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Modeling the Relationship Between Past Outcomes, Overconfidence and Risk Taking

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Overconfidence and Risk Taking in Foreign Policy Decision Making

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Abstract

The third chapter develops a four-period sequential model and several testable hypotheses combined to predict the causal path predicting failure resulting from inordinate risk taking induced by overconfidence bias. Key predictions of the model are, first, that decision makers will be stimulated by a shock, second that the successful outcome of their response to that event will induce them to over-adjust themselves to their knowledge and leading them to attribute too much of their success to their judgment and competence. Third, decision makers, upon observing a set of similar signals to that of their past, are emboldened to take more risks as a result of increase in their confidence. The fourth prediction of the model is that since decision makers’ risk attitudes are biased by overconfidence these decisions are more likely to result in failed commitments. The rest of the chapter addresses methodological issues, specifies the research design and justifies method selection. Conceptual and operational definitions are provided for the variables in the casual chain of the relation between past performance outcomes, overconfidence, and risk taking behavior.

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  1. Department of International Relations, Marmara University, Beykoz, Istanbul, Turkey

    Imran Demir

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Demir, I. (2017). Modeling the Relationship Between Past Outcomes, Overconfidence and Risk Taking. In: Overconfidence and Risk Taking in Foreign Policy Decision Making. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-52605-8_3

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