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The Retirement Plan Solution: The Reinvention of Defined Contribution by Matthew X. Smith, Bob Collie, Don Ezra

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Chapter 10. Why the Waste? Because We're Only Human

Are you an above-average driver? Research indicates that 80 percent of people in general will rate themselves as above-average drivers.[76] Of course, it is not possible for most people really to be above-average drivers. By definition, only half the population can be above average at this or any task. But it seems to be part of human nature to be overconfident in one's own abilities.

This tendency to be overconfident has been studied extensively. Many studies have focused on overconfidence as it relates to financial decisions. One study involving individuals' level of confidence when it comes to selecting investments found that participants were more confident when their investment decisions were less accurate.[77] The same study also concluded that as task complexity increases, overconfidence increases as well.

Another widely quoted demonstration of overconfidence asks people to provide estimates of 10 quantities (such as the diameter of the moon, or the number of members of OPEC), with the instruction that for each of these, a range should be provided that the respondent is 90 percent confident contains the true value. (You will recall that we used this form of question in Chapter 3 when considering what future stock market returns might turn out to be.) Because you are free to make the ranges as wide as they need to be to get to the 90 percent confidence level, most people should (in theory) find just one of the 10 true values ...

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