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Skill or Luck? Biases of Rational Agents


  • Eric, Van den Steen


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.

Suggested Citation

  • Eric, Van den Steen, 2002. "Skill or Luck? Biases of Rational Agents," Working papers 4255-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  • Handle: RePEc:mit:sloanp:1569

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    References listed on IDEAS

    1. Harsanyi, John C, 1995. "Games with Incomplete Information," American Economic Review, American Economic Association, vol. 85(3), pages 291-303, June.
    2. Edward P. Lazear, 2001. "The Peter Principle: Promotions and Declining Productivity," NBER Working Papers 8094, National Bureau of Economic Research, Inc.
    3. Robert Wilson, 1977. "A Bidding Model of Perfect Competition," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 511-518.
    4. Morris, Stephen, 1995. "The Common Prior Assumption in Economic Theory," Economics and Philosophy, Cambridge University Press, vol. 11(02), pages 227-253, October.
    5. 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.
    6. Matthew Rabin & Joel L. Schrag, 1999. "First Impressions Matter: A Model of Confirmatory Bias," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 37-82.
    7. J. Michael Harrison & David M. Kreps, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 92(2), pages 323-336.
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    Cited by:

    1. Anat Bracha & Elke U. Weber, 2012. "A psychological perspective of financial panic," Public Policy Discussion Paper 12-7, Federal Reserve Bank of Boston.
    2. Krähmer, Daniel, 2003. "Learning and self-confidence in contests
      [Lernen und Selbstvertrauen in Wettkämpfen]
      ," Discussion Papers, Research Unit: Market Processes and Governance SP II 2003-10, Social Science Research Center Berlin (WZB).
    3. Olivier Compte & Andrew Postlewaite, 2004. "Confidence-Enhanced Performance," American Economic Review, American Economic Association, vol. 94(5), pages 1536-1557, December.
    4. Hanaki, Nobuyuki & Kirman, Alan & Marsili, Matteo, 2011. "Born under a lucky star?," Journal of Economic Behavior & Organization, Elsevier, vol. 77(3), pages 382-392, March.
    5. Alexander Meschkowski, "undated". "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.


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