Motivated beliefs, social preferences, and limited liability in financial decision-making

Steffen Ahrens and Ciril Bosch-Rosa

No 2022/8, Discussion Papers from Free University Berlin, School of Business & Economics

Abstract: Using a new experimental design, we compare how subjects form beliefs in an investor-client setup under varying degrees of liability. Our results reflect the importance of social preferences when making investment decisions for others. We show that when investors have no liability, those with stronger social preferences are more optimistic about the probability that their investment results in a gain. In other words, we find that social preferences appear to be correlated with motivated beliefs. This finding suggests the existence of cognitive biases in financial decision-making and supports the recent literature on the formation of motivated beliefs under limited liability (Barberis, 2015; Bénabou and Tirole, 2016).

Keywords: Moral Hazard; Experiment; Motivated Beliefs; Social Preferences (search for similar items in EconPapers)
JEL-codes: C91 D84 G11 G41 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-neu
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:fubsbe:20228

DOI: 10.17169/refubium-36335

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