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


  • 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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  • Gneezy, U., 1996. "Probability Judgements in Multi-Stage Problems : Experimental Evidence of Systematic Biases," Discussion Paper 1996-01, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:e4424aaf-139b-44a5-8561-4cd08baa0a9a

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    References listed on IDEAS

    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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    Cited by:

    1. Ludwig Ensthaler & Olga Nottmeyer & Georg Weizsäcker & Christian Zankiewicz, 2013. "Hidden Skewness: On the Difficulty of Multiplicative Compounding under Random Shocks," Discussion Papers of DIW Berlin 1337, DIW Berlin, German Institute for Economic Research.
    2. Ludwig Ensthaler & Olga Nottmeyer & Georg Weizsäcker, 2010. "Hidden Skewness," Discussion Papers of DIW Berlin 1043, DIW Berlin, German Institute for Economic Research.
    3. Gneezy, U. & Das, J.W.M., 1996. "Experimental Investigation of Percieved Risk in Random Walk Processes," Discussion Paper 1996-85, Tilburg University, Center for Economic Research.
    4. Klaus Abbink & Matthew Ellman, 2004. "The donor problem," Economics Working Papers 796, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2005.
    5. Jakob Grazzini, 2013. "Information dissemination in an experimentally based agent-based stock market," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 8(1), pages 179-209, April.
    6. Grazzini, J., 2011. "Experimental Based, Agent Based Stock Market," CeNDEF Working Papers 11-07, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    7. Laurent Denant-Boemont & Olivier L’Haridon, 2013. "La rationalité à l'épreuve de l'économie comportementale," Revue française d'économie, Presses de Sciences-Po, vol. 0(2), pages 35-89.
    8. Joseph Johnson & Jerome Busemeyer, 2001. "Multiple-Stage Decision-Making: The Effect of Planning Horizon Length on Dynamic Consistency," Theory and Decision, Springer, vol. 51(2), pages 217-246, December.
    9. Kim Kaivanto & Eike Kroll, 2014. "Alternation bias and reduction in St. Petersburg gambles," Working Papers 65600286, Lancaster University Management School, Economics Department.


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