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Why You Shouldn’t Trust Confident People

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Overconfidence, stemming from cognitive biases and a lack of accurate feedback in complex environments, can lead to catastrophic errors, as exemplified by the downfall of Barings Bank and other historical disasters, and affects individuals across all levels of expertise.

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Friday the 17th of July 1992. Amidst the

chaos of the trading floor at

Singapore's International Stock

Exchange, one of the junior traders

makes an expensive mistake.

Instead of buying 20 futures contracts

for a client, she sold them instead,

costing Beerings Bank nearly $40,000.

To save her job, her boss, Nick Leon, a

young trader keen to make his mark,

decides to hide the loss. He puts it in

an obscure error account. That's account 88888.

88888.

It's used by banks to solve small

discrepancies in trades. It's a

dangerous move and it should have been

picked up by the central office

immediately. But when nobody from

bearings notices, he gains confidence,

convinced he can win back the loss and

get the team out of trouble.

>> I'm operating in the belief that I can

get it back.

You know, maybe it goes back to the

confidence thing. I don't know. I mean,

I'm confident I can get it back at that

stage. But Leon's staggering

overconfidence would create a debt of

gargantuan proportions and lead to one

of the biggest collapses in banking history.

history.

It's easy for me to make the case that

overconfidence is the most dangerous of

the human biases. Overconfidence gets us

into all sorts of trouble.

It leads us to take risks, make

commitments, enter contests, try things

that will ultimately fail, sometimes in

costly, embarrassing, and dangerous

ways. Overconfidence has been implicated

in almost every big disaster, from the

sinking of the Titanic to the Chernobyl

nuclear disaster to the loss of the

space shuttle Challenger. But

overconfidence isn't reserved for just a

few reckless individuals. We can all

fall victim to it. For example, 93% of

us think we are better drivers than the

median, which is of course impossible.

The scale of the problem was identified

in some now classic research with a set

of simple quiz questions. True or false?

Australia is wider than the moon. Oh, I

bet they're about the same size.

>> It's just it looks small on a map, but

it's huge.

>> Are there more or less stars in the

Milky Way than trees on Earth?

>> More stars. more stars.

>> One teaspoon of pure olive oil,

>> 4 1/2 g, contains more chemical

potential energy than an equivalent 4

1/2 g amount of TNT.

>> I'm going to say true.

>> Oh no,

>> this feels kind of like a trick question.

question.

>> The energy density of butter is 10 times

that of lithium batteries, right? I

mean, lithium batteries are rubbish.

Everyone's going on about them. Just run

your car on butter, I say.

>> True or false? Plants are more efficient

than the average solar panel at

absorbing the sun's energy.

>> Yeah, they must be.

>> Now, these aren't the exact questions

from the original research. More on

those later, but the specifics don't

really matter. The interesting bit is

what they asked next. How confident are

you that you are right?

>> 100% confident.

>> 100. Yes.

>> I think it's true. Um, so I've also got

to go 90%. >> 100%

>> 100% >> 100%

>> 100% >> 100%.

>> 100%. >> Yeah.

>> Yeah.

>> I don't think we actually had any

expectations. This was very early on the

re in in the research on on confidence

assessment, but we didn't really know

what we what what we would find.

>> The results revealed a surprising

disparity between how accurate someone

thinks they are and how accurate they

actually are. When people are 90%

certain, they are right only 75% of the

time. In fact, we ran our own version of

this online and found an even more

extreme discrepancy. We asked the

Veritassin community a bunch of science

questions and then asked how confident

they were in their answer. Our results

showed that those who were the most

confident, describing themselves as 91

to 100% sure, were only correct 51% of

the time. Since the original research,

these results have been replicated again

and again in all areas from general

knowledge to motor skills and it affects

everyone even experts. I have a paper

where we analyze the survey of

professional forecasters. These are

chief economists at various corporations

and banks who are invited to forecast

the state of the economy on a quarterly

basis. We find that they are on average

too sure that they know what's going to

happen. So they on average say they're

something like 53% sure they have

correctly predicted what's going to

happen to inflation for instance and

they are right like 23% of the time. How

well what you think you know matches

with what you actually know is called

your calibration. So if you're perfectly

calibrated and say 80% confident you

should be right 80% of the time. But

most of us are not well calibrated >> 100%

>> 100% >> 100%.

>> 100%.

>> Yeah. There are 200 billion stars in the

Milky Way, but there are three trillion

trees on Earth.

>> 100% confident.

>> 100. Yes. >> False.

>> Most of the time, being overconfident

isn't a huge issue. But for Nick Leon,

the stakes soon became very high. Leon's

plan to recover his team's loss was to

bet that the Japanese stock market would

go up. So he went long on the top 225

companies in Japan, the Nikkeay 225.

Ever since the Japanese asset price

bubble peaked 2 years previously, the

Nikkeay had been dropping from 38,000 to

16,000. And he was confident the market

would soon bottom out and start rising,

but it continued to fall. Over the next

few weeks, it dropped to a low of

14,000. And the whole time, Nick was

betting the wrong way with ever bigger

and riskier bets. He would double down,

betting double his losses so the next

win would bring him back above water.

This strategy should work when the next

win comes along, but the market collapse

was unrelenting and his losses ballooned

from $40,000 to around $3 million. In

spite of this, Leon remained confident

and eventually his luck turned around.

In the spring of 1993, the market

rebounded up to 20,000, and by the

summer, that account was back in credit.

Leon goes out to celebrate that weekend,

drinking and dancing on tables, finally

free of the hole he had dug himself into.

into.

But on Monday morning, he made another

trading error on the futures market. A

damaging loss that Leon didn't want to

admit. So he put the loss back into

account 88888.

Confident that if he got out of the

previous one, he could do it again. He

began making risky trades to try to

recover that initial loss. And as the

losses mounted in the 58 account, it

became harder and harder to make new

trades to cover the last loss. By the

end of 1993, his losses exceeded $30 million.

million.

Leon is obviously an extreme example,

but this tendency to overestimate our

abilities is something we all share. So

the question is why? The obvious

explanation that a lot of people default

to that is we want to feel good about

ourselves and pretend like we're

wellinformed that we enjoy enormous

satisfaction from being able to say I

know or even better I told you so. And so

uh we pretend to ourselves and others

that we know when we don't. That is the

the motivated egocentric version of an

explanation for excessive faith in her

own judgment.

>> Reichel had faith and the idea if

nothing else.

>> But what if it's something more

uncomfortable? Stupidity.

France. Reichelt was a tailor with no

formal scientific or engineering

training. But he was obsessed with

solving the problem of aviation safety.

He spent months designing a parachute

suit which repeatedly failed during

testing. But he became convinced the

issue was that he didn't have enough

height for it to work. So in February

1912, he took it to the Eiffel Tower.

And rather than using a dummy to test

it, he jumped himself.

Tragic, but also really dumb.

>> Do you recognize this graph?

>> Uh the like Dunning Krueger graph.

>> Are you confident that this is the

actual Dunning Krueger graph?

>> Not at all. I in fact, I think that this

is not the Dunning Krueger graph. I

think that this is a bit of a

communication trick. This is what people

call the Mount Stupid curve, which will

pop up if you search for the Dunning

Krueger effect into Google images.

>> As far as I understand it, um it's a

it's an effect that says that when you

know very little about it, your

confidence is high. And as you know more

about it, your confidence sinks until

you become a master at it.

>> But I think that the actual result was

like a little bit more fuzzy than this.

It was this graph doesn't actually show

the Dunning Krueger effect. It's just a

meme that resonates with a lot of people

and it became conflated with the effect.

In their original research, Dunning and

Krueger tested people on tasks like

grammar, logic, and humor and then they

asked participants to estimate how well

they performed. That produced this

curve. You can see that those who

performed worse had the largest mismatch

between their confidence and

performance. They were the most

overconfident. Those who performed the

best were actually slightly

underconfident. This suggests that

overconfidence may be linked to how much

we know. Those who know less think that

they know more than they do. But to me,

this effect looks a little like a

statistical artifact. Because while I

was doing my PhD, I asked students some

physics questions and I also asked for

their confidence in their answers. And

when I looked at the results, accuracy

spanned the full range from nearly 0% to

100%. But confidence varied over a much

narrower range. All the scores were

roughly in the middle. This meant that

poor performers were the most

overconfident and the highest performers

were actually slightly underconfident.

This is exactly what Dunning and Krueger

found. So maybe overconfidence isn't

entirely due to how much we know, but

also because most of us express at least

kind of middle-of the road confidence.

But there is another factor at play

here, which is how much information our

brains are capable of processing.

Monday, the 27th of January, 1986. It's

5:45 p.m. at the Kennedy Space Center in

Cape Canaveral, and the engineers from

Morton Theacle, who made the Challenger

Space Shuttle's rocket boosters, make an

emergency conference call. They've just

seen the weather forecast, predicting

temperatures overnight will plummet to

25° F, far colder than any previous

shuttle launch. They know the rubber

O-rings that seal joints in the boosters

become less flexible in the cold, but

have just a few hours to gather data,

create charts, and present their case.

Over the next 6 hours, the engineers

present 13 charts with data on O-ring

temperature, hot gas erosion, joint

rotation, and more. But the data is

scattered, incomplete, and not

synthesized into a clear narrative.

They'd never tested below 53° F. So NASA

managers were trying simultaneously to

track historical O-ring data, erosion

patterns, joint dynamics, seal

resiliency, pressure differentials, and

more. No single chart told the whole

story. So overwhelmed by seemingly

contradictory data and confident that

their rocket boosters were safe, theole

management overruled their own engineers

and approved the launch.

At 11:38 the next morning, 73 seconds

after launch,

all seven crew members were killed.

Calibrating your certainty requires

thinking of all the ways that you could

be wrong. And that's hard for finite

fallible agents like us. If it means

considering everything that we don't know,

know,

>> how many chunks of novel information you

can hold in your head at one time is

your short-term memory capacity. In

2008, Hansen, Jesus, and Winman

investigated how short-term memory

capacity was linked to accuracy and

overconfidence. Participants were asked

to give ranges for factual questions

like the length of a river or the

population of a city. People's ranges

were consistently too narrow, which

effectively meant they were being

overconfident. And those who had worse

short-term memory were more often wrong

and more likely to be overconfident.

Another study conducted by Conti in 2023

asked participants to keep sequences of

letters in their mind while they judged

their own performance. As the memory

load increased, confidence estimates

became less accurate, even for

participants with higher working memory

capacities. Together, these studies

suggest that assessing your accuracy is

a mentally taxing task. So

overconfidence isn't necessarily about

arrogance. It's your brain working at

the limits of what it can track and

hold. And because of this, your brain

can start using shortcuts.

Psychologist Daniel Conorman describes

these mental shortcuts as heruristics

that together create systemic errors

called cognitive biases. One shortcut we

use a lot is substituting hard questions

with easier related ones. Researchers

have tested this by asking students how

happy they were in their life and how

many dates they'd had in the last month.

Unsurprisingly, these two questions did

not correlate. There's a lot more to

happiness than matches on Tinder, at

least for most people. However, if you

switch it around and ask about their

dates first, suddenly the correlation

jumps to 66. Working out how happy you

are in your life is a difficult

question. You have to consider many

things and balance them all out. So,

when you're primed with the information

about your dating life, you're very

likely to substitute that hard question

like, "How happy am I in my life?" with,

"How many dates have I recently had?"

Overconfidence from misprocessing

information like this can be disastrous.

So, why are our brains wired this way? I

mean, you might expect natural selection

to have wiped out the confidently

incorrect, but there is evidence that

overconfidence can actually be advantageous.

advantageous. Overconfidence

Overconfidence

can massively improve your status. In a

scientific version of the apprentice,

scientists in 2012 compared participants

own assessments of their skill with

objective measures. They placed them in

group tasks to see who was chosen as a

leader and whose ideas influenced the

group, tracking status over multiple

sessions and assessing whether the

desire for status led participants to

exaggerate their abilities. The results

were clear. Overconfident individuals

were more likely to lead, assert

themselves, and maintain influence even

when their actual abilities were mid.

And the evidence certainly shows people

react better to confident individuals.

Using an fMRI, researchers at the

University of Sussex measured brain

activity of people after hearing

unconfident versus confident advice.

Those who listened to the confident

advice had increased activity in the

ventromedial prefrontal cortex. That's a

brain region associated with processing

rewards and expected satisfaction. This

means that human brains are biologically

tuned to be influenced by confident

individuals. We literally feel better

when we hear confident people. But

recognizing that dynamic

highlights a potentially problematic

incentive for anyone who's contending

for positions that they want. People who

express more confidence in employment

interviews or political campaigns, for

instance, do earn the confidence of

interviewers and potential voters even

if they're being overconfident. They

can't actually deliver. They don't

actually know the answer, but they can

talk a good line to impress others even

if they can't ultimately deliver on

those grand assertions. They know the

audience will place more faith in them

if they express conf. Well, they should

express maximal confidence.

>> Leon knew this and he took advantage of

it. While he was secretly racking up

huge losses in the infamous 58 account,

he was publicly posting huge profits and

everyone believed the illusion.

>> They come in and they don't test any records.

records.

>> So, I can't be happier. They didn't test

one record. As Leon's hidden losses

mounted, he requested huge sums from

head office to keep doubling down, up to

$5 million at a time. Bearing

management, barely understanding futures

and believing in their star trader, they

granted his requests and continued to

grant future requests. Every day that I

make one of these requests for

additional money, I never expected to

come. I expect somebody to say, "Look,

what the hell's going on?"

>> By autumn 1994, the account was nearly

$260 million in the red. To mask this,

Leon began buying futures from himself,

inflating his perceived profits further.

At Syax's 10th anniversary in September,

Beerings received two awards, largely

credited to Leon. In December, he was

flown to New York, seemingly responsible

for $44 million in Bearings turnover

that year. Some traders raised doubts

that these kinds of profits could be

made from the low-risisk trading he was

supposed to be doing. But management's

faith in Leon's talent was unshakable,

and they dismissed these concerns.

Beering's overconfidence in Leon and

Leon's overconfidence in himself would

be the bank's downfall. The figures are

so big it seems like the ultimate

confidence trick. But there's a partial

explanation for the delusion on both

sides. Leon's and bearings

overconfidence was amplified by the

complexity and unpredictability of the

market and the trades he was making.

It's sort of an issue of feedback.

In a controlled environment where there

are clear rules and guaranteed outcomes,

like in a chess match, there is clear

feedback on whether decisions are good

or bad. With reliable feedback,

professional chess players are able to

learn to make better decisions with more

accurate confidence. But in a noisy

environment where there is rarely

consistent or timely consequences for

predictions, this feedback is

unreliable. Whether our confidence is

accurate or misplaced is increasingly

hard to judge even amongst experts. It's

especially problematic for political pundits.

pundits.

>> This is going to be a landslide. I think

Romney is going to win by quite a bit.

>> So, right now, we have Hillary's about a

75 or an 80% favorite.

>> For example, prior to 2024, political

analyst Alan Lickman had accurately

predicted the winner of nine of the 10

previous US presidential elections using

his 13 keys to the White House method.

Using the same strategy in 2024, he

predicted that

>> Kla Harris will be a president-breaking president.

president.

>> Look what happened. Is this crazy?

>> He attributed his miscalculation to the

spread of disinformation that misled the

electorate. This noisy environment made

it difficult to discern key issues like

the actual state of the economy.

Similarly, the feedback Leon had

received was inconsistent. He was making

some bad trades, but he had also won it

all back before. and this significantly

clouded his judgment, amplifying his

overconfidence. By 1995, Leon's losses

were in the hundreds of millions, and

Bearings had unwittingly sent him $1

billion. For a bank with around $700

million in capital base, they were

legally only allowed to lend around a

quarter of that. But no one questioned

it. They were all blinded by his

apparent success. At this point, his

positions were so big, he estimates that

he was probably half of the entire Nikay

futures market. So all he could do was

buy himself some time and hope that the

market went his way. And for a while it

worked. The economy was stable and he

couldn't see anything on the horizon

that would change this. But then

disaster struck. Japan is tonight in a

state of mourning and of shock.

>> On the 17th of January 1995, the great

Henshin earthquake struck Japan. 20 km

from the city of Coobe. With a magnitude

of 6.9, it devastated the city which was

one of Japan's key ports. This

devastation spread to the stock market.

The NIK index plunged 1,055 points. Leon

attempting to double down again risked

even more money. He bet heavily that the

Nikay would make a rapid recovery, but

it didn't. And in the end, in today's

money, Leon had lost $2.8 billion. On

the 23rd of February, Leon went on the

run. And 3 days later, Bearings, one of

the oldest and most trusted banks in the

world, collapsed. overconfidence was at

least partially to blame for its

downfall. Realizing the walls were

closing in, Leon fled to Malaysia and

then Thailand, but his escape was

short-lived. He was eventually arrested

in Germany and extradited to face

justice, marking the end of a

spectacularly destructive gamble. He was

just 28 years old.

Now, we don't all bring down banks, but

we are all vulnerable to overconfidence.

In a complex world with unclear, noisy

feedback where our brains are

overwhelmed, a set of simplistic biases

can take over and we all too often end

up thinking we know more than we do. So,

what can we actually do about this? I

try to get better at calibrating my

confidence judgments by keeping track

and keeping score. So, uh, when a

colleague asks me, "How long is it going

to take you to get me comments on this

paper draft we're working on?" I don't

promise I'll do it by Friday. I'm much

more likely to say something like, "I

think there's a 60% chance I can get you

comments by Friday." They'll often uh

react with a quizzical look or uh a

laugh. Well, practicing and being aware

of our calibration is the obvious way to

improve, but so is being intellectually humble.

humble.

>> I think that uh the best medicine for

overconfidence is not so much

information as feedback. Um and I get

plenty of that

though. I also I I think people are

right that sometimes I do have a little

bit of overconfidence.

>> If we want to become more accurate, we

should capitalize on the wisdom of the

crowd by listening more to others. In

particular, we should listen to people

who disagree with us. Understanding the

best arguments of your critics,

understanding what information those who

disagree with you have that you lack is

very helpful for making better

decisions. The best calibrated people

aren't those who know the most. It's

those who know what they don't know. So,

true wisdom lies not in being certain,

but in knowing the limits of your own

certainty. And that's an idea that's

inspired our latest project. All those

questions I asked. These are good

questions. A >> well,

>> well,

>> they come from a new board game that

we've made. It's called Elements of

Truth. The game contains over 800

fascinating science trivia questions

with a twist. The number of points you

win on each question depends on how

confident you are. You can bid any

number from 1 to 10. If you're not sure,

you can play a low number, or you can

try to follow the lead of someone else

who you think should know the answer.

We've tested this game with scientists,

teachers, and students. And what we

found is that it regularly leads to

discussions that go way beyond the

initial questions. The core game comes

with 200 questions that cover all

aspects of science, and there are five

additional packs on specific topics like

physics, technology, engineering, and

astronomy. Plus, there's a Veritassium

pack on concepts covered in many of our

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YouTube Transcript:Why You Shouldn’t Trust Confident People