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Ignorance illusion in decisions under risk: The impact of perceived expertise on probability weighting

Maren Baars and Michael Goedde‐Menke

Journal of Risk & Insurance, 2022, vol. 89, issue 1, 35-62

Abstract: Current decision‐making models assume that an individual's attitude towards risk is unique. Hence, a decision maker's processing of probabilities and the resulting degree of probability weighting should not vary within the domain of risk. This paper provides evidence that challenges this assumption. We conduct two experiments involving different gambles, that is, risky games where objective probabilities are known, no further information‐based advantages exist, and outcomes are independent of knowledge. Even though all probabilities are explicitly provided, we find that individuals exhibit more pronounced inverse‐S‐shaped probability weighting if they perceive their level of expertise regarding a gamble to be lower. This result suggests that individuals are subject to ignorance illusion in decisions under risk, constituting expertise‐dependent risk attitudes. We document that ignorance illusion stems from the wrongly assigned importance of perceived expertise in the decision‐making process and that it occurs in both the gain and the loss domain.

Date: 2022
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Handle: RePEc:bla:jrinsu:v:89:y:2022:i:1:p:35-62