EconPapers    
Economics at your fingertips  
 

Inference by Believers in the Law of Small Numbers

Matthew Rabin

Method and Hist of Econ Thought from University Library of Munich, Germany

Abstract: Many people believe in the "Law of Small Numbers," exaggerating the degree to which a small sample resembles the population from which it is drawn. To model this, I assume that a person exaggerates the likelihood that a short sequence of i.i.d. signals resembles the long-run rate at which those signals are generated. Such a person believes in the "gambler's fallacy", thinking early draws of one signal increase the odds of next drawing other signals. When uncertain about the rate, the person over-infers from short sequences of signals, and is prone to think the rate is more extreme than it is. When the person makes inferences about the frequency at which rates are generated by different sources -- such as the distribution of talent among financial analysts -- based on few observations from each source, he tends to exaggerate how much variance there is in the rates. Hence, the model predicts that people may pay for financial advice from "experts" whose expertise is entirely illusory. Other economic applications are discussed.

JEL-codes: B49 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2001-01-02
Note: 53 pages Acrobat .pdf
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/mhet/papers/0012/0012002.pdf (application/pdf)

Related works:
Working Paper: Inference by Believers in the Law of Small Numbers (2000) Downloads
Working Paper: Inference by Believers in the Law of Small Numbers (2000) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpmh:0012002

Access Statistics for this paper

More papers in Method and Hist of Econ Thought from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ().

 
Page updated 2021-01-03
Handle: RePEc:wpa:wuwpmh:0012002