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Experimental Economics and the Theory of Decision Making Under Risk and Uncertainty

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  • John D. Hey

    (Department of Economics and Related Studies, Universities of Bari and York, Helsington, York YO10 500, UK)

Abstract

Following a brief review of the main experimental work into the economics of risk and uncertainty, both static and dynamic, this paper reports the results of an experiment testing one of the key assumptions of the theory of dynamic economic behaviour—that people have a plan and implement it. Using a unique design which enables the plan (if one exists) to be revealed by the first move, the experiment was implemented via the Internet on a subset of the University of Tilburg's ongoing family expenditure survey panel. The advantages of using such a set of subjects for the experiment are twofold: the demographic characteristics of the set are known and therefore demographic inferences can be made; the representativeness of the set is known and therefore inferences about populations can be made. The results suggest that at least 36% of the subjects had behaviour inconsistent with the hypothesis under test: that people formulate plans and then implement them. Interestingly demographic variables are unable to explain the consistency or inconsistency of individuals. One conclusion is that subjects simply make errors. An alternative conclusion, consistent with previous experimental research, is that people are unable to predict their own future decisions. The implications for dynamic theory (particularly relating to savings and pensions decisions) are important. The Geneva Papers on Risk and Insurance Theory (2002) 27, 5–21. doi:10.1023/A:1020634723329

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Theory.

Volume (Year): 27 (2002)
Issue (Month): 1 (June)
Pages: 5-21

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Handle: RePEc:pal:genrir:v:27:y:2002:i:1:p:5-21

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Cited by:
  1. Bellemare, Charles & Kröger, Sabine, 2004. "On Representative Social Capital," IZA Discussion Papers 1145, Institute for the Study of Labor (IZA).
  2. John Bone & John D Hey & John Suckling, 2007. "Do People Plan?," Discussion Papers 07/31, Department of Economics, University of York.
  3. Huck, S. & Müller, W., 2007. "Allais for All: Revisiting the Paradox," Discussion Paper 2007-99, Tilburg University, Center for Economic Research.
  4. Andersen, Steffen & Harrison, Glenn W. & Lau, Morten Igel & Rutström, Elisabet E., 2009. "Behavioral Econometrics for Psychologists," Working Papers 04-2009, Copenhagen Business School, Department of Economics.
  5. Hey, John D. & Knoll, Julia A., 2007. "How far ahead do people plan?," Economics Letters, Elsevier, vol. 96(1), pages 8-13, July.
  6. Andersen, Steffen & Harrison, Glenn W. & Lau, Morten Igel & Rutström, E. Elisabet, 2010. "Preference heterogeneity in experiments: Comparing the field and laboratory," Journal of Economic Behavior & Organization, Elsevier, vol. 73(2), pages 209-224, February.
  7. Bellemare, Charles & Kröger, Sabine, 2003. "On Representative Trust," SFB 373 Discussion Papers 2003,27, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.

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