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How do beliefs about skill affect risky decisions?

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  • Bruhin, Adrian
  • Santos-Pinto, Luís
  • Staubli, David

Abstract

Beliefs about relative skill matter for risky decisions such as market entry, career choices, and financial investments. Yet in most laboratory experiments risk is exogenously given and beliefs about relative skill play no role. We use a laboratory experiment without strategy confounds to isolate the impact of beliefs about relative skill on risky choices. We find that low (high) skill individuals are more (less) willing to take risks on gambles where the probabilities depend on relative skill than on gambles with exogenously given probabilities. This happens because low (high) skill individuals overestimate (underestimate) their relative skill. Consequently, the wrong people may engage in risky activities where performance is based on relative skill while the right people may be crowded out.

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  • Bruhin, Adrian & Santos-Pinto, Luís & Staubli, David, 2018. "How do beliefs about skill affect risky decisions?," Journal of Economic Behavior & Organization, Elsevier, vol. 150(C), pages 350-371.
    • Handle: RePEc:eee:jeborg:v:150:y:2018:i:c:p:350-371
    DOI: 10.1016/j.jebo.2018.01.016
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    4. Barron, Kai & Gravert, Christina, 2018. "Beliefs and actions: How a shift in confidence affects choices," MPRA Paper 84743, University Library of Munich, Germany.
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    6. Cheung, Stephen L. & Johnstone, Lachlan, 2017. "True Overconfidence, Revealed through Actions: An Experiment," IZA Discussion Papers 10545, Institute of Labor Economics (IZA).
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    More about this item

    Keywords

    Individual risk taking behavior; Self-confidence; Laboratory experiment;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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