Subjective Evaluations of Risk Taking Decisions Determinants and Consequences of Outcome Bias

This study investigates determinants and consequences of outcome bias in a setting of delegated risk taking decisions. A decision maker acts on behalf of a client who holds the decision maker accountable by way of a subjective evaluation after observing the risk taking decision’s outcome. Across and within three experiments, the information environment of the relationship and the monetary consequences which evaluations have for decision makers are manipulated. We find evidence for evaluations being biased towards outcomes across all experiments. In a situation where evaluations affect decision maker’s compensations, a stronger outcome bias in evaluations translates into risk taking decisions being less frequently aligned with clients’ risk preferences. In the same situation, giving clients the opportunity to make peer comparisons increases outcome bias. We further find that clients do not hold decision makers accountable for their risk choices when they cannot observe the risk taking decision, but have to infer it from observing the outcome. Theoretical and practical implications of the results are discussed