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Would you Pay for Transparently Useless Advice? A Test of Boundaries of Beliefs in The Folly of Predictions

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  • Nattavudh Powdthavee

    () (London School of Economics and University of Melbourne)

  • Yohanes E. Riyanto

    () (Nanyang Technological University)

Abstract

Standard economic models assume that the demand for expert predictions arises only under the conditions in which individuals are uncertain about the underlying process generating the data and there is a strong belief that past performances predict future performances. We set up the strongest possible test of these assumptions. In contrast to the theoretical suggestions made in the literature, people are willing to pay for predictions of truly random outcomes after witnessing only a short streak of accurate predictions live in the lab. We discuss potential explanations and implications of such irrational learning in the contexts of economics and finance. © 2015 The President and Fellows of Harvard College and the Massachusetts Institute of Technology

Suggested Citation

  • Nattavudh Powdthavee & Yohanes E. Riyanto, 2015. "Would you Pay for Transparently Useless Advice? A Test of Boundaries of Beliefs in The Folly of Predictions," The Review of Economics and Statistics, MIT Press, vol. 97(2), pages 257-272, May.
  • Handle: RePEc:tpr:restat:v:97:y:2015:i:2:p:257-272
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    Citations

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    Cited by:

    1. Silvia Bou & Jordi Brandts & Magda Cayón & Pablo Guillén, 2016. "The price of luck: paying for the hot hand of others," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 2(1), pages 60-72, May.
    2. Athanasakou, Vasiliki & Simpson, Ana, 2016. "Investor attention to rounding as a salient forecast feature," International Journal of Forecasting, Elsevier, vol. 32(4), pages 1212-1233.
    3. Randolph Sloof & Ferdinand A. Siemens, 2017. "Illusion of control and the pursuit of authority," Experimental Economics, Springer;Economic Science Association, vol. 20(3), pages 556-573, September.
    4. Stöckl, Thomas & Huber, Jürgen & Kirchler, Michael & Lindner, Florian, 2015. "Hot hand and gambler's fallacy in teams: Evidence from investment experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 327-339.
    5. Olafsson, Arna & Pagel, Michaela, 2017. "The Ostrich in Us: Selective Attention to Financial Accounts, Income, Spending, and Liquidity," CEPR Discussion Papers 12259, C.E.P.R. Discussion Papers.
    6. Russell Golman & David Hagmann & George Loewenstein, 2017. "Information Avoidance," Journal of Economic Literature, American Economic Association, vol. 55(1), pages 96-135, March.
    7. Anufriev, Mikhail & Bao, Te & Sutan, Angela & Tuinstra, Jan, 2019. "Fee structure and mutual fund choice: An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 158(C), pages 449-474.
    8. Athanasakou, Vasiliki E. & Simpson, Ana, 2016. "Investor attention to salient features of analyst forecasts," LSE Research Online Documents on Economics 65745, London School of Economics and Political Science, LSE Library.
    9. Joshua B. Miller & Adam Sanjurjo, 2014. "A Cold Shower for the Hot Hand Fallacy," Working Papers 518, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    10. Agarwal, Sumit & He, Jia & Liu, Haoming & Png, I. P. L. & Sing, Tien Foo & Wong, Wei-Kang, 2016. "Superstition, Conspicuous Spending, and Housing Markets: Evidence from Singapore," IZA Discussion Papers 9899, Institute of Labor Economics (IZA).
    11. Ronayne, David & Sgroi, Daniel, 2018. "Ignoring Good Advice," CAGE Online Working Paper Series 359, Competitive Advantage in the Global Economy (CAGE).

    More about this item

    Keywords

    demand; expert predictions; accurate predictions; irrational learning;

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

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