Misperception of Risk and Incentives by Experienced Agents
21 Pages Posted: 12 May 2014
Date Written: May 10, 2014
We study an observable risk-return tradeoff for which risk "preferences" are normatively prescribed by the desire to win the game. The choice is whether to shoot a 2-pointer or a 3-pointer in professional (NBA) basketball. When trailing, teams should get more risk-loving as they fall further behind, matching prospect theory preferences. When leading, risk aversion should increase with the lead, running counter to typical risk preferences. We find strong evidence that players trade off risk and return correctly only in the trailing domain. In the leading domain, they incorrectly exhibit decreasing absolute risk aversion with the magnitude of their lead. Players thus exhibit preferences similar those widely found in the lab, but misapplied in this setting.
Keywords: risk, experience, incentives, bias, learning
JEL Classification: D03, D81, D83
Suggested Citation: Suggested Citation