Understanding Outcome Bias
52 Pages Posted: 25 Oct 2017 Last revised: 22 Feb 2019
Date Written: January 31, 2019
Disentangling effort and luck is critical when judging performance. In a principal-agent experiment, we demonstrate that principals' judgments of agent effort are biased by luck, despite perfectly observing the agent's effort. This bias can erode the power of incentives to stimulate effort when there is noise in the outcome process. As such, we explore two potential solutions to this "outcome bias" -- control over irrelevant information about luck, and outsourcing judgment to independent third parties. We find that both are ineffective. When principals have control over information about luck, they do not avoid the information that biases their judgment. In contrast, when agents have control over the principal's information about luck, agents strategically manipulate principals' outcome bias to minimize their punishments. We also find that independent third parties are just as biased as principals. These findings indicate that outcome bias may be more widespread and pernicious than previously understood. They also suggest that outcome bias cannot be driven solely by disappointment nor by distributional preferences. Instead, we hypothesize that luck directly affects beliefs about agents even though effort is perfectly observed. We elicit the beliefs of third parties and principals and find that lucky agents are believed to exert more effort in general than identical, unlucky agents.
Keywords: Experiment, Reciprocity, Outcome Bias, Attribution Bias, Blame
JEL Classification: C92, D63, D83
Suggested Citation: Suggested Citation