Good Choice, Bad Judgment: How Choice Under Uncertainty Generates Overoptimism

23 Pages Posted: 20 Jul 2017 Last revised: 4 Dec 2017

Jordan Tong

University of Wisconsin - Madison - School of Business

Daniel Feiler

Tuck School of Business at Dartmouth

Anastasia Ivantsova

University of Wisconsin - Madison

Date Written: August 22, 2017

Abstract

We examine a fundamental feature of choice under uncertainty: Overestimating an alternative makes one more likely to choose it. If people are naive to this structural feature, then they will tend to have erroneously inflated expectations for the alternatives they choose. In contrast to theories of motivated reasoning, this theory suggests that individuals will overestimate chosen alternatives even before they make their choice. In four studies, we found that students and managers exhibited behavior consistent with naivety toward this relationship between estimation error and choice, leaving them overoptimistic about their chosen alternatives. This overoptimism from choosing positive error is exacerbated when the true values of the alternatives are close together, when there is more uncertainty about the values of alternatives, and when there are many alternatives to choose from. Our results illustrate how readily overoptimism emerges as a result of statistical naivety, even in the absence of a desire to justify one’s decision after the choice.

Keywords: overoptimism, overconfidence, sampling, judgment, cognitive bias

Suggested Citation

Tong, Jordan and Feiler, Daniel and Ivantsova, Anastasia, Good Choice, Bad Judgment: How Choice Under Uncertainty Generates Overoptimism (August 22, 2017). Tuck School of Business Working Paper No. 3003413. Available at SSRN: https://ssrn.com/abstract=3003413 or http://dx.doi.org/10.2139/ssrn.3003413

Jordan Tong (Contact Author)

University of Wisconsin - Madison - School of Business ( email )

975 University Avenue
Madison, WI 53706
United States

Daniel Feiler

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States

Anastasia Ivantsova

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

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