Importing Preferences: Asymmetric Misperception of Risk by Experienced Agents∗

Using incentives to shape behavior requires that people understand the choice-outcome mapping and don’t use preferences or heuristics imported from other domains. We study an observable risk-return tradeoff for which risk preferences are normatively prescribed by a minimal assumption. The choice is whether to shoot a 2-pointer or a 3-pointer in professional (NBA) basketball. When losing, teams should get more risk-loving as they fall further behind, matching loss-averse preferences. When winning, risk aversion should increase with the lead, running counter to typical risk attitudes. We find strong evidence that teams only trade off risk and return correctly in the losing domain. In the winning domain, players incorrectly display decreasing absolute risk aversion with the magnitude of their lead. By misperceiving risk in this way, these experienced agents appear to import their individual preferences to decisions in the workplace and in doing so, act against the firm’s interest. ∗David Eil, Ben Handel and Grant Wang gave us detailed comments and feedback. Some of the results were presented and distributed at the MIT Sloan Sports Analytics Conference under the title “The Price of Risk in the NBA” and many attendees of that conference gave us useful feedback as well, as did seminar participants at Cornell.