The Curse of Overconfidence and some revealing party tricks...

Irving Fisher, probably the greatest american economist of his generation (most known for his theory of interest rates), remarked famously just before the great crash of 1929 that "Stock prices have reached what looks like a permanently high plateau". To be fair, he put his money where he mouth was, and invested much of his assets in the stock market. Soon after he was broke, and had to sell his home in NewHaven Connecticut to pay his debts (fortunately his university bought his house and let him live there, or he would have been destitute!). Even after his experience, he continued to argue that he had been right.
The curse of overconfidence is not unique to economists, indeed one of the major trends in new economic thought is behavioral finance, applying all of social science theory to finance, not just economics. And one the cornerstones of this theory is that people are overconfident, inconsistent, lazy, and simply stupid at times. In short, not the "homo economicus" of classical theory. Consider one's own overconfidence - ask yourself or your friends to define a 90% [lower,upper] range for answers to the following questions (no cheating!), and find out if you indeed tend to get 9 out of 10 them right.

1. What is the population of Turkey?
2. What is the weight of the Empire State Building? (tons)
3. What is the GDP of Australia?
4. How many cells in the human brain?
5. How likely is it that you will be struck by lightening this year?
6. How many bibles are there in the world?
7. How many children will die of malnourishment in the world in the next day?
8. How likely is it that you will be in a plane crash this year?
9. What is the likelihood of a asteroid hitting the earth in the next year and destroying all life on the planet?
10. What is the likelihood of a AAA bond defaulting in the next year?

 Answers (no peeking)

1. 72,561,312 as of 1st January 2010
2. 365,000 tons
3. $1 trillion USD
4. 100 billion
5. 1/750,000
6.  6,000,000,000
7. 3000
8. 1/675,638
9. 0.00000002
10. 0.1

Most people (assuming they play fair) get significantly fewer than 9 out of 10 of these questions right. They believe the world is less complex and better understood than it actually is, and this influences their behaviour. Unfortunately sometimes with disasterous results - i am reminded of the quote from Larry Kersten, an american sociologist that "before you attempt to beat the odds, be sure you could survive the odds beating you.”