Are People Bayesian? Uncovering Behavioral Strategies

Abstract

Economists and psychologists have recently been developing new theories of decision making under uncertainty that can accommodate the observed violations of standard statistical decision theoretic axioms by experimental subjects. We propose a procedure which finds a collection of decision rules that best explain the behavior of experimental subjects. The procedure is a combination of maximum likelihood estimation of the rules together with an implicit classification of subjects to the various rules, and a penalty for having too many rules. We apply our procedure to data on probabilistic updating by subjects in four different universities. We get remarkably robust results which show that the most important rules used by the subjects (in order of importance) are Bayes ' s rule, a representativeness rule (ignoring the prior), and to a lesser extent, conservatism (over-weighting the prior).

Risk and Rationality: Uncovering Heterogeneity in Probability Distortion

“…On the basis of statistical classification procedures, such as finite mixture regression models, investigators have tried to discover which decision rules people actually apply when playing games or dealing with complex decision situations (El-Gamal and Grether, 1995;Stahl and Wilson, 1995;Houser, Keane, and McCabe, 2004;Houser and Winter, 2004).…”

The Behavioral Revolution and International Relations

“…39. El-Gamal andGrether 1995;Frederick, Lowenstein, and O'Donoghue 2002;Kahneman, Knetsch, and Thaler 1990;Kahneman, Slovic, and Tversky 1982;Laibson 1997;Loewenstein and Elster 1992;Loomes, Starmer, and Sugden 1991;O'Donoghue and Rabin 1999;Thaler 1999. 40. See Akerlof and Yellen 1990;Fehr and Schmidt 1999;Rabin 1993 catalogue of biases we outlined.…”

Detecting Failures of Backward Induction: Monitoring Information Search in Sequential Bargaining

“…Costa-Gomes et al [19]; and Gabaix and Laibson [27], for more ambitious efforts). Following Harless and Camerer [30], El-Gamal and Grether [23] and CostaGomes et al [19], we posit a discrete set of decision rules, identify how often they are used, and test whether classifying subjects by decision rules to predict the offers they make. Like Costa-Gomes et second pie to the second player, which does not even require her to know the first-period pie size.…”