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Skill or Luck? Biases of Rational Agents

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  • Eric, Van den Steen

Abstract

This paper shows why, in a world with differing priors, rational agents tend to attribute their own success more to skill and their failure more to bad luck than an outsider. It further shows why each agent in a group might think he or she is the best, why an agent might overestimate the control he has over the outcome, and why two agents' estimated contributions often add up to more than 100%. Underlying all these phenomena is a simple and robust mechanism that endogenously generates overoptimism about one's own actions. The paper also shows how these biases hinder learning and discusses some implications for organizations.

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File URL: http://hdl.handle.net/1721.1/1569
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Bibliographic Info

Paper provided by Massachusetts Institute of Technology (MIT), Sloan School of Management in its series Working papers with number 4255-02.

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Date of creation: 09 Aug 2002
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Handle: RePEc:mit:sloanp:1569

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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
Phone: 617-253-2659
Web page: http://mitsloan.mit.edu/
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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA

Related research

Keywords: Success; Failure; Attribution and Inference Bias; Rational Agents;

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References

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  1. Morris, Stephen, 1995. "The Common Prior Assumption in Economic Theory," Economics and Philosophy, Cambridge University Press, vol. 11(02), pages 227-253, October.
  2. Harsanyi, John C., 1994. "Games with Incomplete Information," Nobel Prize in Economics documents 1994-1, Nobel Prize Committee.
  3. Glenn Ellison, 2002. "Evolving Standards for Academic Publishing: A q-r Theory," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 994-1034, October.
  4. Wilson, Robert, 1977. "A Bidding Model of Perfect Competition," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 511-18, October.
  5. Harrison, J Michael & Kreps, David M, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, MIT Press, vol. 92(2), pages 323-36, May.
  6. Joel L. Schrag, 1999. "First Impressions Matter: A Model Of Confirmatory Bias," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 37-82, February.
  7. Edward P. Lazear, 2001. "The Peter Principle: Promotions and Declining Productivity," NBER Working Papers 8094, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Alexander Meschkowski, . "The Economics Of D&O Liability For False Information In German Secondary Capital Markets," German Working Papers in Law and Economics 2006-1-1135, Berkeley Electronic Press.
  2. Nobuyuki Hanaki & Alan Kirman & Matteo Marsili, 2009. "Born Under a Lucky Star?," Tsukuba Economics Working Papers 2009-003, Economics, Graduate School of Humanities and Social Sciences, University of Tsukuba.
  3. Anat Bracha & Elke U. Weber, 2012. "A psychological perspective of financial panic," Public Policy Discussion Paper 12-7, Federal Reserve Bank of Boston.
  4. Olivier Compte & Andrew Postlewaite, 2001. "Confidence-Enhanced Performance," PIER Working Paper Archive 04-023, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 May 2003.
  5. Krähmer, Daniel, 2003. "Learning and self-confidence in contests," Discussion Papers, Research Unit: Market Processes and Governance SP II 2003-10, Social Science Research Center Berlin (WZB).

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