When diversification clashes with the reinforcement heuristic: An experimental investigation

Santiago I. Sautua

Journal of Economic Behavior & Organization, 2020, vol. 174, issue C, 196-211

Abstract: I experimentally investigate how diversification decisions are affected by information about historical outcomes. In the experiment, subjects have the opportunity to diversify between two simple binary gambles. When subjects lack information about previous outcomes, a vast majority diversify. By contrast, only a minority diversify after learning that one of the gambles has experienced better outcomes than the other in the past. Subjects’ posterior beliefs about winning probabilities predict the propensity to diversify. However, most of the subjects who do not diversify tend to chase the gamble with better historical outcomes, regardless of their beliefs. This behavior is consistent with subjects following a reinforcement heuristic.

Keywords: Uncertainty; Diversification; Beliefs; Reinforcement heuristic (search for similar items in EconPapers)
JEL-codes: C91 D83 D91 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:174:y:2020:i:c:p:196-211

DOI: 10.1016/j.jebo.2020.04.018

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