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Probability Judgements in Multi-Stage Problems: Experimental Evidence of Systematic Biases

Uri Gneezy

No 1996-01, Discussion Paper from Tilburg University, Center for Economic Research

Abstract: We report empirical evidence that in problems of random walk with positive drift, bounded rationality leads individuals to under-estimate the probability of success in the long run.In particular, individuals who were given the stage by stage probability distribution failed to aggregate this information in a multi-stage case.Estimations of the long run probability distribution did not differ much from the given stage-by-stage probability distribution, and were systematically lower than the accurate one.Applications to risk perception in financial markets are considered

Keywords: bounded rationality; Probability; random walks; Estimation (search for similar items in EconPapers)
Date: 1996
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