A target-based foundation for the "hard-easy effect" bias
Published on Oct 1, 2014
· DOI :10.1007/978-3-319-46319-3_41
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.