Good decision vs. good results: Outcome bias in the evaluation of financial agents
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Good decision vs. good results: Outcome bias in the evaluation of financial agents Christian Ko¨nig-Kersting1 • Monique Pollmann2 • Jan Potters2 Stefan T. Trautmann3
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The Author(s) 2020
Abstract We document outcome bias in situations where an agent makes risky financial decisions for a principal. In three experiments, we show that the principal’s evaluations and financial rewards for the agent are strongly affected by the random outcome of the risky investment. This happens despite her exact knowledge of the investment strategy, which can, therefore, be assessed independently of the outcome. The principal thus judges the same decision by the agent differently, depending on factors that the agent has no influence on. The effect of outcomes persists in a setting where principals communicate a preferred investment level. Principals are more satisfied with the agent after a random success when the agent did not follow the requested investment level, than after a failed investment that followed their explicit request. Keywords Decision under risk Decisions of agents Accountability Outcome bias Financial advice
1 Introduction Whenever the quality of a decision is evaluated after its consequences have played out and have become public knowledge, there is a chance of falling prey to outcome bias. Outcome bias describes the phenomenon by which evaluators tend to take information about the outcome into account when evaluating the quality of a decision itself (Baron and Hershey 1988). This tendency is problematic for two & Stefan T. Trautmann [email protected] 1
University of Innsbruck, Innsbruck, Austria
2
Tilburg University, Tilburg, Netherlands
3
Alfred-Weber-Institute for Economics, University of Heidelberg, Bergheimer Strasse 58, 69115 Heidelberg, Germany
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reasons. First, the evaluator has available a different information set than the decision maker, who typically faces uncertainty at the time of her decision. Second, a good outcome might derive from a bad decision, and a bad outcome might derive from a good decision.1 Evaluation of outcomes may, therefore, be questionable and may lead to suboptimal future decisions if decision makers follow strategies that were successful only by chance (e.g., Bertrand and Mullainathan 2001, for managerial performance; or Sirri and Tufano 1998, for investors’ mutual fund choices).2 The consideration of potentially irrelevant outcome information in the evaluation of decision quality has been documented in a wide variety of settings including medical advice, military combat decisions and salesperson performance evaluation (Baron and Hershey 1988; Lipshitz 1989; Marshall and Mowen 1993). In these early studies, participants were asked to evaluate the quality of a decision described in hypothetical scenarios differing in featuring a favorable, an unfavorable, or no outcome at all. Later studies on peer review of scientific publications and strategies in professional football move away from sc
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