We examine decision-making under risk and uncertainty in a laboratory experiment. The heart of our design examines how one's propensity to use Bayes' rule is affected by whether this rule is aligned with reinforcement or clashes with it. In some cases, we create environments where Bayesian updating after a successful outcome should lead a decision-maker to make a change, while no change should be made after observing an unsuccessful outcome.We observe striking patterns: When payoff reinforcement and Bayesian updating are aligned, nearly all people respond as expected. However, when these forces clash, around 50% of all decisions are inconsistent with Bayesian updating. While people tend to make costly initial choices that eliminate complexity in a subsequent decision, we find that complexity alone cannot explain our results. Finally, when a draw provides only information (and no payment), switching errors occur much less frequently, suggesting that the 'emotional reinforcement' (affect) induced by payments is a critical factor in deviations from Bayesian updating. There is considerable behavioral heterogeneity; we identify different types in the population and find that people who make 'switching errors' are more likely to have cross-period 'reinforcement' tendencies.
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Itzhak Gilboa & David Schmeidler, 1992.
"Case-Based Decision Theory,"
Discussion Papers
994, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Richard Weber & Georg von Graevenitz & Dietmar Harhoff, 2009.
"The Effects of Entrepreneurship Education,"
Discussion Papers
269, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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