Estimating the Relationship between Skill and Overconfidence

Abstract

The Dunning–Kruger effect states that the low skilled are overconfident while the high skilled are more accurate in assessing their skill. In apparent support of this effect, many studies have shown that low performers overestimate their performance while high performers are more accurate. This empirical pattern, however, might be a statistical artifact caused by measurement error. We are the first paper to consistently estimate the Dunning–Kruger effect using an instrumental variable approach. In the context of exam grade predictions of economics students, we use students’ grade point average as an instrument for their skill. Our results support the existence of the Dunning–Kruger effect.