Berkeley Program in Law and Economics

Overconfidence is an overestimation of one’s own ability that is often associated with an underestimation of risks and inflated estimation of one’s future success. Debiasing overconfidence through tort law is not an easy task. If people tend to believe that risks are less likely to materialize for themselves than for others, they inadequately react to legal threats and incentives. For example, overconfidence may lead to the assumption of excessive risks, undermining the deterrent effect of liability rules, even if parties are provided accurate information about statistical facts. In this paper, we build an economic model to consider the role of tort rules in debiasing overconfidence. We show a surprising and counterintuitive implication: the most effective way to correct overconfidence in tort law may be to forgive it, rather than penalize it through liability.