Expectation formation in an evolving game of uncertainty: new experimental evidence

Gigi Foster, Paul Frijters, Markus Schaffner and Benno Torgler

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We examine the nature of stated subjective probabilities in a complex, evolving context in which participants are not told what the actual probability is: we collect information on subjective expectations in a computerized car race game wherein participants must bet on a particular car but cannot influence the odds of winning once the race begins. In our setup, the actual probability of the good outcome (a win) can be determined based on computer simulations from any point in the process. We compare this actual probability to the subjective probability stated by participants at three different points in each of six races. In line with previous research in which participants have direct access to actual probabilities, we find that the inverse S-shaped curve relating subjective to actual probabilities is also evident in our far more complex situation, and that there is only a limited degree of learning through repeated play. We show that the model in the inverse S-shaped function family that provides the best fit to our data is Prelec’s 1998 conditional invariant model. We also find that individuals who report a greater degree of ambiguity are more pessimistic and less responsive to actual changes in real probabilities.

Keywords: behavioral economics; expected utility theory; experiments; expectations; probabilities (search for similar items in EconPapers)
JEL-codes: D40 L10 (search for similar items in EconPapers)
Date: 2018-10-01
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Citations: View citations in EconPapers (1)

Published in Journal of Economic Behavior & Organization, 1, October, 2018, 154, pp. 379-405. ISSN: 0167-2681

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Journal Article: Expectation formation in an evolving game of uncertainty: New experimental evidence (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:90087

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