Deck 8: Confirmation and Overconfidence

Question 1

Consider the statement "if it is a swan, then it is white." The contra-positive of this statement is "if white, then it is a swan."

Answer 1

False

Question 2

An individual who displays a confirmation bias in the type of information they seek is said to display "hypothesis-based filtering."

Answer 2

True

Question 3

Under the hypothesis filtering model, my beliefs about the state will always be further from the "truth" than if I did not exhibit a confirmation bias.

Answer 3

False

Question 4

Overconfidence in one's own knowledge is best described as being overly certain about one's knowledge or probabilistic belief.

Question 5

A person can only be overconfident in their own knowledge if they have a preferred outcome.

Question 6

Consider the farmer's problem that starts on page 8-2. Describe the two levels of uncertainty present the farmer's information search.

Question 7

I believe that there is an $80 \%$ chance that I will get the promotion. The day before my supervisor tells me that he has "valuable" information about the chance that I get promoted. He tells me that there is an $80 \%$ chance that I will get the promotion. What type of forecast is this to me?

A) Confirming forecast.
B) Disconfirming forecast.
C) A precise forecast.
D) An incorrect forecast.

Question 8

I believe that there is an $80 \%$ chance that I will get the promotion. The day before my supervisor tells me that he has "valuable" information about the chance that I get promoted. He tells me that there is an $80 \%$ chance that I will get the promotion. My supervisor's forecast was valuable because it contained new information.

Question 9

The confirmation bias concerns the type of information an individual seeks and the way an individual interprets that information.

Question 10

$95 \%$ confidence intervals should contain the truth $95 \%$ of the time.

Question 11

Confirmation bias is counter to the idea of conservatism.

Question 12

One stylized fact about overconfidence is that people tend to be more overconfident when facing easy questions and under-confident when facing difficult questions.

Question 13

An overconfident individual may perceive an asset to be less risky than it really is because they under-estimate the variance of the return on the asset, but correctly estimate the mean of the return.

Question 14

Overconfidence in one's own knowledge is a type of self-serving bias.

Question 15

Overconfidence does not adversely affect individual behavior if the overconfident beliefs do not change the individual's actions.

Question 16

Overconfidence can refer to beliefs that are overly certain, beliefs that absolutely overestimate one's ability and beliefs that overplace an individual relative to others.

Question 17

Self-serving biases always cause individuals to make sub-optimal decisions.

Question 18

There are four cards on the table each labeled with one of the following words: swan, white, black, bat. On one side of a card is a color on the other side is an animal. Consider the following statement: if there is a swan on any one side of the card, then there is white written on the other side. Which card would an individual with a confirmation bias turn over?

A) White and swan.
B) Black.
C) Black and swan.
D) Black and bat.

Question 19

An individual is said to be overconfident if

A) They believe there is a $55 \%$ chance that they are better than everyone else.
B) Their probabilistic belief about the occurrence of state is higher than is objectively true.
C) They believe the chance of a state occurring is $100 \%$ .
D) Their probabilistic belief about the chance that they are in the top half of drivers is more than $50 \%$ .

Question 20

Sally is asked 10 questions and is told to give her answer in intervals such that $10 \%$ of the time the correct answer fell above the interval and $10 \%$ of the time the answer fell below the interval. Which confidence interval is Sally being asked to give?

A) $90 \%$
B) $10 \%$
C) $20 \%$
D) $80 \%$

Question 21

Sally is asked 10 questions and is told to give her answer in intervals such that $15 \%$ of the time the correct answer fell above the interval and $15 \%$ of the time the answer fell below the interval. The experimenter concludes that Sally is overconfident. For how many questions did the true answer fall within Sally's given intervals?

A) 8
B) 6
C) 7
D) 9

Question 22

Sally is asked 10 questions and is told to give her answer in intervals such that $20 \%$ of the time the correct answer fell above the interval and $20 \%$ of the time the answer fell below
The interval. The experimenter concludes that Sally is under-confident. For how many questions did the true answer fall within Sally's given intervals?

A) 3
B) 6
C) 5
D) 7

Question 23

Sally is asked 10 questions and is told to give her answer in intervals such that $5 \%$ of the time the correct answer fell above the interval and $5 \%$ of the time the answer fell below the interval. The experimenter concludes that Sally is calibrated. For how many questions did the true answer fall within Sally's given intervals?

A) 9
B) 5
C) 10
D) 8

Question 24

Suppose an asset has a risky return given by $x \sim N\left(\mu, \sigma^{2}\right)$ . Yi-Yi believes the return on the asset is given by $\hat{x} \sim N\left(\hat{\mu}, \sigma^{2}\right)$ , where $\hat{\mu}>\mu$ . Kyle believes the return on the asset is given by $x \sim N\left(\mu, \sigma^{2}\right)$ . Kyle and Yi-Yi have the same risk averse preferences. Which of the following is true?

A) Kyle requires a larger risk premium on the asset than Yi-Yi.
B) Yi-Yi requires a larger risk premium on the asset than Kyle.
C) Kyle is more likely to purchase the asset.
D) Yi-Yi and Kyle require the same risk premium.

Question 25

Suppose an asset has a risky return given by $x \sim N\left(\mu, \sigma^{2}\right)$ . Gus believes the return on the asset is given by $\hat{x} \sim N\left(\mu, \hat{\sigma}^{2}\right)$ , where $\hat{\sigma}>\sigma$ . Lulu believes the return on the asset is given by $x \sim N\left(\mu, \sigma^{2}\right)$ . Gus and Lulu have the same risk averse preferences. Which of the following is true?

A) Gus requires a larger risk premium on the asset than Lulu.
B) Lulu requires a larger risk premium on the asset than Gus.
C) Gus is more likely to purchase the asset.
D) Gus and Lulu require the same risk premium.

Question 26

Which of the following statements is an example of optimistic overconfidence?

A) When a fair coin is flipped, I win $\$ 1$ if heads comes up and $\$ 0$ if tails comes up. I believe that there is a $75 \%$ chance that tails will come up.
B) I give $90 \%$ confidence intervals for 10 questions. Of the 10 questions, the true value for 7 questions falls within the stated intervals.
C) When a fair coin is flipped, I win $\$ 1$ if heads comes up and $\$ 0$ if tails comes up. I believe that there is a $75 \%$ chance that heads will come up.
D) I give $90 \%$ confidence intervals for 10 questions. Of the 10 questions, the true value for 10 questions falls within the stated intervals.

Question 27

Pilar just started her job at the weather forecasting agency. Brock has made forecasts for the agency for over 40 years. Based on the data, Pilar and Brock agree that sun is more likely than rain tomorrow. Who is more likely to predict $60 \%$ chance of sun and who is more likely to predict $90 \%$ chance of sun.

A) Bob: $60 \%$ ; Pilar: $90 \%$
B) Bob: $90 \%$ ; Pilar: $60 \%$
C) Bob: $60 \%$ ; Pilar: $60 \%$
D) Bob: $90 \%$ ; Pilar: $90 \%$

Question 28

I believe there is a $60 \%$ chance that toilet paper is going on sale tomorrow for $\$ .75$ per roll and a $40 \%$ chance that it will not and cost $\$ 2$ per roll. Unfortunately, I have to place an order today. I have $\$ 10$ to spend on toilet paper.
a. Given my beliefs, how many rolls do I order?
b. If I receive insider information from the store that toilet paper will definitely be on sale, how many rolls do I order? (Suppose you can order fractions of a roll.)
c. If I receive insider information from the story that toilet paper will definitely not be on sale, how many rolls do I order?

Question 29

Tony was class president of his senior class in high school. He was very involved and knew just about everyone in his class. Tony's best subjects were chemistry and literature and his worst subjects were physics, math and geology. Which of Tony's confidence intervals should be wider: the $90 \%$ confidence interval about the number of kids in your high school graduating class or the $90 \%$ confidence interval about the number of pebbles in a 1 liter bucket?

Question 30

There are four cards on the table each labeled with one of the following words: swan, white, black, bat. On one side of a card is a color on the other side is an animal. Consider the following statement: if there is a swan on any one side of the card, then there is white written on the other side.
a. Which card provides confirmatory information?
b. Which card provides disconfirmatory information?