Subjective Evaluations of Risk Taking Decisions: Experimental Evidence on Outcome Biases and Their Consequences

42 Pages Posted: 16 Aug 2018

See all articles by Robert M. Gillenkirch

Robert M. Gillenkirch

University of Osnabrueck - Faculty of Business and Economics

Louis Velthuis

Goethe University Frankfurt

Date Written: August 16, 2018

Abstract

This study experimentally investigates how a principal uses outcome information in her subjective evaluation of an agent who chooses between alternatives of differing risks, and how outcome bias in the evaluation is related to the agent’s risk taking decision. We consider both a situation of information symmetry, where the principal can observe the agent’s decision, and a situation of information asymmetry, where the agent’s decision is hidden. Within both situations, we compare a condition where the principal receives peer comparison information with a condition where such information is unavailable. We hypothesize and find that principals’ evaluations are subject to an outcome bias, and that the bias is stronger when peer comparison is present. We further hypothesize and find that with peer comparison being present, agents’ decisions become increasingly misaligned with principals’ preferences. Our findings contribute to understanding outcome biases in subjective evaluations of risk taking decisions, and how these biases may contribute to explaining excessive risk taking by agents.

Keywords: subjective performance evaluation, outcome bias, risk taking, peer comparison

JEL Classification: M41, M52

Suggested Citation

Gillenkirch, Robert M. and Velthuis, Louis J., Subjective Evaluations of Risk Taking Decisions: Experimental Evidence on Outcome Biases and Their Consequences (August 16, 2018). Available at SSRN: https://ssrn.com/abstract=3232703 or http://dx.doi.org/10.2139/ssrn.3232703

Robert M. Gillenkirch (Contact Author)

University of Osnabrueck - Faculty of Business and Economics ( email )

Rolandstr. 8
Osnabrück, D-49069
Germany

Louis J. Velthuis

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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