Abstract
In this talk I will examine how decision makers systematically misunderstand the skill-luck relationship in competitive markets like business and sports. An interesting feature of competitive markets is that as they become more skilled they also become more dependent on random chance (a phenomenon known as the “paradox of skill”). When competitions remove low performers, absolute skill levels increase and differences in skill among remaining competitors decrease. Smaller differences in skill mean that random chance is more likely to assert itself in deciding outcomes. Using monte carlo simulations, field data, and online experiments, I provide evidence that decision makers fail to appreciate this paradox, acting as if high skill competitions are less chancy than low skill ones. For instance, Serie A futbol matches are viewed as less dependent on random chance than those in Serie B, and Serie B games are in turn viewed as less random than Serie C games. This pattern of judgment arises because decision makers substitute absolute for relative skill, and take the presence of absolute skill to imply the absence of luck. As a result, when competitors are highly competent but equally skilled (high absolute skill but low relative differences in skill) outcomes are viewed as more predictable and less random than they actually are.

Please contact dip.mkt@unibocconi.it if you wish to attend.