Prospect Theory or Skill Signaling?

Failure is embarrassing. In gambles involving both skill and chance, we show that a strategic desire to avoid appearing unskilled generates behavioral anomalies consistent with prospect theory’s concepts of loss aversion, framing effects, and probability weighting. Based on models from the career concerns literature that formalize early social psychology models of risk taking, the results show that skill signaling and prospect theory behavior might be confounded in economic, financial, and managerial decisions where both skill and chance are important. We identify specific situations where skill signaling makes opposite predictions than prospect theory, allowing for tests between the strategic and behavioral approaches to understanding risk. D81;