IDEAS home Printed from https://ideas.repec.org/p/zbw/rwirep/568.html
   My bibliography  Save this paper

Disentangling two causes of biased probability judgment: Cognitive skills and perception of randomness

Author

Listed:
  • Duttle, Kai

Abstract

This experimental study investigates the interaction of two influential factors of biased probability judgments. Results provide new insights on the preconditions for an application of either the gambler's fallacy or its exact opponent, the hot hand fallacy. The first factor is cognitive ability, measured in a cognitive reflection test. The second one is the level of perceived randomness in the observed outcomes. Probability judgments are found to vary significantly across salience of randomness treatments as well as across subgroups with high or low cognitive abilities. Like in previous research, subjects with higher cognitive skills are more likely to engage the gambler's fallacy, yet only if perception of sequential randomness is low. In a setting where randomness is very salient the exact opposite can be observed. Similarly surprising insights are revealed when controlling for cognitive abilities in the analysis of salience treatments. Past results are only confirmed for a subgroup with lower cognitive skills, while their peers' beliefs are completely opposite.

Suggested Citation

  • Duttle, Kai, 2015. "Disentangling two causes of biased probability judgment: Cognitive skills and perception of randomness," Ruhr Economic Papers 568, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:568
    DOI: 10.4419/86788654
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/114183/1/833370103.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.4419/86788654?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Theo Offerman & Joep Sonnemans, 2004. "What’s Causing Overreaction? An Experimental Investigation of Recency and the Hot‐hand Effect," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(3), pages 533-554, October.
    2. Matthew Rabin, 2002. "Inference by Believers in the Law of Small Numbers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(3), pages 775-816.
    3. Oechssler, Jörg & Roider, Andreas & Schmitz, Patrick W., 2009. "Cognitive abilities and behavioral biases," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 147-152, October.
    4. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
    5. Jürgen Huber & Michael Kirchler & Thomas Stöckl, 2010. "The hot hand belief and the gambler’s fallacy in investment decisions under risk," Theory and Decision, Springer, vol. 68(4), pages 445-462, April.
    6. Elena Asparouhova & Michael Hertzel & Michael Lemmon, 2009. "Inference from Streaks in Random Outcomes: Experimental Evidence on Beliefs in Regime Shifting and the Law of Small Numbers," Management Science, INFORMS, vol. 55(11), pages 1766-1782, November.
    7. Suetens, Sigrid & Tyran, Jean-Robert, 2012. "The gambler's fallacy and gender," Journal of Economic Behavior & Organization, Elsevier, vol. 83(1), pages 118-124.
    8. Hoppe, Eva I. & Kusterer, David J., 2011. "Behavioral biases and cognitive reflection," Economics Letters, Elsevier, vol. 110(2), pages 97-100, February.
    9. Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kyung-Hee Park & Jinho Byun & Paul Moon Sub Choi, 2019. "Managerial Overconfidence, Corporate Social Responsibility Activities, and Financial Constraints," Sustainability, MDPI, vol. 12(1), pages 1-14, December.
    2. Shashank Kathpal & Asif Akhtar & Asma Zaheer & Mohd Naved Khan, 2021. "Covid-19 and heuristic biases: evidence from India," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 26(4), pages 305-316, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bao, Te & Corgnet, Brice & Hanaki, Nobuyuki & Riyanto, Yohanes E. & Zhu, Jiahua, 2023. "Predicting the unpredictable: New experimental evidence on forecasting random walks," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).
    2. Brice Corgnet & Mark Desantis & David Porter, 2018. "What Makes a Good Trader? On the Role of Intuition and Reflection on Trader Performance," Journal of Finance, American Finance Association, vol. 73(3), pages 1113-1137, June.
    3. Corgnet, Brice & DeSantis, Mark & Porter, David, 2020. "The distribution of information and the price efficiency of markets," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    4. Stöckl, Thomas & Huber, Jürgen & Kirchler, Michael & Lindner, Florian, 2015. "Hot hand and gambler's fallacy in teams: Evidence from investment experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 327-339.
    5. Mohammad Noori, 2016. "Cognitive reflection as a predictor of susceptibility to behavioral anomalies," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 11(1), pages 114-120, January.
    6. repec:cup:judgdm:v:11:y:2016:i:1:p:114-120 is not listed on IDEAS
    7. Mathieu Chevrier & Brice Corgnet & Eric Guerci & Julie Rosaz, 2024. "Algorithm Credulity: Human and Algorithmic Advice in Prediction Experiments," GREDEG Working Papers 2024-03, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    8. Alós-Ferrer, Carlos & Hügelschäfer, Sabine, 2016. "Faith in intuition and cognitive reflection," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 64(C), pages 61-70.
    9. Jinrui Pan & Jason Shachat & Sijia Wei, 2020. "Cognitive reflection and economic order quantity inventory management: An experimental investigation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(6), pages 998-1009, September.
    10. Tiziana Assenza & Te Bao & Cars Hommes & Domenico Massaro, 2014. "Experiments on Expectations in Macroeconomics and Finance," Research in Experimental Economics, in: Experiments in Macroeconomics, volume 17, pages 11-70, Emerald Group Publishing Limited.
    11. Cary Frydman & Gideon Nave, 2017. "Extrapolative Beliefs in Perceptual and Economic Decisions: Evidence of a Common Mechanism," Management Science, INFORMS, vol. 63(7), pages 2340-2352, July.
    12. Ray Saadaoui Mallek & Mohamed Albaity, 2019. "Individual differences and cognitive reflection across gender and nationality the case of the United Arab Emirates," Cogent Economics & Finance, Taylor & Francis Journals, vol. 7(1), pages 1567965-156, January.
    13. Kai Duttle & Keigo Inukai, 2015. "Complexity Aversion: Influences of Cognitive Abilities, Culture and System of Thought," Economics Bulletin, AccessEcon, vol. 35(2), pages 846-855.
    14. Brice Corgnet & Cary Deck & Mark DeSantis & David Porter, 2022. "Forecasting Skills in Experimental Markets: Illusion or Reality?," Management Science, INFORMS, vol. 68(7), pages 5216-5232, July.
    15. Daniel J. Benjamin & Sebastian A. Brown & Jesse M. Shapiro, 2013. "Who Is ‘Behavioral’? Cognitive Ability And Anomalous Preferences," Journal of the European Economic Association, European Economic Association, vol. 11(6), pages 1231-1255, December.
    16. Roger K. Loh & Mitch Warachka, 2012. "Streaks in Earnings Surprises and the Cross-Section of Stock Returns," Management Science, INFORMS, vol. 58(7), pages 1305-1321, July.
    17. Lauber, Arne & March, Christoph & Sahm, Marco, 2023. "Optimal and fair prizing in sequential round-robin tournaments: Experimental evidence," Games and Economic Behavior, Elsevier, vol. 141(C), pages 30-51.
    18. Ruffle, Bradley J. & Wilson, Anne E., 2019. "Tat will tell: Tattoos and time preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 166(C), pages 566-585.
    19. Antonio Mastrogiorgio & Enrico Petracca, 2014. "Numerals as triggers of System 1 and System 2 in the ‘bat and ball’ problem," Mind & Society: Cognitive Studies in Economics and Social Sciences, Springer;Fondazione Rosselli, vol. 13(1), pages 135-148, June.
    20. Benjamin Enke & Uri Gneezy & Brian Hall & David Martin & Vadim Nelidov & Theo Offerman & Jeroen van de Ven, 2020. "Cognitive Biases: Mistakes or Missing Stakes?," CESifo Working Paper Series 8168, CESifo.
    21. Joshua Zonca & Giorgio Coricelli & Luca Polonio, 2020. "Gaze patterns disclose the link between cognitive reflection and sophistication in strategic interaction," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 15(2), pages 230-245, March.

    More about this item

    Keywords

    law of small numbers; gambler's fallacy; hot hand effect; cognitive reflection test;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:rwirep:568. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/rwiesde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.