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Probability Judgements in Multi-Stage Problems : Experimental Evidence of Systematic Biases

Listed author(s):
  • Gneezy, U.

    (Tilburg University, Center For Economic Research)

We report empirical evidence that in problems of random walk with positive drift, bounded rationality leads individuals to under-estimate the probability of success in the long run.In particular, individuals who were given the stage by stage probability distribution failed to aggregate this information in a multi-stage case.Estimations of the long run probability distribution did not differ much from the given stage-by-stage probability distribution, and were systematically lower than the accurate one.Applications to risk perception in financial markets are considered

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1996-01.

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Date of creation: 1996
Handle: RePEc:tiu:tiucen:e4424aaf-139b-44a5-8561-4cd08baa0a9a
Contact details of provider: Web page: http://center.uvt.nl

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  1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  2. Machina, Mark J, 1989. "Dynamic Consistency and Non-expected Utility Models of Choice under Uncertainty," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1622-1668, December.
  3. Camerer, Colin F, 1987. "Do Biases in Probability Judgment Matter in Markets? Experimental Evidence," American Economic Review, American Economic Association, vol. 77(5), pages 981-997, December.
  4. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
  5. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
  6. Werner F. M. De Bondt & Richard H. Thaler, 1994. "Financial Decision-Making in Markets and Firms: A Behavioral Perspective," NBER Working Papers 4777, National Bureau of Economic Research, Inc.
  7. Arrow, Kenneth J, 1982. "Risk Perception in Psychology and Economics," Economic Inquiry, Western Economic Association International, vol. 20(1), pages 1-9, January.
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