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

Foster, Gigi, Frijters, Paul, Schaffner, Markus and Torgler, Benno (2018) Expectation formation in an evolving game of uncertainty: new experimental evidence. Journal of Economic Behavior and Organization, 154. pp. 379-405. ISSN 0167-2681

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Identification Number: 10.1016/j.jebo.2018.07.013

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.

Item Type: Article
Official URL: https://www.journals.elsevier.com/journal-of-econo...
Additional Information: © 2018 Elsevier B.V.
Divisions: Centre for Economic Performance
Subjects: B Philosophy. Psychology. Religion > BF Psychology
H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D4 - Market Structure and Pricing > D40 - General
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L10 - General
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 23 Aug 2018 10:53
Last Modified: 20 Feb 2019 06:52
Projects: DP090987840
Funders: Australian Research Council, ORSEE, ASBLab
URI: http://eprints.lse.ac.uk/id/eprint/90087

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