Wednesday, April 09, 2003

Misplaced overconfidence

Landsburg from Slate claims that economics shows how everything goes worse than expected. A little economics can be a dangerous thing, and this muddled thinking from Landsburg is a case in point.

There is a phenomenon in economics called the "winner's curse" which works just as Landsburg says. Auction winners are, by definition, those who were most optimistic about the value of the prize. Given that the true value is likely to be the mean of all the bids, it means that winners were those who overpaid the most. (This is not lost on auction goers. In industries where this stuff really matters, like oil exploration, they conduct auctions under different rules to deal with this effect).

Landsburg then applies this to war, saying that wars of choice are where the chooser feels most optimistic about winning, and therefore is most likely to be overoptimistic, and therefore finds things harder going than first expected. While it is true that war involves overoptimism (both sides think they can win, but only one is right) I don't see why this is limited to the one who picked the conflict. After all, unless you are dealing with nutcases, the other side usually has a list of demands which you can capitulate on and therefore avoid war (Clauswitz makes a persuasive argument that war is merely an extension of diplomacy). Since both sides have freedom of action in a war of choice, overconfidence can come from either side.

The be frank, the main overconfidence I've seen over the last three weeks have been from news commentators thinking they know what they are talking about.


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