On the Magnification of Small Biases in Decision-Making

42 Pages Posted: 25 Jun 2019

See all articles by Shaun Davies

Shaun Davies

University of Colorado at Boulder - Leeds School of Business

Edward Dickersin Van Wesep

University of Colorado at Boulder - Department of Finance

Brian Waters

University of Colorado, Boulder

Date Written: June 20, 2019

Abstract

We analyze a setting in which an actor chooses between N ex ante identical options. She can exert effort to learn about the quality of each option, but can ultimately choose only one. There are up to N! unique optimal effort vectors, and each is asymmetric: a large amount of effort is expended learning about one arbitrarily chosen option, less on another, even less on a third, etc. This implies asymmetric likelihoods of each item being chosen. If the actor has an infinitesimal bias in favor of one option, then the actor selects an effort vector that maximizes the likelihood of her favored option being chosen. Small biases are magnified, sometimes enormously. We also show that a glass ceiling can arise, in which favored types are increasingly prevalent as one ascends the corporate ladder. These results have implications for portfolio selection (e.g., home bias, socially responsible investment funds), hiring (e.g., CEO choice, the glass ceiling), start-up funding, and a variety of other applications.

Keywords: choice, bias, portfolio selection, glass ceiling

JEL Classification: D83, D91, J71, G41

Suggested Citation

Davies, Shaun and Van Wesep, Edward Dickersin and Waters, Brian, On the Magnification of Small Biases in Decision-Making (June 20, 2019). Available at SSRN: https://ssrn.com/abstract=3407651 or http://dx.doi.org/10.2139/ssrn.3407651

Shaun Davies (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Edward Dickersin Van Wesep

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

Brian Waters

University of Colorado, Boulder ( email )

1070 Edinboro Drive
Boulder, CO 80309
United States
3034921703 (Phone)

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