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When Optimal Choices Feel Wrong: A Laboratory Study of Bayesian Updating, Complexity, and Affect

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Author Info
Gary Charness (University of California, Santa Barbara)
Dan Levin (Ohio State University)

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Abstract

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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Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number 9-03.

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Date of creation: 24 Oct 2003
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Handle: RePEc:cdl:ucsbec:9-03

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Related research
Keywords: Bayesian updating; Reinforcement; Affect; Experimental economics;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Gary Charness & Dan Levin, 2003. "When Optimal Choices Feel Wrong: A Laboratory Study of Bayesian Updating, Complexity, and Affect," University of California at Santa Barbara, Economics Working Paper Series 9-03, Department of Economics, UC Santa Barbara. [Downloadable!]
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  2. Camerer, Colin & Ho, Teck-Hua, 1997. "Experience-Weighted Attraction Learning in Games: A Unifying Approach," Working Papers 1003, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  3. Grether, David M, 1980. "Bayes Rule as a Descriptive Model: The Representativeness Heuristic," The Quarterly Journal of Economics, MIT Press, vol. 95(3), pages 537-57, November. [Downloadable!] (restricted)
  4. Zizzo, Daniel John & Stolarz-Fantino, Stephanie & Wen, Julie & Fantino, Edmund, 2000. "A violation of the monotonicity axiom: experimental evidence on the conjunction fallacy," Journal of Economic Behavior & Organization, Elsevier, vol. 41(3), pages 263-276, March. [Downloadable!] (restricted)
  5. Ouwersloot, Hans & Nijkamp, Peter & Rietveld, Piet, 1998. "Errors in probability updating behaviour : Measurement and impact analysis," Journal of Economic Psychology, Elsevier, vol. 19(5), pages 535-563, October. [Downloadable!] (restricted)
  6. Erev, Ido & Roth, Alvin E, 1998. "Predicting How People Play Games: Reinforcement Learning in Experimental Games with Unique, Mixed Strategy Equilibria," American Economic Review, American Economic Association, vol. 88(4), pages 848-81, September. [Downloadable!] (restricted)
  7. Grether, David M., 1992. "Testing bayes rule and the representativeness heuristic: Some experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 17(1), pages 31-57, January. [Downloadable!] (restricted)
  8. Gilboa, Itzhak & Schmeidler, David, 1995. "Case-Based Decision Theory," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 605-39, August. [Downloadable!] (restricted)
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  9. Camerer, Colin & Weber, Martin, 1992. " Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 325-70, October.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. McLeish, Kendra N & Oxoby, Robert J, 2006. "Measuring Impatience: Elicited Discount Rates and the Barratt Impulsiveness Scale," MPRA Paper 1524, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  2. Tim Grebe & Radosveta Ivanova-Stenzel & Sabine Kröger, 2006. "How eBay Sellers set “Buy-it-now” prices - Bringing The Field Into the Lab," Discussion Papers 181, 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. [Downloadable!]
  3. Dohmen Thomas & Falk Armin & Huffman David & Sunde Uwe, 2009. "Are Risk Aversion and Impatience Related to Cognitive Ability?," Research Memoranda 040, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
    Other versions:
  4. David L. Dickinson & Robert J. Oxoby, 2007. "Cognitive Dissonance, Pessimism, and Behavioral Spillover Effects," IZA Discussion Papers 2832, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  5. 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. [Downloadable!]
    Other versions:
  6. Gary Charness & Dan Levin, 2005. "The Origin of the Winner’s Curse: A Laboratory Study," Levine's Bibliography 666156000000000602, UCLA Department of Economics. [Downloadable!]
    Other versions:
  7. Edward Cartwright & Amrish Patel, 2008. "Public Goods, Social Norms and Naive Beliefs," Studies in Economics 0807, Department of Economics, University of Kent. [Downloadable!]
  8. Gary Charness & Dan Levin, 2005. "When Optimal Choices Feel Wrong: A Laboratory Study of Bayesian Updating, Complexity, and Affect," American Economic Review, American Economic Association, vol. 95(4), pages 1300-1309, September. [Downloadable!]
    Other versions:
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