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Strategies, heuristics and the relevance of risk aversion in a dynamic decision problem

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  • Müller, Wieland

Abstract

In this paper I consider a complex decision problem where subjects have to cope with a time horizon of uncertain duration and must update their termination probabilities which depend on stochastic events during life. First I describe how economic theory suggests to solve the decision problem. But since real decision makers can hardly be expected to behave according to the theoretical solution in the problem at hand, I describe several heuristics or rules of thumb and investigate their theoretical performance. Then observed behavior and the way how people tackled the problem is described. In the second part of the paper I discuss how much of the data can be explained by assuming that experimental subjects are risk averse.

Suggested Citation

  • Müller, Wieland, 1999. "Strategies, heuristics and the relevance of risk aversion in a dynamic decision problem," SFB 373 Discussion Papers 1999,61, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    • Handle: RePEc:zbw:sfb373:199961
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    1. Hey, John D & Dardanoni, Valentino, 1987. "Optimal Consumption under Uncertainty: An Experimental Investigation," Economic Journal, Royal Economic Society, vol. 98(390), pages 105-116, Supplemen.
    2. Enrica Carbone & John Hey, 2001. "A Test of the Principle of Optimality," Theory and Decision, Springer, vol. 50(3), pages 263-281, May.
    3. Eric J. Johnson & John W. Payne, 1985. "Effort and Accuracy in Choice," Management Science, INFORMS, vol. 31(4), pages 395-414, April.
    4. Hey, John D, 1983. "Whither Uncertainty?," Economic Journal, Royal Economic Society, vol. 93(369a), pages 130-139, Supplemen.
    5. Pemberton, James, 1993. "Attainable Non-optimality or Unattainable Optimality: A New Approach to Stochastic Life Cycle Problems," Economic Journal, Royal Economic Society, vol. 103(416), pages 1-20, January.
    6. Vital Anderhub & Werner Gäuth & Wieland Mäuller & Martin Strobel, 2000. "An Experimental Analysis of Intertemporal Allocation Behavior," Experimental Economics, Springer;Economic Science Association, vol. 3(2), pages 137-152, October.
    7. Huck, Steffen & Weizsacker, Georg, 1999. "Risk, complexity, and deviations from expected-value maximization: Results of a lottery choice experiment," Journal of Economic Psychology, Elsevier, vol. 20(6), pages 699-715, December.
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    Cited by:

    1. Hey, John D. & Knoll, Julia A., 2011. "Strategies in dynamic decision making - An experimental investigation of the rationality of decision behaviour," Journal of Economic Psychology, Elsevier, vol. 32(3), pages 399-409, June.

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