A Target-Based Foundation for the “Hard-Easy Effect” Bias

Robert Bordley (), Marco LiCalzi and Luisa Tibiletti ()
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Robert Bordley: University of Michigan

A chapter in Country Experiences in Economic Development, Management and Entrepreneurship, 2017, pp 659-671 from Springer

Abstract: Abstract The “hard-easy effect” is a well-known cognitive bias on self-confidence calibration that refers to a tendency to overestimate the probability of success in hard-perceived tasks, and to underestimate it in easy-perceived tasks. This paper provides a target-based foundation for this effect, and predicts its occurrence in the expected utility framework when utility functions are S-shaped and asymmetrically tailed. First, we introduce a definition of hard-perceived and easy-perceived task based on the mismatch between an uncertain target to meet and a suitably symmetric reference point. Second, switching from a target-based language to a utility-based language, we show how this maps to equivalence between the hard-perceived target/gain seeking and the easy-perceived target/loss aversion. Third, we characterize the agent’s miscalibration in self-confidence. Sufficient conditions for acting according to the “hard-easy effect” and the “reversed hard-easy effect” biases are set out. Finally, we derive sufficient conditions for the “hard-easy effect” and the “reversed hard-easy effect” to hold. As a by-product we identify situations in enterprise risk management where misconfidence in judgments emerges. Recognizing these cognitive biases, and being mindful of to be normatively influenced by them, gives the managers a better framework for decision making.

Keywords: Hard-easy effect bias; Benchmarking procedure; Loss-gain asymmetry; Endowment effect bias; Escalation of commitment effect bias (search for similar items in EconPapers)
Date: 2017
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Working Paper: A target-based foundation for the "hard-easy effect" bias (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:spr:eurchp:978-3-319-46319-3_41

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DOI: 10.1007/978-3-319-46319-3_41

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