When hope springs eternal: The role of chance in risk taking

Abstract (Via Natalia Karelaia, Hogarth)

In most naturally occurring situations, success depends on both skill and chance. We contrast experimental market entry decisions where payoffs depend on skill as opposed to combinations of skill and chance. Our data show differential attitudes toward chance by those whose self-assessed skills are low and high. Making chance more important induces greater optimism for the former who start taking more risk, while the latter maintain a belief that high levels of skill are sufficient to overcome the vagaries of chance. Finally, although we observed “excess entry” (i.e., too many participants entered markets), this could not be attributed to overconfidence.

Conclusion (Via Natalia Karelai & Hogarth)

In summary, we augmented the realism of the market entry paradigm by including an explicit chance component in determining payoffs and found that people take more risk when both skill and chance, as opposed to skill alone, determine outcomes of their actions. Our data support the explanation that for people who assess their own skill as low, greater uncertainty induces more risk taking. Although not entirely “rational,” the reason, we suggest, is not unreasonable. People with low skill know they cannot succeed if outcomes only depend on

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25. November 2009 by Miguel Barbosa
Categories: Curated Readings, Risk & Uncertainty | Leave a comment

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