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False Consensus and the Role of Ambiguity in Predictions of Others’ Risky Preferences

Sina Borgsen () and Martin Weber
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Sina Borgsen: Lehrstuhl für ABWL, Finanzwirtschaft, insbesondere Bankbetriebslehre, Postal: L 5,2, 68131 Mannheim

No 07-46, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: Already in the 1930ies psychologists mentioned the tendency of people to see the self as the center of social judgment. This leads to egocentrically biased judgments when assessing others behavior. Since the first demonstration of this social projection bias in a study 1977 by Ross, Greene, and House a lot of studies followed. They show the effect in different contexts and the false consensus effect became a widely accepted phenomenon. In this paper we analyze the false consensus effect in a financial context. We use simple lottery questions and ask subjects to state certainty equivalents for the own person and also to predict the average certainty equivalents of other subjects. We find a strong correlation between the own judgment and the prediction of others'. The bias is stronger in situations with ambiguity. We also asked participants to give an interval, i.e. a lower bound that they think will not be gone below by more than 5 % of the participants and also an upper bound which is not exceeded by more than 5 %. We find that people strongly underestimate the variation in others’ risky choices.

Date: 2007-06-26
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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