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Overconfident people are more exposed to “black swan” events: A case study of avalanche risk

Author

Listed:
  • Nicolao Bonini
  • Stefania Pighin
  • Enrico Rettore
  • Lucia Savadori
  • Federico Schena
  • Sara Tonini
  • Paolo Tosi

Abstract

Overconfidence is a well-established bias in which someone's subjective confidence in their own judgments is systematically greater than their objective accuracy. There is abundant anecdotal evidence that overconfident people increase their exposure to risk. In this paper, we test whether overconfident people underestimate the probability of incurring an avalanche accident. An avalanche accident is a typical "black swan" event because it has a low probability of occurring but has potential dramatic consequences. To test whether the overconfidence bias affects the decision of backcountry skiers to go on a ski trip under different levels of avalanche risk, we measured individual cognitive traits and then used a random effect logit model to measure their effects on the probability to take the tour, by controlling for other observable characteristics of the respondent. We show that 1) overconfidence is widespread even in our sample and 2) practitioners who are more prone to overestimate their knowledge are also more likely to take the risk associated with a ski trip exposed to avalanche danger. This suggests that overconfident people are more exposed to black swan events.

Suggested Citation

  • Nicolao Bonini & Stefania Pighin & Enrico Rettore & Lucia Savadori & Federico Schena & Sara Tonini & Paolo Tosi, 2015. "Overconfident people are more exposed to “black swan” events: A case study of avalanche risk," FBK-IRVAPP Working Papers 2015-02, Research Institute for the Evaluation of Public Policies (IRVAPP), Bruno Kessler Foundation.
  • Handle: RePEc:fbk:wpaper:2015-02
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    References listed on IDEAS

    as
    1. Ulrike Malmendier & Geoffrey Tate, 2005. "CEO Overconfidence and Corporate Investment," Journal of Finance, American Finance Association, vol. 60(6), pages 2661-2700, December.
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    More about this item

    Keywords

    Cognitive bias; Risky decision; Backcountry skiing; Measurement errors; Logit model;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables

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