False Consensus and the Role of Ambiguity in Predictions of Others' Risky Preferences

44 Pages Posted: 9 Aug 2008

See all articles by Sina Borgsen

Sina Borgsen

University of Mannheim - Department of Business Administration and Finance, especially Banking

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: January 1, 2008

Abstract

Already in the 1930s psychologists mentioned the tendency of people to see the self as the center of social judgment. This leads to egocentrically biased judgments when assessing others' behavior. Since the first demonstration of this social projection bias in a study by Ross, Greene, and House (1977) a lot of studies followed. They show the effect in different contexts and the false consensus effect became a widely accepted phenomenon.

In this paper we analyze the false consensus effect in a financial context. In two studies, we use simple lottery questions and ask subjects to state certainty equivalents for the own person and also to predict the average certainty equivalent of other participants. We find a strong correlation between the own judgment and the prediction of others' judgments. As we use 50/50-lotteries and in addition ambiguous probabilities in our studies, we extend the scope of Gilovich (1990) to financial decisions. The false consensus effect is stronger in situations with ambiguity. We also asked participants to give an interval for the certainty equivalents, i.e. a lower bound that they think is not fallen short by more than 5% of the participants and also an upper bound which is not exceeded by more than 5%. We find that people strongly underestimate the variation in others' risk preferences.

Keywords: Risk Attitude, Ambiguity, False Consensus Effect, Prediction Error

JEL Classification: G1, D8

Suggested Citation

Borgsen, Sina and Weber, Martin, False Consensus and the Role of Ambiguity in Predictions of Others' Risky Preferences (January 1, 2008). Available at SSRN: https://ssrn.com/abstract=1212322 or http://dx.doi.org/10.2139/ssrn.1212322

Sina Borgsen

University of Mannheim - Department of Business Administration and Finance, especially Banking ( email )

L 5, 2
D-68131 Mannheim
Germany

Martin Weber (Contact Author)

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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