How Do Individuals React to Information in Naturalistic Settings? Rational Decision Making in Elite Sports

Abstract

In many experimental settings, individuals appear to either underreact or overreact to information when making decisions about the future. Less is known about how individuals react to information when making decisions in naturalistic settings. In this paper, I study the ability of individual decision makers to incorporate information about past outcomes when making judgements about future outcomes in naturalistic settings using data on elite sports. In the setting under observation, fans make hundreds of decision relating to the future performance of elite athletes. Using variation in outcomes between athletes who took comparable actions, I show that fans correctly incorporate persistence in the data generating process into their predictions. Not only do fans react to information in the correct direction, but they also appear to react with the correct magnitude. This is consistent with fans rationally reacting to information.