The maintenance and enhancement of self-esteem has always been identified as a fundamental human impulse. Philosophers, writers, educators and of course psychologists all have emphasized the crucial role played by self-image in motivation, affect, and social interactions. The aim of this paper is to bring these concerns into the realm of economic analysis, and show that this has important implications for how agents process information and make decisions. Conversely, the tools of economic modelling can help shed light on a number of apparently irrational behaviors documented by psychologists. This is a major analysis on self-confidence personal motivation.
Indeed, both the demand and the supply sides of self—confidence appear at odds with economists’ view of human behaviour and cognition. Why should people prefer rosy views of themselves to accurate ones, or want to impart such beliefs to their children? From car accidents, failed dot.com firms and day trading to the space shuttle disaster and lost wars, the costs of overconfidence are plain for all to see. Even granting that some “positive illusions” could be desirable, is it even possible for a rational, Bayesian individual to deceive himself into holding them? Finally, the welfare consequences of so-called self—serving beliefs are far from clear: while “thinking positive” is often viewed as a good thing, self—deception is not, even though the former is only a particular form of the latter.
The Demand for Self-Confidence
A first reason may be that thinking of oneself favourably just makes a person happier: self—image is then simply another argument in the utility function. Indeed, psychologists emphasize the affective benefits of self—esteem as well as the functional ones on which we shall focus. One may also hypothesize that such preferences over beliefs could have been selected for through evolution: the overconfidence that typically results may propel individuals to undertake activities (exploration, foraging, combat) which are more risky than warranted by their private material returns, but confer important external benefits on the species. In Section V.B we shall explain how a hedonistic self—image motive can readily be incorporated into our general framework. This is a major analysis on self-confidence personal motivation.
A second explanation may be that believing oneself to be of high ability or morality makes it easier to convince others (rightly or wrongly) that one does have such qualities. Indeed, it is often said that to lie most convincingly one must believe one’s own lies. While the idea that people are “transparent” and have trouble misrepresenting their private information may seem unusual in economics, one could easily obtain an instrumental value of self—confidence from a signalling game where those who truly believe in their own abilities face lower costs of representing themselves favourably to others.
The explanation that we emphasize most is that self—confidence is valuable because it improves the individual’s motivation to undertake projects and persevere in the pursuit of his goals, in spite of the setbacks and temptations that periodically test his willpower. Morale is universally recognized as key to winning a medal, performing on stage, getting into college, writing a great book, doing innovative research, setting up a firm, losing weight, finding a mate, and so forth.
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