Sunday, November 06, 2011

Information Calibration And Confidence

In 1979 [Studies in Intelligence, Vol. 23, No. 1 (Spring 1979)], a study of expert handicappers demonstrated an interesting interaction between information and confidence. There were two key findings. First, as soon as an experienced handicapper has the minimum information (seven plus or minus two variables) necessary to make an informed judgment, obtaining additional information generally does not improve the accuracy of his selections. Second, additional information does, however, lead the handicapper to become more confident in his judgments, to the point of overconfidence. It appears that handicappers have an imperfect understanding of what information they actually use in making judgments. They are unaware of the extent to which their judgments are determined by a few dominant factors, rather than by the systematic integration of all available information.
As ever, if the handicapper cannot find variables that account for sufficient variance in outcomes over and above that provided by market prices then he will not have an edge and will lose his bankroll.