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A Test of the Principle of Optimality

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  • Enrica Carbone
  • John Hey

Abstract

This paper reports on an experimental test of the Principle of Optimality in dynamic decision problems. This Principle, which states that the decision-maker should always choose the optimal decision at each stage of the decision problem, conditional on behaving optimally thereafter, underlies many theories of optimal dynamic decision making, but is normally difficult to test empirically without knowledge of the decision-maker's preference function. In the experiment reported here we use a new experimental procedure to get round this difficulty, which also enables us to shed some light on the decision process that the decision-maker is using if he or she is not using the Principle of Optimality - which appears to be the case in our experiments.
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Suggested Citation

  • Enrica Carbone & John Hey, 2001. "A Test of the Principle of Optimality," Theory and Decision, Springer, vol. 50(3), pages 263-281, May.
    • Handle: RePEc:kap:theord:v:50:y:2001:i:3:p:263-281
    DOI: 10.1023/A:1010342908638
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    References listed on IDEAS

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    1. Hey, John D, 1993. "Dynamic Decision Making under Uncertainty: An Experimental Study of the Dynamic Competitive Firm," Oxford Economic Papers, Oxford University Press, vol. 45(1), pages 58-82, January.
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    Citations

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    Cited by:

    1. Muller, Wieland, 2001. "Strategies, heuristics, and the relevance of risk-aversion in a dynamic decision problem," Journal of Economic Psychology, Elsevier, vol. 22(4), pages 493-522, August.
    2. Quemin, Simon & Trotignon, Raphaël, 2021. "Emissions trading with rolling horizons," Journal of Economic Dynamics and Control, Elsevier, vol. 125(C).
    3. John D. Hey, 2005. "Do People (Want To) Plan?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 52(1), pages 122-138, February.
    4. John D. Hey & Julia A. Knoll, 2018. "How far ahead do people plan?," World Scientific Book Chapters, in: Experiments in Economics Decision Making and Markets, chapter 12, pages 301-306, World Scientific Publishing Co. Pte. Ltd..
    5. Levesque, Moren & Schade, Christian, 2005. "Intuitive optimizing: experimental findings on time allocation decisions with newly formed ventures," Journal of Business Venturing, Elsevier, vol. 20(3), pages 313-342, May.
    6. Maria J. Ruiz Martos, 2017. "Individual Dynamic Choice Behaviour and the Common Consequence Effect," ThE Papers 17/01, Department of Economic Theory and Economic History of the University of Granada..
    7. Spiro, Daniel, 2014. "Resource prices and planning horizons," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 159-175.
    8. Diasakos, Theodoros M, 2013. "Complexity and Bounded Rationality in Individual Decision Problemsing," SIRE Discussion Papers 2013-93, Scottish Institute for Research in Economics (SIRE).
    9. Miller, Logan & Rholes, Ryan, 2023. "Joint vs. Individual performance in a dynamic choice problem," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 897-934.
    10. John D. Hey & Julia A. Knoll, 2018. "Strategies in dynamic decision making – An experimental investigation of the rationality of decision behaviour," World Scientific Book Chapters, in: Experiments in Economics Decision Making and Markets, chapter 9, pages 223-233, World Scientific Publishing Co. Pte. Ltd..
    11. Amit Kothiyal & Vitalie Spinu & Peter Wakker, 2014. "An experimental test of prospect theory for predicting choice under ambiguity," Journal of Risk and Uncertainty, Springer, vol. 48(1), pages 1-17, February.
    12. Antoine Nebout & Marc Willinger, 2014. "Are Non-Expected Utility individuals really Dynamically Inconsistent? Experimental Evidence," Working Papers 14-08, LAMETA, Universtiy of Montpellier, revised Jul 2014.
    13. Maria J. Ruiz Martos, 2018. "Sequential Common Consequence Effect and Incentives," ThE Papers 18/04, Department of Economic Theory and Economic History of the University of Granada..
    14. Yamamori, Tetsuo & Iwata, Kazuyuki & Ogawa, Akira, 2018. "Does money illusion matter in intertemporal decision making?," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 465-473.
    15. Theodoros M. Diasakos, 2008. "Complexity and Bounded Rationality in Individual Decision Problems," Carlo Alberto Notebooks 90, Collegio Carlo Alberto.

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