Aggregating or Interacting?: The Role of Individual Overconfidence
60 Pages Posted: 14 Dec 2023 Last revised: 25 Feb 2025
Date Written: January 11, 2025
Abstract
We compare two approaches to combining individual judgments about an unknown value into a collective point estimate: statistically aggregating individual estimates or asking individuals to interact and reach a joint estimate. The latter interacting approach pools private information from all group members, and thus is superior in this regard to the former aggregating approach where each individual estimate is based solely on the individual's own information. We are interested in whether the aggregating approach is able to produce a more accurate collective estimate than the interacting approach.
Even under perfect group interactions, we show that the aggregating approach can do so when individuals are overconfident, that is, when they misinterpret their private information without being aware of it. In particular, when the level of individual overconfidence is very high (resp., very low), the aggregating approach (resp., interacting approach) outperforms; when the overconfidence is at a moderate level, the performance comparison depends on the group size. Importantly, the finding that the aggregating approach may outperform the interacting approach is not driven by the existence of individuals' misinterpretation errors, but rather by their ignorance of it. Moreover, we show that whereas the accuracy of the aggregating approach always increases in the group size, it is not always optimal to have as many interacting group members as possible when these group members are overconfident. Finally, we provide the theoretical optimal solutions for the joint decision of how to form collective estimates, aggregating versus interacting, and how to determine group size.
Keywords: wisdom of the crowd, statiscized groups, interacting groups, overconfidence
Suggested Citation: Suggested Citation
Jia, Yanwei and Tang, Wenjie, Aggregating or Interacting?: The Role of Individual Overconfidence (January 11, 2025). Available at SSRN: https://ssrn.com/abstract=4645002 or http://dx.doi.org/10.2139/ssrn.4645002
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