Confidence type 2 is a new link between rationality and predictions about contrarian futures.
Start with a paradox: The concept of "overconfidence," in the tradition of Kahneman/ Tversky, implies that any attempt to try something that has never been successfully approached by someone else in the past is irrational. So breakthrough entrepreneurs would be irrational by definition.
Todd Zenger and I think that this is fundamentally wrong if entrepreneurs have reasons –a theory– of why things are different and they will succeed. More generally, when strategists envision valuable alternative futures, learning how to reach them means learning to make the presently untrue true.
These actors must then develop a measure of confidence in success with creating these futures, if massive investments are associated with the actions that strategists' theories suggest as a path towards these futures. We propose that this measure must involve, but also go beyond, probability. Probabilities should be calibrated, as usual, backward-looking by drawing inferences from data. But confidence in a theory's logic by measured by belief strengh --Confidence Type 2-- trading off reasons in theory and counter-theories. We illustrate this with an extended example. Recalibrating Confidence Type 2 cannot be reduced to probabilistic learning, as contradictions need to be resolved. We define rational confidence, a state where both the process of theorizing and counter-theorizing and the process of evidence gathering reach temporal stability.
Revise and Resubmit at the Academy of Management Review.