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Belief in mean reversion and the law of small numbers

Author

Listed:
  • Noor, Jawwad

    (Department of Economics, Boston University)

  • Payro, Fernando

    (Universitat Autonoma de Barcelona and Barcelona School of Economics)

Abstract

Studies find that people systematically underestimate the likelihood of streaks in a random sequence. In a canonical coin-tossing environment, this paper shows that the evidence can be explained by a belief in mean reversion. Such beliefs are represented as if the bias of the coin is history-dependent and “self-correcting”. In a Bayesian inference setting, a belief in mean reversion ensures that the agent never rules out the true parameter.

Suggested Citation

  • Noor, Jawwad & Payro, Fernando, 0. "Belief in mean reversion and the law of small numbers," Theoretical Economics, Econometric Society.
    • Handle: RePEc:the:publsh:5996
    as

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    File URL: http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/5996/44977/1
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    More about this item

    Keywords

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    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D9 - Microeconomics - - Micro-Based Behavioral Economics

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