over time.
As the MBAs’ careers progress, overconfidence significantly undermines the monetary returns to being competitive. Competitive individuals who are also overconfident experience reduced earnings growth, resulting in lower incomes seven years post-graduation.
The miscalibration of their skills relative to actual performance means that overconfident individuals who compete end up underperforming, resulting in increased job interruptions and a tendency to exit high-reward industries.
This research shows that preferences for competition alone do not account for the gender pay gap among MBAs, which widens over time and is influenced more by family choices than by gender differences in competitiveness.

This article contributes to the literature by identifying the nuanced role of competitiveness in economic outcomes, suggesting that while it can be advantageous, it is detrimental when coupled with overconfidence. The findings underscore the complexity of factors influencing income disparities and challenge oversimplified narratives that link competitive behavior to favorable outcomes.

This research aligns with C-BID's commitment to advancing our understanding of behavioral economics and informing policy discussions on gender equity in the workplace. By exposing the interactions between psychological traits and economic behavior, the study encourages a more sophisticated approach to addressing income inequality and enhancing decision-making processes in high-stakes environments.

Authors

Ernesto Reuben

NYU Abu Dhabi

Paola Sapienza

Northwestern University

Luigi Zingales

University of Chicago

New York University Abu Dhabi

Saadiyat Island

Abu Dhabi

United Arab Emirates

nyuad.cbid@nyu.edu

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