Ignorance illusion in decisions under risk: The impact of perceived expertise on probability weighting

Baars, M., & Goedde-Menke, M. (2022). Ignorance illusion in decisions under risk: The impact of perceived expertise on probability weighting. Journal of Risk and Insurance, 89(1), 35– 62. https://doi.org/10.1111/jori.12356

55 Pages Posted: 30 May 2019 Last revised: 22 Feb 2022

See all articles by Maren Baars

Maren Baars

University of Muenster - Finance Center

Michael Goedde-Menke

University of Münster - Finance Center Münster

Date Written: June 1, 2021

Abstract

Current decision-making models assume that an individual’s attitude towards risk is unique. Hence, a decision maker’s processing of probabilities and the resulting degree of probability weighting should not vary within the domain of risk. This paper provides evidence that challenges this assumption. We conduct two experiments involving different gambles, i.e., risky games where objective probabilities are known, no further information-based advantages exist, and outcomes are independent of knowledge. Even though all probabilities are explicitly provided, we find that individuals exhibit more pronounced inverse-S-shaped probability weighting if they perceive their level of expertise regarding a gamble to be lower. This result suggests that individuals are subject to ignorance illusion in decisions under risk, constituting expertise-dependent risk attitudes. We document that ignorance illusion stems from the wrongly assigned importance of perceived expertise in the decision-making process and that it occurs in both the gain and the loss domain.

Keywords: decision making, risk, probability weighting, perceived expertise, ignorance illusion

JEL Classification: D81, D83, D91

Suggested Citation

Baars, Maren and Goedde-Menke, Michael, Ignorance illusion in decisions under risk: The impact of perceived expertise on probability weighting (June 1, 2021). Baars, M., & Goedde-Menke, M. (2022). Ignorance illusion in decisions under risk: The impact of perceived expertise on probability weighting. Journal of Risk and Insurance, 89(1), 35– 62. https://doi.org/10.1111/jori.12356, Available at SSRN: https://ssrn.com/abstract=3383607 or http://dx.doi.org/10.2139/ssrn.3383607

Maren Baars

University of Muenster - Finance Center ( email )

Universitätsstraße 14-16
Münster, 48143
Germany

Michael Goedde-Menke (Contact Author)

University of Münster - Finance Center Münster ( email )

Universitätsstraße 14-16
Münster, 48143
Germany

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