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Why Do People Pay for Useless Advice? Implications of Gambler's and Hot-Hand Fallacies in False-Expert Setting

  • Powdthavee, Nattavudh

    ()

    (London School of Economics)

  • Riyanto, Yohanes E.

    ()

    (Nanyang Technological University, Singapore)

We investigated experimentally whether people can be induced to believe in a non-existent expert, and subsequently pay for what can only be described as transparently useless advice about future chance events. Consistent with the theoretical predictions made by Rabin (2002) and Rabin and Vayanos (2010), we show empirically that the answer is yes and that the size of the error made systematically by people is large.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6557.

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Length: 26 pages
Date of creation: May 2012
Date of revision:
Publication status: published as 'Would You Pay for Transparently Useless Advice? A Test of Boundaries of Beliefs in the Folly of Predictions' in: Review of Economics and Statistics, 2014, [Online First]
Handle: RePEc:iza:izadps:dp6557
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  1. Jørgensen, Claus Bjørn & Suetens, Sigrid & Tyran, Jean-Robert, 2011. "Predicting Lotto Numbers," CEPR Discussion Papers 8314, C.E.P.R. Discussion Papers.
  2. Rabin, Matthew, 2000. "Inference by Believers in the Law of Small Numbers," Department of Economics, Working Paper Series qt4sw8n41t, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
  4. Jonathan Guryan & Melissa S. Kearney, 2008. "Gambling at Lucky Stores: Empirical Evidence from State Lottery Sales," American Economic Review, American Economic Association, vol. 98(1), pages 458-73, March.
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