When Optimal Choices Feel Wrong: A Laboratory Study of Bayesian Updating, Complexity, and Affect

21 Pages Posted: 12 Sep 2003

See all articles by Gary Charness

Gary Charness

University of California, Santa Barbara (UCSB) - Department of Economics

Dan Levin

Ohio State University (OSU) - Economics

Date Written: November 17, 2004

Abstract

We examine decision-making under risk in a laboratory experiment. The heart of our design examines how one's propensity to use Bayes' rule is affected by whether this rule is aligned with reinforcement or clashes with it. In some cases, we create environments where Bayesian updating after a successful outcome should lead a decision-maker to make a change, while no change should be made after observing an unsuccessful outcome. We observe striking patterns: When payoff reinforcement and Bayesian updating are aligned, nearly all people respond as expected. On the other hand, when these forces clash, around 50% of all decisions are inconsistent with Bayesian updating; a slight increase in the precision of the information and decrease in the complexity of the calculations does not lower the error rate. However, when a draw provides only information (and no payment), switching errors occur much less frequently, suggesting that the "emotional reinforcement" (affect) induced by payments is a critical factor in deviations from Bayesian updating. We also find considerable behavioral heterogeneity across the population. Finally, we see that people have a "taste for consistency", as voluntary draws are more likely to be repeated than draws that were required.

Keywords: Bayesian updating, Reinforcement, Affect, Experimental economics

JEL Classification: B49, C91, D80, D81

Suggested Citation

Charness, Gary and Levin, Dan, When Optimal Choices Feel Wrong: A Laboratory Study of Bayesian Updating, Complexity, and Affect (November 17, 2004). Available at SSRN: https://ssrn.com/abstract=437866 or http://dx.doi.org/10.2139/ssrn.437866

Gary Charness (Contact Author)

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

2127 North Hall
Santa Barbara, CA 93106
United States
805-893-2412 (Phone)
805-893-8830 (Fax)

Dan Levin

Ohio State University (OSU) - Economics ( email )

1945 N. High Street
Columbus, OH 43210-1172
United States

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