Why People Are So Confident When They're Wrong

[00:01] Amidst the chaos of the trading floor one of the junior traders makes an expensive mistake. she sold them instead,

[00:15] costing Barings Bank nearly $40,000. a young trader keen to make his mark, He puts it in an obscure error account,

[00:28] It's used by banks to solve small discrepancies and trades. by the central office immediately,

[00:40] convinced he can win back the loss - I'm operating in the belief that I can get it back. I mean, I'm confident I can get it back at that stage.

[00:57] would create a debt of gargantuan proportions and lead to one of the biggest collapses in banking history. as the most dangerous of the human biases.

[01:12] Overconfidence gets us into all sorts of trouble. It leads us to take risks, make commitments, enter contests, try things that will ultimately fail,

[01:26] sometimes in costly, embarrassing, and dangerous ways. from the sinking of the Titanic to the loss of the space shuttle Challenger.

[01:39] for just a few reckless individuals. For example, 93% of us think we are better drivers The scale of the problem was identified

[01:54] with a set of simple quiz questions. - Oh! - It looks small on a map, but it's huge.

[02:07] - Are there more or less stars in the Milky Way - One teaspoon of pure olive oil, contains more chemical potential energy

[02:22] than an equivalent four and a half gram amount of TNT. (Derek laughs) - The energy density of butter

[02:36] is 10 times that of lithium batteries, right? Just run your car on butter, I say. than the average solar panel at absorbing the sun's energy.

[02:51] - Now, these aren't the exact questions but the specifics don't really matter. how confident are you that you are right?

[03:05] - I think it's true. - 100%? - Yeah. This was very early on in the research

[03:21] but we didn't really know what we would find. between how accurate someone thinks they are When people are 90% certain, they are right,

[03:37] In fact, we ran our own version of this online We asked the Veritasium community a bunch Our results showed that those

[03:53] as 91 to 100% sure were only correct 51% of the time. these results have been replicated again and again

[04:05] in all areas from general knowledge to motor skills, - I have a paper where we analyze the survey These are chief economists at various corporations

[04:19] of the economy on a quarterly basis. too sure that they know what's going to happen, say there's something like 53% sure

[04:34] what's gonna happen to inflation, for instance, - How well what you think you know matches So, if you're perfectly calibrated and, say, 80% confident,

[04:50] but most of us are not well calibrated. in the Milky Way, - [Group] Oh!

[05:03] False! (laughs) - Most of the time, being overconfident isn't a huge issue, but for Nick Leeson, the stakes soon became very high.

[05:17] was to bet that the Japanese stock market would go up, the Nikkei 225. the Nikkei had been dropping from 38,000 to 16,000,

[05:35] would soon bottom out and start rising, Over the next few weeks, it dropped to a low of 14,000, with ever bigger and riskier bets,

[05:50] so the next win would bring him back above water. This strategy should work when the next win comes along, and his losses ballooned from $40,000 to around $3 million.

[06:06] In spite of this, Leeson remained confident, In the spring of 1993, the market rebounded up to 20,000, and by the summer, that account was back in credit.

[06:21] drinking and dancing on tables, finally free of the hole he had dug himself into. he made another trading error on the futures market,

[06:34] so he put the loss back into account 88888, he could do it again. and as the losses mounted in the five eights account,

[06:51] to cover the last loss. By the end of 1993, his losses exceeded $30 million. but this tendency to overestimate our abilities

[07:06] So, the question is why? that is we wanna feel good about ourselves

[07:18] and pretend like we're well-informed, from being able to say, And so, we pretend to ourselves and others

[07:35] That is the motivated egocentric version - [Narrator] Reichelt had faith than the idea, - But what if it's something more uncomfortable, stupidity?

[07:50] Franz Reichelt was a tailor with no formal scientific with solving the problem of aviation safety. which repeatedly failed during testing,

[08:04] was that he didn't have enough height for it to work. and rather than using a dummy to test it, he jumped himself.

[08:17] Do you recognize this graph? - Are you confident that this that this is not the Dunning-Kruger graph.

[08:31] - This is what people call the Mount Stupid Curve, for the Dunning-Kruger effect into Google images. that says that when you know very little about it,

[08:46] your confidence sinks until you become a master at it. is, like, a little bit more fuzzy than this. This graph doesn't actually show the Dunning-Kruger effect.

[09:02] and it became conflated with the effect. on tasks like grammar, logic and humor, how well they performed.

[09:17] You can see that those who performed worse They were the most overconfident. were actually slightly underconfident.

[09:30] to how much we know. but to me, this effect looks a little I asked students some physics questions

[09:45] And when I looked at the results, from nearly 0% to 100%, but confidence varied over a much narrower range.

[09:59] This meant that poor performers were the most overconfident were actually slightly under confident. so maybe overconfidence isn't entirely

[10:13] but also because most of us express But there is another factor at play here, are capable of processing.

[10:28] it's 5:45 PM at the Kennedy Space Center in Cape Canaveral, who made the Challenger space shuttle's rocket boosters predicting temperatures overnight will plummet

[10:44] far colder than any previous shuttle launch. in the boosters become less flexible create charts, and present their case.

[10:58] on O-ring temperature, hot gas erosion, But the data is scattered, incomplete, They'd never tested below 53 degrees Fahrenheit,

[11:13] to track historical O-ring data, erosion patterns, pressure differentials, and more. So, overwhelmed by seemingly contradictory data

[11:28] Thiokol management overruled their own engineers At 11:38 the next morning, 73 seconds after launch,

[11:41] all seven crew members were killed. - Calibrating your certainty requires thinking and that's hard for finite, fallible agents like us

[11:58] - How many chunks of novel information you can hold In 2008, Hansson, Juslin, and Windmann was linked to accuracy and overconfidence.

[12:13] for factual questions like the length of a river People's ranges were consistently too narrow, and those who had worse short-term memory

[12:26] Another study conducted by Conte in 2023 asked participants while they judged their own performance. confidence estimates became less accurate,

[12:41] Together, these studies suggest that assessing your accuracy So, overconfidence isn't necessarily about arrogance. of what it can track and hold.

[12:56] And because of this, your brain can start using shortcuts. these mental shortcuts as heuristics, that together, One shortcut we use a lot is substituting hard questions

[13:10] how happy they were in their life Unsurprisingly, these two questions did not correlate. at least for most people.

[13:25] suddenly, the correlation jumps to 0.66. is a difficult question. So, when you're primed

[13:39] you're very likely to substitute that hard question, with, how many dates have I recently had? like this can be disastrous.

[13:53] I mean, you might expect natural selection but there is evidence that overconfidence Overconfidence can massively improve your status.

[14:11] scientists in 2012 compared participants' own assessments They placed them in group tasks to see who is chosen tracking status over multiple sessions

[14:25] to exaggerate their abilities. overconfident individuals were more likely to lead, even when their actual abilities were mid.

[14:39] to confident individuals. measured brain activity of people and those who listened to the confident advice

[14:53] in the ventromedial prefrontal cortex. and expected satisfaction. to be influenced by confident individuals.

[15:07] - But recognizing that dynamic highlights a potentially problematic incentive for anyone who's contending for positions that they want.

[15:21] People who express more confidence in employment interviews or political campaigns, for instance, do earn the confidence of interviewers and potential voters,

[15:34] They can't actually deliver. but they can talk a good line to impress others, They know the audience

[15:51] Well, they should express maximal confidence. While he was secretly racking up he was publicly posting huge profits

[16:05] - They come in and they don't test any records, They didn't test one record. he requested huge sums from head office

[16:18] Barings management, barely understanding futures they granted his requests - Every day that I make one of these requests

[16:31] "Look, mate, what the hell's going on?" the account was nearly $260 million in the red. inflating his perceived profits further.

[16:47] Barings received two awards, largely credited to Leeson. seemingly responsible for $44 million that these kinds of profits could be made

[17:03] But management's faith in Leeson's talent was unshakeable, Barings' overconfidence in Leeson would be the bank's downfall.

[17:17] it seems like the ultimate confidence trick, for the delusion on both sides. by the complexity and unpredictability of the market

[17:30] It's sort of an issue of feedback. and guaranteed outcomes like in a chess match,

[17:42] With reliable feedback, professional chess players with more accurate confidence. or timely consequences for predictions,

[17:56] Whether our confidence is accurate or misplaced It's especially problematic for political pundits. I think Romney's gonna win by quite a bit.

[18:10] or an 80% favorite. had accurately predicted the winner of nine using his 13 keys to the White House method.

[18:24] - Kamala Harris will be a precedent-breaking president. Is this crazy? (crowd cheering)

[18:36] of disinformation that misled the electorate. to discern key issues like the actual state of the economy. He was making some bad trades,

[18:51] and this significantly clouded his judgment, By 1995, Leeson's losses were in the hundreds of millions, and Barings had unwittingly sent him $1 billion.

[19:05] For a bank with around $700 million in capital base, but no one questioned it. At this point, his positions were so big,

[19:18] of the entire Nikkei futures market, and hope that the market went his way. The economy was stable and he couldn't see anything

[19:31] But then disaster struck. and of shock. (siren wailing) the Great Hanshin Earthquake struck Japan

[19:44] With the magnitude of 6.9, it devastated the city, This devastation spread to the stock market. Leeson, attempting to double down again,

[19:59] He bet heavily that the Nikkei would make a rapid recovery, Leeson had lost $2.8 billion.

[20:12] And three days later, Barings, in the world, collapsed. for its downfall.

[20:24] Leeson fled to Malaysia and then Thailand, He was eventually arrested in Germany marking the end of a spectacularly destructive gamble.

[20:36] He was just 28 years old. but we are all vulnerable to overconfidence. where our brains are overwhelmed,

[20:50] And we all too often end up thinking So, what can we actually do about this? - I try to get better at calibrating my confidence judgments

[21:03] So, when a colleague asks me, to get me comments on this paper draft we're working on?"

[21:15] I'm much more likely to say something like, They'll often react with a quizzical look or a laugh.

[21:30] is the obvious way to improve, - I think that the best medicine for overconfidence

[21:42] and I get plenty of that. (laughs) that sometimes I do have a little bit of overconfidence. we should capitalize on the wisdom of the crowd

[21:57] to people who disagree with us. understanding what information is very helpful for making better decisions.

[22:11] - The best calibrated people aren't those who know the most. So, true wisdom lies not in being certain, And that's an idea that's inspired our latest project.

[22:27] (Hannah laughs) It's called "Elements of Truth." science trivia questions with a twist.

[22:40] depends on how confident you are. If you're not sure, you can play a low number who you think should know the answer.

[22:55] teachers, and students, and what we've found that go way beyond the initial questions. and there are five additional packs on specific topics

[23:12] like physics, technology, engineering, and astronomy. in many of our most popular videos. to give you the opportunity to shape it with us.

[23:26] for a special community pack. with a credited question in the game. use this QR code or the link in the description

[23:41] It is only because of you that I've been able so as always, I wanna thank you for your support and thank you for watching.