How Believing in Ourselves Increases Risk Taking: Perceived Self‐Efficacy and Opportunity Recognition

What effect does positive and negative feedback about past risk taking have on the future risk taking of decision makers? The results of an experimental study show that subjects who are led to believe they are very competent at decision making see more opportunities in a risky choice and take more risks. Those who are led to believe they are not very competent see more threats and take fewer risks. The feelings of self-competence and self-confidence on one task did not generalize to a similar task. Perception of opportunities was unexpectedly not related to the perception of threats. As executives bring their personal perceptual biases to firm decision making, our results identify a serious built-in bias in SWOT analysis (the analysis of firms' strengths and weaknesses as related to potential opportunities and threats). Executives who believe that they and their firm are very competent will take more risks and vice versa. Our results also provide evidence that the perceived likelihood of an event depends on whether the event is a loss or a gain. Human decision making is subject to the general bias that outcome expectations are not independent of outcome valuations.

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