Suboptimality of Probability Matching − a Formal Proof, a Graphical Analysis and an Impulse Balance Interpretation
13 Pages Posted: 8 Jun 2020
Date Written: June 3, 2020
We prove suboptimality of probability matching in prediction tasks with an arbitrary (finite) number of outcomes and repetitions. For the popular case of binary prediction tasks, we also provide a graphical representation of the result. Finally, we relate probability matching to impulse balance equilibrium theory and show when probability matching is consistent with its predictions.
Keywords: probability matching, individual decision making, impulse balance equilibrium
JEL Classification: D81, D83
Suggested Citation: Suggested Citation