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Strategies, heuristics, and the relevance of risk-aversion in a dynamic decision problem

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  • Muller, Wieland

Abstract

In this paper I consider a complex decision problem where subjects have to cope with a time horizon of uncertain duration and must update their termination probabilities which depend on stochastic events during life. First I describe how economic theory suggests to solve the decision problem. But since real decision makers can hardly be expected to behave according to the theoretical solution in the problem at hand, I describe several heuristics or rules of thumb and investigate their theoretical performance. Then observed behavior and the way how people tackled the problem is described. In the second part of the paper I discuss how much of the data can be explained by assuming that experimental subjects are risk averse. --

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Psychology.

Volume (Year): 22 (2001)
Issue (Month): 4 (August)
Pages: 493-522

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Handle: RePEc:eee:joepsy:v:22:y:2001:i:4:p:493-522

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Web page: http://www.elsevier.com/locate/joep

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  1. Enrica Carbone & John Hey, 2001. "A Test of the Principle of Optimality," Theory and Decision, Springer, vol. 50(3), pages 263-281, May.
  2. Vital Anderhub & Werner Gäuth & Wieland Mäuller & Martin Strobel, 2000. "An Experimental Analysis of Intertemporal Allocation Behavior," Experimental Economics, Springer, vol. 3(2), pages 137-152, October.
  3. Hey, John D, 1983. "Whither Uncertainty?," Economic Journal, Royal Economic Society, vol. 93(369a), pages 130-39, Supplemen.
  4. Huck, Steffen & Weizsacker, Georg, 1999. "Risk, complexity, and deviations from expected-value maximization: Results of a lottery choice experiment," Journal of Economic Psychology, Elsevier, vol. 20(6), pages 699-715, December.
  5. Eric J. Johnson & John W. Payne, 1985. "Effort and Accuracy in Choice," Management Science, INFORMS, vol. 31(4), pages 395-414, April.
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