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The hot stove effect in repeated-play decision making under ambiguity

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  • Fujikawa, Takemi

Abstract

The ''hot stove effect'' has been studied for repeated-play decision making under uncertainty (also referred to as experience-based decision making) in which the decision makers repeatedly face the Allais-type binary choice problems, and have to learn about the outcome distributions through sampling as the decision makers are not explicitly provided with prior information on the payoff structure. The previous studies have found mixed evidence: some studies have found that the hot stove effect is strong in repeated-play decision making under uncertainty, while other studies have found that the effect is weak. Thus, the evidence is inconsistent. This paper reports an experimental investigation of the hot stove effect in repeated-play decision making under ambiguity. The current experiment involves an ambiguity treatment in which (1) the participants perform two binary repeated-play choice problems, each involving 400-fold choice between a risky option and a riskless option; and (2) in each problem, there are two states of nature available: a favourable state and an unfavourable state, but only one of them obtains on any given trial. The realisation of the actual state is not disclosed to the participants, thus they would be expected to discover the actual state through sampling with immediate feedback. The current results suggest that the magnitude of the hot stove effect is significantly different between repeated-play decision making under uncertainty and repeated-play decision making under ambiguity. I shall show that the hot stove effect is attenuated in repeated-play decision making under ambiguity.

Suggested Citation

  • Fujikawa, Takemi, 2009. "The hot stove effect in repeated-play decision making under ambiguity," MPRA Paper 17647, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:17647
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    File URL: https://mpra.ub.uni-muenchen.de/17647/1/MPRA_paper_17647.pdf
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    References listed on IDEAS

    as
    1. Sujoy Mukerji & Jean-Marc Tallon, 2001. "Ambiguity Aversion and Incompleteness of Financial Markets," Review of Economic Studies, Oxford University Press, vol. 68(4), pages 883-904.
    2. Mukerji, Sujoy & Tallon, Jean-Marc, 2004. "Ambiguity aversion and the absence of wage indexation," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 653-670, April.
    3. Mukerji, Sujoy & Tallon, Jean-Marc, 2003. "Ellsberg's two-color experiment, portfolio inertia and ambiguity," Journal of Mathematical Economics, Elsevier, vol. 39(3-4), pages 299-316, June.
    4. Takemi Fujikawa, 2009. "On the relative importance of the hot stove effect and the tendency to rely on small samples," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 4(5), pages 429-435, August.
    5. Mukerji, Sujoy, 1998. "Ambiguity Aversion and Incompleteness of Contractual Form," American Economic Review, American Economic Association, vol. 88(5), pages 1207-1231, December.
    6. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005. "A Smooth Model of Decision Making under Ambiguity," Econometrica, Econometric Society, vol. 73(6), pages 1849-1892, November.
    7. Einhorn, Hillel J & Hogarth, Robin M, 1986. "Decision Making under Ambiguity," The Journal of Business, University of Chicago Press, vol. 59(4), pages 225-250, October.
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    More about this item

    Keywords

    Allais-type choices; decisions from experience; risk; uncertainty;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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