What if you are not Bayesian? The consequences for decisions involving risk

Paul Goodwin (), Dilek Önkal () and Herman Stekler
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Paul Goodwin: University of Bath
Dilek Önkal: University of Bradford

No 2017-003, Working Papers from The George Washington University, Department of Economics, H. O. Stekler Research Program on Forecasting

Abstract: Many studies have examined the extent to which individuals’ probability judgments depart from Bayes’ theorem when revising probability estimates in the light of new information. Generally, these studies have not considered the implications of such departures for decisions involving risk. We identify when such departures will occur in two common types of decisions. We then report on two experiments where people were asked to revise their own prior probabilities of a forthcoming economic recession in the light of new information. When the reliability of the new information was independent of the state of nature, people tended to overreact to it if their prior probability was low and underreact if it was high. When it was not independent, they tended to display conservatism. We identify the circumstances where discrepancies in decisions arising from a failure to use Bayes’ theorem were most likely to occur in the decision context we examined. We found that these discrepancies were relatively rare and, typically, were not serious.

Keywords: decision processes; Bayes’ theorem; judgmental biases; risk (search for similar items in EconPapers)
Pages: 34 pages
Date: 2017-10
New Economics Papers: this item is included in nep-cta
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https://www2.gwu.edu/~forcpgm/2017-003.pdf First version, 2017 (application/pdf)

Related works:
Journal Article: What if you are not Bayesian? The consequences for decisions involving risk (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:gwc:wpaper:2017-003

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