Can People Learn About ‘Black Swans’? Experimental Evidence

61 Pages Posted: 13 Jun 2016 Last revised: 4 Feb 2018

See all articles by Elise Payzan-LeNestour

Elise Payzan-LeNestour

University of New South Wales; Financial Research Network (FIRN)

Date Written: February 4, 2018

Abstract

How do people cope with tail risk? In a lab experiment that removed informational and incentive confounds, subjects overwhelmingly behaved like Bayesian learners. The results of simulations further revealed that if one is to survive under tail risk, one needs to follow the Bayesian approach, as all boundedly rational alternatives fail. These findings support the Bayesian assumption commonly made in prior studies on tail risk and model uncertainty, and they also demonstrate the importance of optimal learning under tail risk.

Keywords: Tail Risk, Model Uncertainty, Bayesian Learning, Adaptive Learning

JEL Classification: C91, D83, D87, G02, G11

Suggested Citation

Payzan-LeNestour, Elise, Can People Learn About ‘Black Swans’? Experimental Evidence (February 4, 2018). UNSW Business School Research Paper No. 2016 BFIN 03. Available at SSRN: https://ssrn.com/abstract=2793824 or http://dx.doi.org/10.2139/ssrn.2793824

Elise Payzan-LeNestour (Contact Author)

University of New South Wales ( email )

Australian School of Business
Sydney, NSW 2052
Australia

HOME PAGE: http://www.elisepayzan.com/

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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