July 23, 2014, by Suzanne

How do risk attitudes affect measured confidence?

Zahra Murad

A Working Paper from the University of Nottingham’s Centre for Decision Research and Experimental Economics (CeDEx) explores how risk attitudes affect measured confidence – paper reference 2014-05.

Authors Zahra Murad, Martin Sefton and Chris Starmer examine confidence in own absolute performance using two elicitation procedures: self-reported (non-incentivised) confidence and an incentivised procedure that elicits the certainty equivalent of a bet based on performance.  The former procedure reproduces the “hard-easy effect” (overconfidence in easy tasks and underconfidence in hard tasks) found in a large number of studies using non-incentivised self-reports.  The latter procedure produces general underconfidence, which is somewhat reduced when they filter out the effects of risk attitudes.  However, even after controlling for risk attitudes their incentivised procedure leads to significant underconfidence, and does not lead to better calibration between confidence and performance than non-incentivised self-reports. Finally, they find that self-reported confidence correlates significantly with features of individual risk attitudes including parameters of individual probability weighting.

Zahra says; ‘It is a great opportunity for me to be a part of the CeDEx community at the School of Economics.  In our CeDEx lab, in conjunction with my supervisors, we are doing experiments analysing incentivized decisions of participants and psychological mechanisms behind those decisions. My current research is about biases in decision making.  I use experimental games to study whether people overestimate or underestimate their skills relative to others or relative to their actual skills. We hope that this line of research will offer new perspectives to understand individual decision making, in particular, in financial markets and entrepreneurial ventures’.

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