Outcome Bias in Financial Decision Making

77 Pages Posted: 28 Sep 2018

See all articles by Maximilian Germann

Maximilian Germann

University of Mannheim - Department of Banking and Finance

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: September 2018

Abstract

We experimentally investigate the Outcome Bias in financial decision making. In three treatments, we vary the cognitive challenge investors have to overcome to separate skill from luck. Investors show clear tendencies towards the Outcome Bias in all treatments. The Outcome Bias is stronger, by a third, in the two treatments in which high outcomes correspond to worse investment choices. This result is puzzling, since investment quality can be identified with certainty in the second treatment, while Bayesian probability updating is required in the third treatment. Results are not a product of chance, as randomly simulated data reveals.

Keywords: Outcome Bias, Return Chasing, Decision Under Risk

JEL Classification: D81, G29, C91

Suggested Citation

Germann, Maximilian and Weber, Martin, Outcome Bias in Financial Decision Making (September 2018). Available at SSRN: https://ssrn.com/abstract=3247148 or http://dx.doi.org/10.2139/ssrn.3247148

Maximilian Germann (Contact Author)

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

L9, 1-2
Mannheim, 68161
Germany

Martin Weber

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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