Throughout history, the maintenance and enhancement of self-esteem has been identified as a fundamental human impulse. Philosophers, writers, educators and of course psychologists have long emphasized the crucial role played by self-image in individual motivation and social interactions. A recent CEPR Discussion Paper by Roland Benabou and Jean Tirole – ‘Self-Confidence: Intrapersonal Strategies’, No. 2580 (October 2000) – brings these concerns into the realm of economic analysis, where they have important implications in areas as diverse as education, career and investment decisions, and family and workplace relations. The paper is part of an exciting new research initiative for CEPR in the interdisciplinary field of economics and psychology.

Benabou and Tirole use the tools of economics to show that several puzzling examples of behaviour documented by psychologists can be quite rational. Their analysis is based on three premises about behaviour. First, we often have imperfect knowledge of our abilities and are uncertain of the long-run pay-offs of our efforts. Second, these self-perceptions affect our incentives to undertake or persevere in a variety of tasks. And third, our decisions exhibit a ‘salience of the present’ so we are tempted to seek immediate gratification at the expense of our long-term interests, to procrastinate and to give up in the face of adversity.

The danger that such myopia may damage our long-term interests creates strong incentives for the manipulation of self-knowledge. An individual’s current ‘self’ has a vested interest in enhancing the self-confidence of future ‘selves’ so as to counter the natural tendency to procrastinate or give up too easily. Hence, good news about our abilities or expected productivity should make us less likely to procrastinate or give up. But the motivation benefits of confidence-maintenance must be traded off against the risks of overconfidence.

This interpretation of rational self-deception helps explain the phenomenon of selective memory, the tendency to remember successes more than failures. This, in turn, helps explain the widely documented prevalence of self-serving beliefs, where people have over-optimistic assessments of their own abilities and hence choose over-ambitious tasks in which they are sure to fail.

Benabou and Tirole show how this ‘psychological immune system’ can lead to a range of possible outcomes in people’s cognitive strategies, self-confidence and behaviour. This suggests the value of benevolent outside parties, such as parents or therapists, to help people escape the ‘self-traps’ they create. Most importantly, they show that while ‘positive thinking’ and similar forms of self-deception can improve welfare, they can also be self-defeating so that it might be better always to be honest with oneself. The research also helps explain why people sometimes seek to lower their own self-confidence: defensive pessimism may reduce the temptation to rest on one’s laurels.