Download this Paper Open PDF in Browser

Misperception of Risk and Incentives by Experienced Agents

21 Pages Posted: 12 May 2014  

Matt Goldman

Microsoft Corporation - Microsoft Research - Redmond; UC San Diego

Justin M. Rao

Microsoft Research; Microsoft Corporation - Microsoft Research - Redmond

Date Written: May 10, 2014

Abstract

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

Goldman, Matt and Rao, Justin M., Misperception of Risk and Incentives by Experienced Agents (May 10, 2014). Available at SSRN: https://ssrn.com/abstract=2435551 or http://dx.doi.org/10.2139/ssrn.2435551

Matt Goldman

Microsoft Corporation - Microsoft Research - Redmond ( email )

Building 99
Redmond, WA
United States

UC San Diego ( email )

CA
United States

Justin M. Rao (Contact Author)

Microsoft Research ( email )

641 Avenue of Americas
7th Floor
New York, NY 11249
United States

Microsoft Corporation - Microsoft Research - Redmond ( email )

Building 99
Redmond, WA
United States

Paper statistics

Downloads
83
Rank
253,216
Abstract Views
423