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How Do Beliefs about Skill Affect Risky Decisions?

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  • Adrian Bruhin
  • Luis Santos-Pinto
  • David Staubli

Abstract

Beliefs about relative skill matter for risky decisions such as career choices, market entry, 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 free of 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 with probabilities depending on relative skill than on gambles with exogenously given probabilities. Additionally, the correlation between stated and revealed beliefs -- beliefs estimated from choices -- is only moderate, suggesting that relying exclusively on stated beliefs may be misleading.

Suggested Citation

  • Adrian Bruhin & Luis Santos-Pinto & David Staubli, 2016. "How Do Beliefs about Skill Affect Risky Decisions?," Cahiers de Recherches Economiques du Département d'économie 16.20, Université de Lausanne, Faculté des HEC, Département d’économie.
    • Handle: RePEc:lau:crdeep:16.20
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    Cited by:

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    3. Cathleen Johnson & Aurélien Baillon & Han Bleichrodt & Zhihua Li & Dennie Dolder & Peter P. Wakker, 2021. "Prince: An improved method for measuring incentivized preferences," Journal of Risk and Uncertainty, Springer, vol. 62(1), pages 1-28, February.
    4. Barron, Kai & Gravert, Christina, 2018. "Beliefs and actions: How a shift in confidence affects choices," MPRA Paper 84743, University Library of Munich, Germany.
    5. Vincent Laferrière & David Staubli & Christian Thöni, 2023. "Explaining Excess Entry in Winner-Take-All Markets," Management Science, INFORMS, vol. 69(2), pages 1050-1069, February.
    6. Cheung, Stephen L. & Johnstone, Lachlan, 2017. "True Overconfidence, Revealed through Actions: An Experiment," IZA Discussion Papers 10545, Institute of Labor Economics (IZA).
    7. Cédric Gutierrez & Thomas Åstebro & Tomasz Obloj, 2020. "The Impact of Overconfidence and Ambiguity Attitude on Market Entry," Organization Science, INFORMS, vol. 31(2), pages 308-329, March.
    8. Chen, Si & Schildberg-Hörisch, Hannah, 2019. "Looking at the bright side: The motivational value of confidence," European Economic Review, Elsevier, vol. 120(C).
    9. David Boto-Garcìa & Alessandro Bucciol & Luca Zarri, 2020. "Managerial Beliefs and Firm Performance: Field Evidence from Professional Elite Soccer," Working Papers 19/2020, University of Verona, Department of Economics.
    10. Marcus Sidki & Lara Boerger & David Boll, 2024. "The effect of board members’ education and experience on the financial performance of German state-owned enterprises," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 28(2), pages 445-482, June.

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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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