The Red-Bull Effect: Causes and Consequences of Overconfidence in Foreign Policy Decision Making

Yıl 2017, Cilt: 5 Sayı: Özel Sayı Nisan 2017, 123 - 140, 10.05.2017

İmran Demir

Öz

Why do foreign policy decision makers take risk in situations that require prudence? Why do they

escalate their commit to a failing course of action? This research examines the impact of overconfidence

in foreign policy decision making. Building on extensive literature in social psychology, the premise of

my argument is that successful past performance leads decision makers to develop overconfidence in

their judgment, capacity and expectations, which bias their risk assessments. Based on this assumption,

I develop a model that explains the causes and consequences of overconfidence in foreign policy

decision making. In the model, past success persuades decision makers to overweight their skills

and knowledge relative to what objective evidence warrants, which generates inordinate risk taking

and exposes decision makers to sever failures. However, belief in success survives despite glaring

setbacks, which convinces decision makers to escalate their commitment to a failing course of action.

Nevertheless, there is a limit to decision makers’ ability to engage in self-deception. Therefore, over the

course of repeated failures, it is expected that the decision makers will make adjustments to correct

overconfident reactions.

Anahtar Kelimeler

Overconfidence, Past Success, Risk, Attribution Bias, Escalation of Commitment

Kaynakça

• Allais, Maurice. (1979). “The So-called Allais Paradox and Rational Decisions under Uncertainty.” In Expected Utility Hypotheses and the Allais Paradox. eds. Maurice Allais and Ole Hagen. Dordrecht: Reidel.
• Arrow, Kenneth J. (1951) “Alternative Approaches to the theory of Choice in Risk taking situations” Econometrica. 19 (4): 4004-437.
• Bar-Hillel, Maya. (1973) “On the Subjective Probability of Compound Events.” Organizational Behavior and Human Performance 9 (3): 396-406.
• Barber, Brad M., and Terrance Odean. 2000. “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors.” Journal of Finance 55(2): 773-806.
• Baumeister, Roy F. (1989) “The Optimal Margin of Illusion,” Journal of Social and Clinical Psychology 8 (2): 176-189.
• Bazerman, Max H. Toni Guiliano, and Allen Appelman. 1984. “Escalation of Commitment in Individual and Group Decision Making.” Organizational Behavior and Human Performance 33: 141-152.
• Bazerman, Max H. (1984) “The Relevance of Kahneman and Tversky’s Concept of Framing to Organizational Behavior.” Journal of Management 10 (3), 333-343.
• Becker, Gordon M., and McClintock, Charles C. (1967) “Value: Behavioral Decision Theory.” Annual Review of Psychology 18 (1): 239-68.
• Billet Mathew T., and Yimin Qian. (2008) “Are Overconfident CEOs Born or Made? Evidence of Self Attribution Bias from Frequent Acquirers.” Management Science 54 (6): 1037–1051.
• Biyalogorsky, Eyal, William Boulding, and Richard Staelin. (2006) “Stuck in the Past: Why Managers persist with new product failures.” Journal of Marketing 70: 108–121.
• Boulding, William, Ruskin Morgan, and Richard Staelin. (1997) “Pulling the Plug to Stop the New Product Drain.” Journal of Marketing Research 34:164–176.
• Bradley, Gifford Weary. (1978) “Self-Serving Biases in the Attribution Process: A Reexamination of the Fact or Fiction Question.” Journal of Personality and Social Psychology 3 (1): 56-71.
• Brockner, Joel. (1992) “The Escalation of Commitment to A Failing Course of Action: Toward Theoretical progress.” Academy of Management Review 17 (1): 39-61.
• Camerer, Colin, and Dan Lovallo. (1999) “Overconfidence and Excess Entry: An Experimental Approach.” American Economic Review 89 (1): 306-318.
• Daniel, Kent, and David Hirshleifer. (2015) “Overconfident Investors, Predictable Returns, and Excessive Trading.” Journal of Economic Perspective 29 (4): 61-88.
• Donaldson, Gordon, and J. W. Lorsch. (1983) Decision Making at the Top: The Shaping of Strategic Direction. New York: Basic Books, 1983.
• Duhaime, Irene M., and Charles R. Schwenk. (1985) Conjectures on Cognitive Simplification in Acquisition and Divestment Decision Making.” Academy of Management Review 10 (2): 287–295.
• Dunning, David, Dale Griffin, James D. Milojkovic, and Lee Ross. (1990) “The Overconfidence Effect in Social Prediction.” Journal of Personality and Social Psychology 58 (4): 568-581.
• Edwards, Ward. (1954) “The Theory of Decision Making.” Psychological Bulletin 51 (4): 380-417. Einhorn, Hillel J., and Robin M. Hogarth. (1986) “Decision Making under Ambiguity.” Journal of Business 59 (4): 225-250.
• Ellsberg, Daniel. (1961) “Risk. Ambiguity, and the Savage Axioms.” Quarterly Journal of Economics 75 (4): 643-669.
• Fischhoff, Baruch, Paul Slovic, and Sarah Lichtenstein. (1977) “Knowing with Certainty: The Appropriateness of Extreme Confidence.” Journal of Experimental Psychology 3 (4): 552-564.
• Fischhoff, Baruch, and Bernard Goitein, and Zur Shapira. (1981) “Subjective Expected Utility: A Model of Decision-Making.” Journal of The American Soceity for Information Science September: 391-399.
• Fishburn, Peter C. (1988) “Expected Utility: An Anniversary and a New Era.” Journal of Risk and Uncertainty 1: 267-283.
• Frisch, Frisch. (1993) “Reasons for Framing Effects.” Organizational Behavior and Human Decision Processes 54 (3): 399-429.
• Fiske, S., and S. Taylor, (1991), Social Cognition (2nd ed.), McGraw-Hill, New York.
• Frey, Dieter. (1982) “Different Levels of Cognitive Dissonance, Information Seeking, and Information Avoidance.” Journal of Personality and Social Psychology 43 (6): 1175–1183.
• Friedman, Milton, and Leonard J. Savage. (1948) “Utility Analysis of Choices Involving Risk.” Journal of Political Economy 56 (4): 279–304.
• Garland, Howard. (1990) “Throwing Good Money after Bad: The Effect of Sunk Costs on the Decision to Escalate Commitment to an ongoing Project.” Journal of Applied Psychology 75, 728–731.
• Gervais, Simeon, and Terrance Odean. (2001) “Learning to Be Overconfident.” The Review of Financial Studies 14 (1): 1-27.
• Gilovich, Thomas, Griffin, Daniel, and Kahneman, Daniel. (2002) Heuristics and Biases: The Psychology of Intuitive Judgment New York: Cambridge University Press.
• Gilovich, Thomas. (1983) “Biased Evaluation and Persistence in Gambling.” Journal of Personality and Social Psychology 44 (6): 1110-1126.
• Greenwald, Anthony G. (1980) The Totalitarian Ego: Fabrication and Rveison of Personal History. American Psychologist 35(7): 603-618.
• Greitemeyer, Tobias, and Stefan Schulz-Hardt. (2003) “Preference-Consistent Evaluation of Information in the Hidden Profile Paradigm: Beyond Group-Level Explanations for the Dominance of Shared Information in Group Decisions.” Journal of Personality and Social Psychology 84 (2): 322–339.
• Hart, William, Dolores Albarracin, Alice H. Eagly, Inge Brechan, Mathew J. Lindberg, and Lisa Merrill. (2009), “Feeling Validated Versus Being Correct: A Metaanalysis Of Selective Exposure to Information.” Psychological Bulletin 135 (4): 555–588.
• Heath, Chip, and Amos Tversky. (1991). “Preference and Belief: Ambiguity and Competence in Choice under Uncertainty.” Journal of Risk and Uncertainty 4: 5-28.
• Hermann, Charles F. (2012). “What We do When Things Go Wrong.” In When Things Go Wrong: Foreign Policy Decision Making Under Adverse Feedback. ed. Charles F. Hermann. New York: Routlage.
• Hillary, Gilles, and Lior Menzly. (2006). “Does Past Success Lead Analysts to Become Overconfident.” Management Science 52 (4): 489-500.
• Hogarth, Robin M., and Spyros Makridakis. (1981). “Forecasting and Planning: An Evaluation.” Management Science 27 (2): 115-138.
• Hunning, Tobias M; Neal F. Thomson. (2014). “The Impact of Performance Attributions on Escalation of Commitment.” Journal of Organizational Culture, Communications and Conflict 18 (1): 115-122.
• Jarvis, Darryl S.L., and Martin Griffiths. (2007) “Learning to Fly: The Evolution of Political Risk Analysis.” Global Society 21 (1): 5-21.
• Jensen, J. M., Conlon, D. E., Humphrey, S. E., and Moon, H. (2011) “The Consequences of Completion: How Level of Completion Influences Information Concealment by Decision Makers.” Journal of Applied Social Psychology 41(2), 401–428.
• Johnson, Dominic D. P. Overconfidence and War: The Havoc and Glory of Positive Illusions. Cambridge, Massachusetts: Harvard University Press.
• Juliusson, Ásgeir. (2006) “Optimism as Modifier of Escalation of Commitment.” Scandinavian Journal of Psychology 47: 345–348.
• Kahneman, Daniel, and Amos Tversky. (1984) “Choices, Values, and Frames.” American Psychologist 39: 341-350.
• Kahneman, Daniel, and Amos Tversky. (1982) “Judgement under Uncertainty: Heuristics and Biases.” In Judgment under Uncertainty: Heuristics and Biases, eds., Daniel Kahneman, Paul Slovic, and Amos Tversky. New York: Cambridge University Press.
• Kahneman, Daniel, and Amos Tversky. (1979) “Prospect Theory: An Analysis of Decisions under Risk.” Econometrica 47: 263-291.
• Kam, Cindy D., and Elizabeth N. Simas. (2010) “Risk Orientations and Policy Frames.” Journal of Politics 72 (2): 381-396.
• Karni, Edi. (2014) Axiomatic Foundations of expected utility theory in the Handbook of Economics of Risk and Uncertainty. In: Mark J. Machina, W. Kip Viscusi, editors, Handbook of the Economics of Risk and Uncertainty. Vol 1, Oxford: North Holland.
• Keil, Mark, Gordon Depledge, and Arun Rai. (2007) “Escalation: The Role of Problem Recognition and Cognitive Bias.” Decision Sciences 28 (3): 391-421.
• Knetsch, J. L., and J.A. Sinden. (1984) Willingness to Pay and Compensation Demanded: Experimental Evidence of an Unexpected Disparity in Measures of Value.” Quarterly Journal of Economics 99: 507- 521.
• Knetsch, Jack L. (1989). The Endowment Effect and Evidence of Nonreversible Indifference Curves.” American Economic Review 79: 1277-1284.
• Knetsch, Jack L., and J. A. Sinden. (1987) The Persistence of Evaluation Disparities.” Quarterly Journal of Economics 102: 691-695.
• Krueger, Justin, and David Dunning. (1994) “Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments.” Journal of Personality and Social Psychology 77 (6): 1121-1134.
• Krueger, Norris, and Peter R. Dickson. (1994) How Believing in Ourselves Increases Risk Taking: Perceived Self-efficacy and Opportunity Recognition. Decision Sciences 23: 385–401.
• Lamborn, Alan C. (1985) “Risk and Foreign Policy Choices.” International Studies Quarterly 29 (4): 385-410. Langer, Ellen J., and Jane Roth. (1975) “Heads I win, Tails It’s Chance: The Illusion of Control as a Function of the Sequence of Outcomes in a Purely Chance Task.” Journal of Personality and Social Psychology 32: 951–955.
• Langer, Ellen. (1975) “The Illusion of Control.” Journal of Personality and Social Psychology 32 (2): 311-328. Levy, Jack S. (1992) “Prospect Theory and International Relations: Theoretical Applications Analytical Problems.” Political Psychology 13:283–310.
• Libby, Robert and Kristina Rennekamp. (2012) “Self-Serving Attribution Bias, Overconfidence, and the Issuance of Management Forecasts.” Journal of Accounting Research 50 (1): 197-231.
• Lichtenstein, Sarah, and Baruch Fischhoff. (1977) “Do Those Who Know More Also Know More about How Much They Know?” Organizational Behavior and Human Performance 20 (2): 159-183.
• Lichtenstein, Sarah, Baruch Fischhoff, and Lawrence D. Phillips. (1982) Calibration of Subjective Probabilities: The State of the Art up to 1980. In Judgment under Uncertainty: Heuristics and Biases. eds. Daniel Kahneman, Paul Slovic, and Amos Tversky. New York: Cambridge University Press.
• Lord, Charles G., Lee Ross, and Mark R. Lepper. (1979) “Biased Assimilation and Attitude Polarization: The Effects of Prior Theories on Subsequently Considered Evidence.” Journal of Personality and Social Psychology 37: 2098-2109.
• Lord, Robert G., and Jonathan E. Smith. (1983) “Theoretical, Information Processing, and Situational Factors Affecting Attribution Theory Models of Organization Behavior.” Academy management Review 8 (1): 50-60.
• Lovallo Dan, and Daniel Kahneman. (2003) “Delusions of Success: How Optimism Undermines Executives’ Decisions.” Harvard Business Review July.
• Malmendier, Ulrike, and Geoffrey Tate. (2005) “CEO Overconfidence and Corporate Investment.” The Journal of Finance 60 (6): 2661-2700.
• Malmendier, Ulrike, and Geoffrey Tate. (2008) “Who Makes the Acquisitions? CEO Overconfidence and Market’s Overreaction.” Journal of Financial Economics 89: 20-43.
• Markowitz. Harry M. (1952) “The Utility of Wealth.” Political Economy 60 (2): 151-58.
• McDermott, Ross. (1998) Risk Taking in International Politics: Prospect Theory in American Foreign Policy Ann Arbor: The University of Michigan Press.
• Meyer, Werner G. (2014) “The Effect of Optimism Bias on the Decision to Terminate Failing Projects.” Project Management Journal 45 (4): 7-20.
• Moore Don, and Paul J. Healey (2008) “The Trouble with Overconfidence.” Psychological Review 115 (2): 502-517.
• Mosteller, Frederich, and Nogee, Philip. (1951) “An Experimental Measurement of Utility.” Political Economy 59 (5): 371-404.
• Neale, Margaret A., and Max H. Bazerman. (1985). “The Effects of Framing and Negotiation Overconfidence on Bargaining Behaviors and Outcomes.” Academy of Management Journal 28 (2): 34-49.
• Nisbett, Richard, and Lee Ross. (1980). Human inference: Strategies and Shortcomings of Social Judgment. Englewood Cliffs, NJ: Prentice-Hall.
• O’neill, Barry. 2001. “Risk Aversion in International Relations History.” International Studies Quarterly 45 (4): 617-640.
• Odean, Terrance. (1998). “Volume, Volatility, Price and Profit: When All Traders Are Above Average.” Journal of Finance 53 (6): 1887-1934.
• Redelmeier, Donald A., and Amos Tversky. 1992. “On the Framing of Multiple Prospects.” Psychological Science 3 (3): 191–193.
• Russo, Edward J., and Paul J. H. Schoemaker. 1992. “Managing Overconfidence.” Sloan Management Review 33 (2): 7-17.
• Russo, J. Edward, Kurt A. Carlson, and Margaret G. Meloy. 2006. “Choosing an Inferior Alternative.” Psychological Science 17 (10): 899–904.
• Schaubroeck, John and Elaine Davis. 1994. “Prospect Theory Predictions When Escalation is not the only Chance to Recover Sunk Costs.” Organizational Behavior and Human Decision Processes 57: 59-82.
• Schmidt, Jeffry B., and Roger J Calantone.1998. “Are Really New Product Development Projects Harder to Shut Down?” Journal of Product Innovation Management 15 (March), 111-23.
• Schmidt, Jeffry B., and Roger J. Calantone. 2002. “Escalation of Commitment During New Product Development. Journal of the Academy of Marketing Science 30 (2): 103–118.
• Schneider, Sandra L. 1992. “Framing and Conflict: Aspiration Level Contingency, the Status Quo, and Current Theories of Risky Choice.” Journal of Experimental Psychology: Learning, Memory, and Cognition. 18 (5): 1040-1057.
• Schnider, Sandra L., and Lola L. Lopes. 1986. “Reflection in Preferences under Risk: Who and When May Suggest Why” Journal of Experimental Psychology. 12 (4): 535-548.
• Schoemaker, Paul J. H. 1982. “The Expected Utility Model: Its Variants, Purposes, Evidence and Limitations.” Journal of Economic Literature 20 (June): 529-563.
• Sen, Sanker, and Eric J. Johnson. 1997. “Mere-possession Effects without Possession in Consumer Choice.” Journal of Consumer Research 24: 105–117.
• Shepperd, James, Wendi Malon, and Kate Sweeny. 2008. “Exploring Causes of the Self-Serving Bias.” Social and Personality Psychology Compass 2 (2): 895-908.
• Simon, Herbert A. (1955) “A Behavioral Model of Rational Choice.” Quarterly Journal of Economics 69 (1): 99-118.
• Simon, Mark, and Susan M. Houghton. 2003. “The Relationship between Overconfidence and the Introduction of Risky Products: Evidence from a Field Study.” Academy of Management Journal 46 (2): 139-149.
• Simon, Mark, Susan M. Houghton, and Karl Aquino. (2000). “Cognitive Biases, Risk Perception, and Venture Formation: How Individuals Decide to Start Companies.” Journal of Business Venturing 15(2): 113-134.
• Skinner Burrhus F. (1974). About Behaviorism. New York: Alfred A. Knopf. , Staw, Barry M. (1976). “Knee-deep in the Big Muddy: A Study of Escalating Commitment of a Chosen Course of Action.” Organizational Behavior and Human Decision Processes 16: 22-44.
• Stigler, George J. (1950). “The Development of Utility Theory.” Political Economy 58 (4):307-327, Part I.
• Stigler, George J. (1950) “The Development of Utility Theory.” Political Economy 58 (5): 373-396, Part II.
• Taylor, Shelley E. and Jonathon D. Brown. (1988) “Illusion and Well Being: A Psychological Perspective on Mental Health.” Psychological Bulletin 103 (2): 193-21.
• Taylor, Shelly E. 1991. “Asymmetrical Effects of Positive and Negative Events: The Mobilization-Minimization Hypothesis. Psychological Bulletin 110 (1): 67-85.
• Thaler, Richard H., and Eric J. Johnson. 1990. “Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice.” Management Science 36 (6): 643-660.
• Thaler, Richard. 1980, “Toward a Positive Theory of Consumer Choice.” Journal of Economic Behavior and Organization 1: 39-60.
• Heukelom, Floris. 2007. Kahneman and Tversky and the origin of behavioral economics (Tinbergen Institute Discussion Papers 07–003/1). Rotterdam, the Netherlands: Tinbergen Institute.
• Tversky, Amos, and Daniel Kahneman. (1991) “Loss Aversion in Riskless Choice. A Refrence-Dependent Model.” The Quarterly Journal of Economics 106 (4): 1039-161.
• Tversky, Amos, and Daniel Kahneman. (1981) The Framing of Decisions and the Psychology of Choice.” Science New Series 211 (4481): 453-458.
• Tversky, Amos and Daniel Kahneman. 1974. “Judgment under Uncertainty: Heuristics and Biases.” Science New Series 185 (4157): 1124-1131.
• Tversky, Amos. 1969. “Intransitivity of Preferences.” Psychological Review 76 (1): 31-48.
• Tversky, Amos. 1975. “A Critique of Expected Utility Theory: Descriptive and Normative Considerations.” Springer 9 (2): 163-173.
• Vertzberger, Yaacov Y.I. 2008. “Misperception in International Politics: A Typological Framework for Analysis.” International Interactions 9 (3): 207-234.
• Vertzberger, Yaacov Y.I. 1995. “Rethinking and Reconceptualizing Risk in Foreign Policy Decision-Making: A Socio-Cognitive Approach.” Political Psychology 16 (2): 347-380.
• Vis, Barbara. 2011. Prospect Theory and Political Decision Making. Political Studies Review 9: 334-343. Vlek, Charles, and Pieter-Jan Stallen. (1981) “Judging Risks and Benefits in the Small and in the Large.” Organizational Behavior and Human Performance 28: 235-271.
• von Neumann, John, and Oskar Morgenstern. 1944. Theory of Games and Economic Behavior. Princeton: Princeton University Press.
• Weber, Martin, and Heiko Zuckel. (2005) “How Do Prior Outcomes Affect Risk Attitude? Comparing Escalation of Commitment and the House-Money Effect.” Decision Analysis 2 (1): 30-43.
• Weiner, Bernard.(1985) An Attributional Theory of Achievement Motivation and Emotion. Psychological Review 92 (4): 548-573.
• Weinstein, Neil D. (1980). “Unrealistic Optimism about Future Life Events.” Journal of Personality and Social Psychology 39 (5): 806-820.
• Whyte, Glen. (1993). “Escalating Commitment in Individual and Group Decision-Making: A Prospect Theory Approach.” Organizational Behavior and Human Decision Processes 54: 430–455.