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Strategies in dynamic decision making – An experimental investigation of the rationality of decision behaviour

In: Experiments in Economics Decision Making and Markets

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  • John D. Hey
  • Julia A. Knoll

Abstract

This paper is concerned with the question of how people tackle dynamic decision problems. It is on the interface between economics and psychology. Economic theory has a well-defined theory of how people should tackle such problems, but experimental evidence suggests that these are not empirically valid, and particularly that people find dynamic decision problems complex and cognitively demanding. Psychologists have long been aware of such issues and have developed a suite of theories to explain behaviour in such contexts, but these have been largely developed in a static context. This paper attempts to build a bridge between the two disciplines by exploring decision processes in a dynamic problem for which economic theory provides clear predictions. To aid us in this quest we use an experimental design which enables us to infer the decision rules that people are using. We identify a number of distinct decision heuristics, which could usefully be embodied into economic models of dynamic decision making.

Suggested Citation

  • John D. Hey & Julia A. Knoll, 2018. "Strategies in dynamic decision making – An experimental investigation of the rationality of decision behaviour," World Scientific Book Chapters, in: Experiments in Economics Decision Making and Markets, chapter 9, pages 223-233, World Scientific Publishing Co. Pte. Ltd..
  • Handle: RePEc:wsi:wschap:9789813235816_0009
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    References listed on IDEAS

    as
    1. Enrica Carbone & John Hey, 2001. "A Test of the Principle of Optimality," Theory and Decision, Springer, vol. 50(3), pages 263-281, May.
    2. Muller, Wieland, 2001. "Strategies, heuristics, and the relevance of risk-aversion in a dynamic decision problem," Journal of Economic Psychology, Elsevier, vol. 22(4), pages 493-522, August.
    3. Johnson, Eric J. & Camerer, Colin & Sen, Sankar & Rymon, Talia, 2002. "Detecting Failures of Backward Induction: Monitoring Information Search in Sequential Bargaining," Journal of Economic Theory, Elsevier, vol. 104(1), pages 16-47, May.
    4. Bettman, James R. & Johnson, Eric J. & Payne, John W., 1990. "A componential analysis of cognitive effort in choice," Organizational Behavior and Human Decision Processes, Elsevier, vol. 45(1), pages 111-139, February.
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    Citations

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    Cited by:

    1. Yasufumi Gemma, 2016. "Money Illusion Matters for Consumption-Saving Decision-Making: An Experimental Investigation," IMES Discussion Paper Series 16-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
    2. Tetsuo Yamamori & Kazuyuki Iwata & Akira Ogawa, 2014. "An Experimental Study of Money Illusion in Intertemporal Decision Making," Working Papers e085, Tokyo Center for Economic Research.
    3. Amit Kothiyal & Vitalie Spinu & Peter Wakker, 2014. "An experimental test of prospect theory for predicting choice under ambiguity," Journal of Risk and Uncertainty, Springer, vol. 48(1), pages 1-17, February.
    4. Mariano, Stefania & Laker, Benjamin, 2024. "On-the-fly decision making within organizations: A systematic literature review and future research directions," Journal of Business Research, Elsevier, vol. 174(C).
    5. Hazhir Rahmandad & Jerker Denrell & Drazen Prelec, 2021. "What makes dynamic strategic problems difficult? Evidence from an experimental study," Strategic Management Journal, Wiley Blackwell, vol. 42(5), pages 865-897, May.
    6. Enrica Carbone & Gerardo Infante, 2014. "Comparing behavior under risk and under ambiguity in a lifecycle experiment," Theory and Decision, Springer, vol. 77(3), pages 313-322, October.
    7. Sinitskaya, Ekaterina, 2014. "Computational modeling of an economy using elements of artificial intelligence," ISU General Staff Papers 201401010800005291, Iowa State University, Department of Economics.
    8. Dragomirescu-Gaina, Catalin & Philippas, Dionisis & Tsionas, Mike G., 2021. "Trading off accuracy for speed: Hedge funds' decision-making under uncertainty," International Review of Financial Analysis, Elsevier, vol. 75(C).
    9. Yamamori, Tetsuo & Iwata, Kazuyuki & Ogawa, Akira, 2018. "Does money illusion matter in intertemporal decision making?," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 465-473.
    10. Miller, Logan & Rholes, Ryan, 2023. "Joint vs. Individual performance in a dynamic choice problem," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 897-934.

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    More about this item

    Keywords

    Experimental Economics; Risk; Ambiguity; Markets; Auctions; Bargaining; Econometrics; Methodology;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

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