The overconfidence generally leads to troublesome situations when the people exude

overconfidence without factual understanding of the situation. Interestingly, research by

Dunning, Johnson, Ehrlinger, & Kruger, 2003) suggests that unskilled people are very often
confident than their counter parts. It is mainly because the unskilled do not have sufficient
knowledge and information to figure out how wrong they are and what needs to be achieved to
be right.

Confidence is the magnitude of certainty that one believes to hold in the accuracy of his mental
states like beliefs, knowledge, perception, judgment and decisions. According to Kahnman and
Tversky (1982) confidence can be described as the subjective probability or magnitude of belief
associated with what we think will happen. Debondt and Thaler (1995) concluded that in the
field of psychology of judgment the strongest finding is that “the people are over confident”

Types of overconfidence are outlined below:

2.2.2.1 Over precision

It is the type of over confidence bias in which the person becomes excessively sure about the
certainty and accuracy of his information and belief. Scientists generally use the technique
known as miscalibration to measure the degree of over precision. The miscalibration technique
helps to determine the correlationship between accuracy and the overconfidence. More the over
confidence bias more is the negative correlation established between accuracy and the over
confidence.

2.2.2.2 Over placement or the better than average effect

Over placement is the type of overconfidence in which people hold the conviction that they are
better than average in their competency and capacities (Heine and Lehman, 1997). For example
the investors often believe that their return on a portfolio will be better than that of the majority
of the investor active in the same market (Alike, 1985). Over placement induces risk taking
behavior (Larwood and Whittaker, 1997). It is measured by comparing perceived percentile of
the subject with the actual percentile of the subject. The actual percentile being derived or
assessed by the external evaluator and the perceived percentile is given by the subject himself.
2.2.2.3 The illusion of control
It is the type of over confidence with the tendency to believe that one has high control over the
events of one’s life. Langer (1975) defines that the illusion of control as the belief by the
individual that his probability of success in his life is higher than would the objective probability
concludes.

2.2.2.4 The unrealistic optimism or overestimation

It is the type of over confidence characterized by the tendency to overestimate the chance of
having favorable outcome than warranted by the objective estimate of the outcome (Weinstein,
1980). For example MBA students generally overestimate the future salary as well as the number
of job offers they will receive after the completion of their study (Hoch, 1985).

2.2.3 Bounded awareness

Bounded awareness basically stems from the tendency to over focusing. Awareness is
unbounded because people fail to recognize and use the stimuli and information which are easily
available to them. This phenomenon is called the bounded awareness (Bazerman and Chugh,
2005).

People tend to focus on misleading information and avoid the most accessible and perceivable
information. This result to the focusing failure that arises due to the discrepancy between the
focused information and information required to take the good decision. This is more
pronounced in the situations where the organization structure is huge. Here the relevant
information is not considered due to multiple layers of the organization and also because the
management deliberately filters the information that they do not want to face.

In a study by Cain, Loewenstein, and Moore (2005) auditors mostly fail to figure out the changes
in the accounting policies and irregularities presented by their organizations in the slow slippery
manner.