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The Relationship between Risk Attitudes and Heuristics in Search Tasks: A Laboratory Experiment

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Abstract

Experimental studies of search behavior suggest that individuals stop searching earlier than the optimal, risk-neutral stopping rule predicts. Two different classes of decision rules could generate this behavior: rules that are optimal conditional on utility functions departing from risk neutrality, or heuristics derived from limited cognitive processing capacities and satisficing. To discriminate between these possibilities, we conduct an experiment that consists of a search task as well as a lottery task designed to elicit utility functions. We find that search heuristics are not related to measures of risk aversion, but to measures of loss aversion.

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... The importance of search strategies to reduce market frictions has been recognized for a long time and inspired a plethora of theoretical and empirical investigations (for recent surveys on searching on labor markets, for example, see Rogerson et al. 2005, or Eckstein and van den Berg 2007). The empirical study of search behavior has a long history and there is a relatively large literature using experimental methods to test the theoretical predictions of different search models (e.g., Schotter and Braunstein, 1981;Hey, 1982;Harrison and Morgan, 1990;Cox and Oaxaca, 1992;Sonnemans, 1998;Zwick et al., 2003;Einav, 2005;Schunk and Winter, 2007). Generally speaking, the existing experimental evidence suggests that individuals stop searching too early in comparison with the optimal strategy 1 and that there is some recall (take an option that previously was rejected). ...
... Interestingly, stopping behavior does not seem to be related to risk aversion (e.g. Kogut, 1992;Sonnemans, 1998), but rather to loss aversion (Schunk and Winter, 2007). ...
... Interestingly, stopping behavior does not seem to be related to risk aversion (e.g. Kogut, 1992; Sonnemans, 1998), but rather to loss aversion (Schunk and Winter, 2007). In this paper we examine how search behavior is affected by the following three variables: (1) a mild form of time pressure, (2) group decision making, and (3) gender. ...
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Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
... The standard optimal search model assumes expected value maximization (i.e., risk neutrality), and thus several authors have suggested risk aversion as a potential explanation for apparent undersearch (Schotter & Braunstein, 1981;Schunk & Winter, 2009;Sonnemans, 1998). Of course, it is well known that decision makers are typically risk averse, and often prefer to avoid variability in reward, even if this involves a reduction in the expected value of the reward (Arrow, 1965; see also Pedroni et al., 2017 for a recent review). ...
... Overall, our work belongs in a stream of research that uses cognitive modeling to investigate search behavior in optimal stopping tasks (Baumann et al., 2020;Guan, 2019;Guan & Lee, 2018;Lee, 2006;Song, Bnaya, & Ma, 2019) and sequential decision making tasks more broadly (i.e., Reutskaja et al., 2011;Wallsten, Pleskac, & Lejuez, 2005), and is the first paper to use quantitative cognitive modeling techniques in search problems with recall. Although different behavioral strategies have been suggested in previous empirical work in search with recall, the authors primarily compared the consistency of people's behavior with these strategies and did not fit models to the behavioral data (i.e., Hey, 1982;Moon & Martin, 1990;Schunk & Winter, 2009;Sonnemans, 1998). Our work goes above and beyond these previous studies in that it examines strategies based on precise and widely studied behavioral principles and systematically tests these accounts using model fits at the individual level. ...
... Again, our finding that people appear to be using some kind of threshold rule (rather than non-threshold rules such as N-search) is aligned with prior work, which has found that threshold models are consistent with the behavior of a large proportion of participants in search studies (Hey, 1982;Sonnemans, 1998Sonnemans, , 2000Schunk & Winter, 2009). Also note that although all the models that we consider in this paper are threshold models, they still predict that searches will occasionally terminate without the selection of the last sampled option, which is consistent with previous findings in the empirical literature (i. ...
Article
Many everyday decisions require sequential search, according to which available choice options are observed one at a time, with each observation involving some cost to the decision maker. In these tasks, decision makers need to trade-off the chances of finding better options with the cost of search. Optimal strategies in such tasks involve threshold decision rules, which terminate the search as soon as an option exceeding a reward value is found. Threshold rules can be seen as special cases of well-known algorithmic decision processes, such as the satisficing heuristic. Prior work has found that decision makers do use threshold rules, however the stopping thresholds observed in data are typically smaller than the (expected value maximizing) optimal threshold. We put forward an array of cognitive models and use parametric model fits on participant-level search data to examine why decision makers adopt seemingly suboptimal thresholds. We find that people's behavior is consistent with optimal search if we allow participants to display risk aversion, psychological effort cost, and decision error. Thus, decision makers appear to be able to search in a resource-rational manner that maximizes stochastic risk averse utility. Our findings shed light on the psychological factors that guide sequential decision making, and show how threshold models can be used to describe both computational and algorithmic aspects of search behavior.
... Many studies on search behavior have focused on search duration and the reservation point. For search duration, experimental studies have shown that individuals stop searching earlier than the duration predicted by the optimal and risk-neutral assumption (Schunk and Winter, 2009). The average search duration is also shorter when there is ambiguity about the point distribution than when the point distribution is known (Asano et al., 2011). ...
... Cox and Oaxaca (2008) found that the assumption of risk aversion better explained search behavior. Evidence has shown that heterogeneity in search behavior is linked to heterogeneity in individual preferences (Schunk and Winter, 2009). For example, ambiguity can notably affect the search behavior of risk-averse subjects but not of risk-neutral or risk-prone subjects (Asano et al., 2011). ...
... To predict search behavior with precision, different search models have been constructed, such as the real options model (Maart et al., 2011) and the reference point updating model (Schunk and Winter, 2009). However, the search duration suggested by the real options model is shorter than its actual duration (Maart et al., 2011), and the reference point updating model is still unable to explain how people form and update reference points in dynamic choice situations (Schunk and Winter, 2009). ...
Article
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Studies of search behavior have shown that individuals stop searching earlier and accept a lower point than predicted by the optimal, risk-neutral stopping rule. This behavior may be related to individual risk preferences. Studies have also found correlativity between risk preferences and the dorsolateral prefrontal cortex (DLPFC). As risk attitude plays a crucial role in search behavior, we studied whether modulating the activity of DLPFC, by using a transcranial direct current stimulation (tDCS) device, can change individual search behavior. We performed a sequential search task in which subjects decided when to accept a point randomly drawn from a uniform distribution. A total of 49 subjects (23 females, mean age = 21.84 ± 2.09 years, all right-handed) were recruited at Zhejiang University from May 2017 to September 2017. They repeated the task in 80 trials and received the stimulation at the end of the 40th trial. The results showed that after receiving right anodal/left cathodal stimulation, subjects increased their searching duration, which led to an increase in their accepted point from 778.17 to 826.12. That is, the subjects may have changed their risk attitude to search for a higher acceptable point and received a higher benefit. In addition, the effect of stimulation on search behavior was mainly driven by the female subjects rather than by the male subjects: the female subjects significantly increased their accepted point from 764.15 to 809.17 after right anodal/left cathodal stimulation, while the male subjects increased their accepted point from 794.18 to 845.49, but the change was not significant.
... It has been suggested that this heterogeneity in dynamic choice situations is reflected in risk preference heterogeneity (Schotter et al., 1981;Schunk, 2009;Sonnemans, 1998Sonnemans, , 2000 whereas risk averse agents would stop earlier in the sequence. However, studies attempting to link individual risk preferences elicited in single gamble tasks with search behavior in sequential decision tasks have failed to show any relationship Pedroni et al., 2017;Schunk, 2009;Schunk et al., 2009). Moreover, the studies throughout this thesis have revealed a time dependence for the participants risk attitudes. ...
... An optimal stopping choice represents a risky decision between a certain outcome and the risk to continue search for a better one. However, studies attempting to link individual risk preferences elicited in single gamble tasks with search behavior in sequential decision tasks have failed to show any relationship Pedroni et al., 2017;Schunk, 2009;Schunk et al., 2009). Nevertheless, this work has found a relationship between risk preferences measured in the gamble task and search length in the optimal stopping task such that participants who were relatively more risk seeking in the single gambles searched more in the optimal stopping task. ...
... Consequently, many authors have proposed that the common finding of stopping too early in such tasks can be attributed to peoples general tendency of risk aversion (in the gain domain) (Schotter et al., 1981;Schunk et al., 2009;Sonnemans, 1998). ...
... Schunk (2009) …nds that the search model with loss aversion, rather than with risk aversion, is more suitable for the search behavior of a subject in the laboratory. One of the recent topics in this …eld is to explore why subjects stop searching earlier than the theoretically optimal level ( Schunk and Winter, 2009). Our experimental task focuses on the e¤ect of information available for the search activity on a subject's search behavior. ...
... Because recall in search activity is not allowed in this experiment, in order to adhere closely to the framework of Nishimura and Ozaki (2004), it is expected from Schunk and Winter (2009) that subjects are discouraged from searching. If a subject is required to declare her reservation point for each round before drawing a point and then decides either to accept the point or to reject it and move on to the next round, we would not obtain enough data to observe a trend in the reservation point. ...
... where u 0 () > 0 and u 00 () < 0. In a similar manner, the reservation point of the N th round is obtained by R N = U N +1. We see that eq(3) and eq(4) share the same reservation point property 9 Because there are many papers showing that subjects do not search long in laboratory experiments ( Schunk and Winter: 2009), we dispense with any discount factor to encourage subjects to search longer. We previously conducted our experiment with a discount factor taking below a value of one. ...
Article
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This paper's objective is to design a laboratory experiment to explore the effect of Knightian uncertainty on a subject's search behavior in a finite sequential search model. Our finding is that the average search duration is shorter when there is Knightian uncertainty in the sense that the true point distribution is unknown to subjects, compared to when the point distribution is known. We also find direct evidence that subjects reduce their own reservation point when there is ambiguity about the point distribution. These results support the implication of Nishimura and Ozaki (2004). Moreover, ambiguity notably affects the search behavior of risk averse subjects, but not of either risk neutral or risk prone subjects.
... The importance of search strategies to reduce market frictions has been recognized for a long time and inspired a plethora of theoretical and empirical investigations (for recent surveys on searching on labor markets, for example, see Rogerson et al. 2005, or Eckstein and van den Berg 2007). The empirical study of search behavior has a long history and there is a relatively large literature using experimental methods to test the theoretical predictions of different search models (e.g., Schotter and Braunstein, 1981;Hey, 1982;Harrison and Morgan, 1990;Cox and Oaxaca, 1992;Sonnemans, 1998;Zwick et al., 2003;Einav, 2005;Schunk and Winter, 2007). Generally speaking, the existing experimental evidence suggests that individuals stop searching too early in comparison with the optimal strategy 1 and that there is some recall (take an option that previously was rejected). ...
... Interestingly, stopping behavior does not seem to be related to risk aversion (e.g. Kogut, 1992;Sonnemans, 1998), but rather to loss aversion (Schunk and Winter, 2007). ...
Article
We study behavior in a search experiment where sellers receive randomized bids for a fictitious good from a computer. At any time, sellers can accept the highest standing bid or ask for another bid at positive costs. We find that sellers stop searching earlier than theoretically optimal. Inducing a mild form of time pressure strengthens this finding at least in the early periods. There are marked gender differences. Men search significantly shorter than women. If subjects search in groups of two, there is no difference to individual search, but teams of two women search again much longer than men.
... The current study suggests that social comparison effects offer an additional (and overlooked) explanation for the empirical phenomenon that search outcomes are correlated within social networks. 1982, 1987, Oaxaca & Cox 1989 and more recent work has focused on behavioral explanations for deviations from theoretical predictions (Kogut 1990, Sonnemans 1998, Schunk 2009, Schunk & Winter 2009, Brown et al. 2011. A feature of all of this literature is that the search decisions are made in isolation. ...
... Some behavioral theories have been proposed as explanations for these findings and have been tested in the laboratory. Studies suggest that the sunk-cost fallacy (Kogut 1990, Sonnemans 1998, loss and risk aversion preferences combined with bounded rationality (Schunk 2009, Schunk & Winter 2009, Soetevent & Bruzikas 2016 and subjective costs of uncertain waiting time (Brown et al. 2011) all contribute to these regular departures from the theoretical predictions. ...
Article
Full-text available
Using a laboratory experiment we examine how social comparisons affect behavior in a sequential search task. In a control treatment subjects search in isolation, while in two other treatments subjects get feedback on the search decisions and outcomes of a partner subject. The average level and rate of decline of reservation wages are similar across treatments. Nevertheless, subjects who are able to make social comparisons search differently from those who search in isolation. Within a search task we observe a reference wage effect: when a partner exits, the subject chooses a new reservation wage which is increasing in partner income. We also observe a social comparison effect between search tasks: subjects whose partners in a previous task searched for longer choose a higher reservation wage in the next task. Our findings imply that the provision of social information can change job-seekers search behavior.
... In lottery questions, participants usually reveal their preferences for a fixed amount of money or a lottery ticket. The expected utility framework has been implemented to analyze risk attitudes and behaviors with data drawn from lottery games (Blondel et al., 2007;Dave Saffer, 2007;Sasaki et al., 2006;Schunk Winter, 2007;Wärneryd, 1996). ...
... Risk aversion indexes based on lottery questions have been used recently to study risk attitudes (Sasaki et al., 2006;Schunk Winter, 2007). To extrapolate uncertainty to risk behaviors we must consider that uncertainty encompasses all decisions involving nontrivial, state-contingent outcome vectors, whether or not the preferences and beliefs associated with these decisions can be characterized by well-defined subjective probabilities. ...
Article
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The main contribution of this paper is an analysis of the nature of the link between internal coherence and risk aversion. Both variables play an important role in individual decisions concerning risk behaviors. We compare the levels of internal consistency and risk aversion among smokers and non-smokers. To measure the individual internal coherence and risk aversion; we use a survey that includes lottery questions. Our results confirm that smokers are consistent in their decisions and they behave as risk averse. These results should be treated with circumspection as lottery questions are based on monetary expectations that depend on socio-economic conditions and they obviate other dimensions such as social recognition.
... In lottery questions, participants usually reveal their preferences for a fixed amount of money or a lottery ticket. The expected utility framework has been implemented to analyze risk attitudes and behaviors with data drawn from lottery games (Blondel et al., 2007;Dave Saffer, 2007;Sasaki et al., 2006;Schunk Winter, 2007;Wärneryd, 1996). ...
... Risk aversion indexes based on lottery questions have been used recently to study risk attitudes (Sasaki et al., 2006;Schunk Winter, 2007). To extrapolate uncertainty to risk behaviors we must consider that uncertainty encompasses all decisions involving nontrivial, state-contingent outcome vectors, whether or not the preferences and beliefs associated with these decisions can be characterized by well-defined subjective probabilities. ...
Article
The main contribution of this paper is an analysis of the nature of the link between internal coherence and risk aversion. Both variables play an important role in individual decisions concerning risk behaviors. We compare the levels of internal consistency and risk aversion among smokers and non-smokers. To measure the individual internal coherence and risk aversion, we use a survey that includes lottery questions. Our results confirm that smokers are consistent in their decisions and they behave as risk averse. These results should be treated with circumspection as lottery questions are based on monetary expectations that depend on socio-economic conditions and they obviate other dimensions such as social recognition. La principal contribución de este artículo es analizar la naturaleza de la asociación entre la coherencia interna y la aversión al riesgo. Ambas variables juegan un papel principal en las decisiones individuales sobre comportamientos de riesgo, tal que como caso particular, comparamos los niveles consistencia interna y aversión al riesgo entre fumadores y no fumadores. Para medir la coherencia interna y la aversión al riesgo individual, recurrimos a una encuesta que incluye preguntas de loterías. Nuestros resultados confirman que los fumadores son consistentes en sus decisiones, y de hecho, se comportan como adversos al riesgo. Estos resultados hay que tomarlos con cautela, pues las preguntas sobre loterías se basan principalmente en expectativas monetarias que dependen de condiciones socio-económicas obviando otras dimensiones como el reconocimiento social.
... The importance of search strategies to reduce market frictions has been recognized for a long time and inspired a plethora of theoretical and empirical investigations (for recent surveys on searching on labor markets, for example, see Rogerson et al. 2005, or Eckstein and van den Berg 2007). The empirical study of search behavior has a long history and there is a relatively large literature using experimental methods to test the theoretical predictions of different search models (e.g., Schotter and Braunstein, 1981;Hey, 1982;Harrison and Morgan, 1990;Cox and Oaxaca, 1992;Sonnemans, 1998;Zwick et al., 2003;Einav, 2005;Schunk and Winter, 2007). Generally speaking, the existing experimental evidence suggests that individuals stop searching too early in comparison with the optimal strategy 1 and that there is some recall (take an option that previously was rejected). ...
... Interestingly, stopping behavior does not seem to be related to risk aversion (e.g. Kogut, 1992;Sonnemans, 1998), but rather to loss aversion (Schunk and Winter, 2007). ...
Article
We study behavior in a search experiment where sellers receive randomized bids from a computer. At any time, sellers can accept the highest standing bid or ask for another bid at positive costs. We find that sellers stop searching earlier than theoretically optimal. Inducing a mild form of time pressure strengthens this finding in the early periods. We find no significant differences in search behavior between individuals and groups of two participants. However, there are marked gender differences. Men search significantly shorter than women, and teams of two women search much longer and recall more frequently than groups with at least one man.
... Although the optimization problem underlying the search task is rather difficult to solve, the simple structure of the search task still makes it attractive for studying many substantive issues experimentally and has proven to be useful in behavioral research in psychology and economics (Schunk and Winter, 2009). Numerous experimental studies have performed the search task in many contexts, such as a job seeker searching for a wage offer (Brown et al., 2011) or a seller searching for a selling price (Einav, 2005). ...
... Second, heuristics adopted due to limited cognitive abilities also impact search behavior and may lead to larger deviations from optimal search strategies. The existing literature has suggested that limited cognitive ability is the direct reason individuals cannot compute optimal reservation prices and instead follow simple heuristics (Moon and Martin, 1990;Schunk and Winter, 2009). ...
Article
Full-text available
It is a well-documented phenomenon that individuals stop searching earlier than predicted by the optimal, risk-neutral stopping rule, leading to inefficient searches. Individuals' search behaviors during making investment decisions in financial markets can be easily affected by their peers. In this study, we designed a search game in a simplified experimental stock market in which subjects were required to search for the best sell prices for their stocks. By randomly assigning subjects into pairs and presenting them with real-time information on their peers' searches, we investigated the effects of peers' decisions on search behaviors. The results showed that two subjects in the same group with real-time peer information learned and engaged in similar search behaviors. However, this peer effect did not exist when subjects had access to feedback information on the ex-post best response. In addition, we found that the presence of information about peers' decisions alone had no significant impact on search efficiency, whereas access to both information on peers' decisions and feedback information significantly improved subjects' search efficiency.
... Simon (1955) and Stigler (1961) completed seminal theoretical work in the economic strand of this literature. Since then, numerous authors (e.g., Cox and Oaxaca, 1989;Harrison and Morgan, 1990;Hey, 1981;1982;1987;Houser and Winter, 2004;Kogut, 1990;Schunk and Winter, 2009;Sonnemans, 1998; have investigated variations of search problems, and they have focused on examining which search strategies exist. However, the central question addressed by this paper, the extent to which theoretical models explain the link between individual heterogeneity in search strategies and heterogeneity in preferences, remains unexplored. ...
... Houser and Winter (2004) and Sonnemanns (1998Sonnemanns ( , 2000 classify those simple behavioral rules in a similar dynamic choice environment. Schunk and Winter (2009) show that the behavior of those individuals for whom there is no relationship with individual risk preferences, indeed often often corresponds to simple decision heuristics, such as satisficer heuristics or constant reservation price heuristics. ...
Article
This paper presents models for search behavior and provides experimental evidence that behavioral heterogeneity in search is linked to heterogeneity in individual preferences. Observed search behavior is more consistent with a new model that assumes dynamic updating of utility reference points than with models that are based on expected-utility maximization. Specifically, reference point updating and loss aversion play a role for more than a third of the population. The findings are of practical relevance as well as of interest for researchers who incorporate behavioral heterogeneity into models of dynamic choice behavior in, for example, consumer economics, labor economics, finance, and decision theory.
... However, in reality, humans do not completely ignore sunk costs and also try to predict the outcome of future search steps. For an overview over more comprehensive models describing human behavior in search tasks the reader is referred to the literature [9] [11] [13] [18]. This section presented a basic model for describing human search behavior. ...
... These different models for human search behavior can be formulated by either defining reservation prices p r for the different search steps t (CRPH and SH), or by specifying price patterns that represent falling and rising x i (BH). For further information about models describing human search behavior we refer to the literature [8] [10] [11] [13] [18] ...
Article
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This study explores the ways in which information about other individual's action affects one's own behavior in a dictator game. The experimental design discriminates behaviorally between three possible effects of recipient's within-game reputation on the dictator's decision: Reputation causing indirect reciprocity, social influence, and identification. The separation of motives is an important step in trying to understand how impulses towards selfish or generous behavior arise. The statistical analysis of experimental data reveals that the reputation effects have a stronger impact on dictators' actions than the social influence and identification.
... These "heuristic" decisions are often sophisticated in the sense that individuals reach valuations very close to the ones obtained by the process of the expected value. It is possible that decision rules that have been treated as "heuristic" in the literature were built as a function both of the expected value and the individual risk attitude, controlled by other cognitive processes at the same time (11) . We therefore understand that deviations from the prefe-rences about the expected value found in the experimental environments might be understood as an approximation of the individual proclivity to risk, modulated by their own previous cognitive experience. ...
Article
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Background: The characterization of the risk-taking attitude of individuals may be useful for planning health care interventions. It has been attempted to study expressions of risk-taking attitude and evaluate characteristics of a standard lottery game in a population that seeks health care to elicit these attitudes. Methods: Multicentric cross-sectional study. Demographic and socioeconomic characteristics, quality of life (EuroQol-5D), and health risk behaviors were collected from 662 users of 23 health centers selected by random sampling. Risk-taking attitude was evaluated by means of a self-evaluation scale and two lotteries games (L1 and L2; L2 included the possibility of economic losses). Generalized estimating equations (GEE) explicative models were used to evaluate the variability of risk-taking attitude. Results: Nineteen percent out of interviewed people (CI95%: 15.6-22.6%) expressed a high risk appetite, but only 10.0% (CI95% 7.0 to 13.0) were classified as risk-seeking by L2. It was found association between increased risk appetite and having a better perception of health status (0.110. CI95%: 0.007-0.212) or a higher income (0.010. CI95%: 0.017-0.123) or smoking status (0.059. CI95%: 0.004-0.114). Being Spanish was associated with lower risk appetite (-0.105. CI95%: -0.005 --0.205), as being over 65 (-0.031. CI95%:- 0.061- -0.001) or a woman (-0.038. CI95%:-0.064- -0.012). The intraclass correlation coefficient for self-evaluation scale was 0.511 (95% CI: 0.372 to 0.629), 0.571 (95% CI: 0.441-0.678) for L1 and 0.349 (95% CI: 0.186-0.493) for L2. Conclusions: People who seek health care express certain inclination to risk, but this feature is attenuated when methodologies involving losses are used. Risk appetite seems greater in young people, males, people with better health, or more income, and in immigrants. Lottery games such as the proposed ones are a simple and useful tool to estimate individuals' inclination to risk.
... To test our hypotheses on BPR, an idea experiment would involve recognizing individual human decision makers on the basis of observations of hiring decisions that they make in secretary problem simulations. Experiments with human decision making for the secretary problem are reported on in [18,17], but raw data consisting of decision maker action trajectories is not available. However, a major conclusion of these studies is that the decisions made by the humans largely can be explained in terms of three decision strategies, each of which uses the concept of a candidate. ...
Article
We study the use of inverse reinforcement learning (IRL) as a tool for the recognition of agents' behavior on the basis of observation of their sequential decision behavior interacting with the environment. We model the problem faced by the agents as a Markov decision process (MDP) and model the observed behavior of the agents in terms of forward planning for the MDP. We use IRL to learn reward functions and then use these reward functions as the basis for clustering or classification models. Experimental studies with GridWorld, a navigation problem, and the secretary problem, an optimal stopping problem, suggest reward vectors found from IRL can be a good basis for behavior pattern recognition problems. Empirical comparisons of our method with several existing IRL algorithms and with direct methods that use feature statistics observed in state-action space suggest it may be superior for recognition problems.
... These include the individual's search process during tasks (Schunk and Winter 2009) and possible selection bias in samples used in experiments (Harrison, Lau, and Rutsröm 2009 Lastly, the discount rates implied by the estimated parameters (or functions depending on the model) are also very reasonable. In the constant discount model, for example, the estimates imply an annual discount rate of 4.9%. ...
Article
The manuscript presents results of an experimental investigation of individual discount rates. As others have found, there is substantial variation across individuals and variation in estimated discount rates when different time horizons are involved. These individual-specific rates are explained as a function of several variables, using a discounted expected utility model. One of the key variables relates to climate change protection preferences. Evidence of declining discount rates over time is found for the subjects in the experiment.
... These "heuristic" decisions are often sophisticated in the sense that individuals reach valuations very close to the ones obtained by the process of the expected value. It is possible that decision rules that have been treated as "heuristic" in the literature were built as a function both of the expected value and the individual risk attitude, controlled by other cognitive processes at the same time (11) . We therefore understand that deviations from the prefe-rences about the expected value found in the experimental environments might be understood as an approximation of the individual proclivity to risk, modulated by their own previous cognitive experience. ...
Article
Full-text available
Background: The characterization of the risk-taking attitude of individuals may be useful for planning health care interventions. It has been attempted to study expressions of risk-taking attitude and evaluate characteristics of a standard lottery game in a population that seeks health care to elicit these attitudes. Methods: Multicentric cross-sectional study. Demographic and socioeconomic characteristics, quality of life (EuroQol-5D), and health risk behaviors were collected from 662 users of 23 health centers selected by random sampling. Risk-taking attitude was evaluated by means of a self-evaluation scale and two lottery games, (L1 and L2; L2 included the possibility of economic losses). Generalized estimating equations (GEE) explicative models were used to evaluate the variability of risk-taking attitude. Results: Nineteen percent out of interviewed people (CI95%: 15.6-22.6%) expressed a high risk appetite, but only 10.0% (CI95% 7.0 to 13.0) were classified as risk-seeking by L2. It was found association between increased risk appetite and having a better perception of health status (0.110, CI95%: 0,007-0,212) or a higher income (0.010, CI95%: 0.017- 0.123) or smoking status (0.059, CI95%: 0.004- 0.114). Being Spanish was associated with lower risk appetite (-0.105, CI95%: -0.005 --0.205), as being over 65 (-0.031, CI95%:- 0.061- -0.001) or a woman (-0.038, CI95%:-0.064- -0.012). The intraclass correlation coefficient for self-evaluation scale was 0.511 (95% CI: 0.372 to 0.629), 0.571 (95% CI: 0.441 to 0.678) for L1 and 0.349 (95% CI: 0.186-0.493) to L2. Conclusions: People who seek health care express certain inclination to risk, but this feature is attenuated when methodologies involving losses are used. Risk appetite seems greater in young people, males, people with better health, or more income, and in immigrants. Lottery games such as the proposed ones are a simple and useful tool to estimate individuals' inclination to risk.
... In our model, the consumer's purchase threshold for low-value product b monotonically increases as the risk coefficients for gains and losses become larger; the purchase threshold for high-value product decreases as the risk coefficients for gains and losses increase, holding other parameters of the model constant. Our findings also offer a theoretical explanation of the experimental evidence that consumers generally stop searching too early [8]. We demonstrate the consumer's purchase threshold is decreasing with the coefficient of loss aversion. ...
Article
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This paper studies a consumer search model with prospect utility in a hybrid uncertain environment. Hybrid uncertainty consists of the uncertainty of the consumer’s valuation for each product and the randomness of stockout. An optimal search strategy is designed for the consumer to search or buy a product. The results show that the presence of prospect utility can result in low purchase threshold. By comparative statics, we demonstrate that the consumer’s purchase threshold for low-value product increases with the risk coefficients for gains and losses, while the purchase threshold for high-value product decreases with the risk coefficients for gains and losses. In addition, we find that the consumer who is more sensitive to the loss will search for much less products. Finally, some numerical examples are given to illustrate the relationships between the model without and with prospect utility and further verify the effectiveness and credibility of the conclusions.
... In regard to motivational variables, Rydzewska et al. (2018) found no relation of the need for cognitive closure and sequential decision making in younger adults. However, search in sequential decision making may be related to risky preferences in young adults (Schunk &Winter, 2009;von Helversen et al., 2018). ...
Chapter
This chapter discusses age differences in complex decision making and judgment, particularly the role of motivational factors and individual differences. Literature on the influence of age-related changes in cognition and motivation on search and performance in complex decision making is reviewed. The role of financial incentives, need for cognition, and need for cognitive closure is discussed, including the age-related influence of motivational factors on the performance of sequential decision-making tasks. Additionally, the role of feedback as a factor producing superior performance of older adults in a decision-making task is introduced. Moreover, novel research findings regarding connections between intellectual helplessness and information and communication technologies in older adults are presented. Lastly, individual differences in numeracy and intellectual helplessness in mathematics as predictors of age-related differences in performance of multiattribute tasks are described.
... We also investigated whether individual difference measures of risk preference were related to exploration behavior, because previous research has suggested a relation between risk taking and exploration (e.g. Schunk & Winter, 2009). We found small but significant correlations between risk preference and exploration in the secretary task and the fishing task, but taking these into account did not change the relation of exploration between the tasks. ...
Article
Recently it has been suggested that individual humans and other animals possess different levels of a general tendency to explore or exploit that may influence behavior in different contexts. In the present work, we investigated whether individual differences in this general tendency to explore (exploit) can be captured across three behavioral paradigms that involve exploration–exploitation trade-offs: A foraging task involving sequential search for fish in several ponds, a multiarmed bandit task involving repeatedly choosing from a set of options, and a sequential choice task involving choosing a candidate from a pool of applicants. Two hundred and sixty-one participants completed two versions of each of the three tasks. Structural equation modeling revealed that there was no single, general factor underlying exploration behavior in all tasks, even though individual differences in exploration were stable across the two versions of the same task. The results suggest that task-specific factors influence individual levels of exploration. This finding causes difficulties in the enterprise of measuring general exploration tendencies using single behavioral paradigms and suggests that more work is needed to understand how general exploration tendencies and task-specific characteristics translate into exploratory behavior in different contexts.
... Previous studies pay lots of attention to the search duration and reservation value of search behavior. Individuals preferred to stop search earlier than the optimal search duration derived from the rational risk-neutral assumption (Schunk and Winter, 2009). Viefers (2012) found that ambiguity-averse decision-makers reacted to ambiguity by postponing the investment relative to a situation where there was a risk. ...
Article
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It is widely known that the feedback from a decision outcome may evoke emotions like regret, which results from a comparison between the gain the decision-maker has made and the gain he/she might make. Less is known about how search behavior is linked to feedback in a sequential search task such as searching for jobs, employees, prices, investments, disinvestments, or other items. What are the neural responses once subjects decide to stop searching and receive the feedback that they stopped too early or too late compared with the optimal stopping time? In an experimental setting of a search task, we found that the feedback-related negativity (FRN) induced by the feedback from stopping too late was more negative than stopping too early, suggesting that subjects might experience stronger regret when stopping too late. Subjects preferred to stop searching earlier if the last feedback was that they stopped too late, and vice versa, although they did not always benefit more from such adjustment. This might reflect general patterns of human learning behavior, which also manifests in many other decisions. Gender differences and risk attitudes were also considered in the study.
... During probabilistic choices involving loss, older adults are more likely to use such strategies when making decisions related to finances (Chen and Sun, 2003) and health (Besedeš et al., 2012). Satisficing strategies are related selectively to loss aversion and not to risk preferences; those who have greater loss aversion tend to stop searching for an optimal solution sooner (Schunk and Winter, 2009). ...
Article
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Decision-making strategies shift during normal aging and can profoundly affect wellbeing. Although overweighing losses compared to gains, termed “loss aversion,” plays an important role in choice selection, the age trajectory of this effect and how it may be influenced by associated changes in brain structure remain unclear. We therefore investigated the relationship between age and loss aversion, and tested for its mediation by cortical thinning in brain regions that are susceptible to age-related declines and are implicated in loss aversion — the insular, orbitofrontal, and anterior and posterior cingulate cortices. Healthy participants (n = 106, 17–54 years) performed the Loss Aversion Task. A subgroup (n = 78) provided structural magnetic resonance imaging scans. Loss aversion followed a curvilinear trajectory, declining in young adulthood and increasing in middle-age, and thinning of the posterior cingulate cortex mediated this trajectory. The findings suggest that beyond a threshold in middle adulthood, atrophy of the posterior cingulate cortex influences loss aversion.
... Consider for example an agent who is trying to make a large purchase or hire a job candidate, and does this by evaluating candidate options in one pass in a take-it-or-leave-it fashion -with each candidate they must either accept it and end the search, or give up on it as an option forever. Experimental studies by Schunk and Winter [11] show that people in this type of task behave consistently with the notion that they are maintaining a time-varying reference point equal to the best option they have seen so far. This means that if they settle for a candidate A that is worse than a better candidate B that they have seen in the past, their utility from selecting A will be reduced by some notion of loss relative to the high reference point set by B. In these studies, people's decisions are best explained by a model in which they take into account this anticipated sense of loss prospectively in making their choices; they operate so as to reduce the chance that they will have to choose a future option that is dominated by one that they have earlier passed up. ...
Preprint
People are often reluctant to sell a house, or shares of stock, below the price at which they originally bought it. While this is generally not consistent with rational utility maximization, it does reflect two strong empirical regularities that are central to the behavioral science of human decision-making: a tendency to evaluate outcomes relative to a reference point determined by context (in this case the original purchase price), and the phenomenon of loss aversion in which people are particularly prone to avoid outcomes below the reference point. Here we explore the implications of reference points and loss aversion in optimal stopping problems, where people evaluate a sequence of options in one pass, either accepting the option and stopping the search or giving up on the option forever. The best option seen so far sets a reference point that shifts as the search progresses, and a biased decision-maker's utility incurs an additional penalty when they accept a later option that is below this reference point. We formulate and study a behaviorally well-motivated version of the optimal stopping problem that incorporates these notions of reference dependence and loss aversion. We obtain tight bounds on the performance of a biased agent in this model relative to the best option obtainable in retrospect (a type of prophet inequality for biased agents), as well as tight bounds on the ratio between the performance of a biased agent and the performance of a rational one. We further establish basic monotonicity results, and show an exponential gap between the performance of a biased agent in a stopping problem with respect to a worst-case versus a random order. As part of this, we establish fundamental differences between optimal stopping problems for rational versus biased agents, and these differences inform our analysis.
... There is a good deal of existing evidence that in search tasks, both with and without recall, experimental subjects tend to search less than would be optimal for risk-neutral agents (e.g. Rapoport and Tversky, 1970 ;Sonnemans, 1998 ;Seale and Rapoport, 1997 ;Schunk and Winter, 2009 ). 11 It is perhaps more interesting to ask whether individuals display the same attitudes to risk when deciding whether to reject a time-limited offer as they do when choosing whether to enter a risky lottery. ...
Article
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Making time-limited offers is a common retail pricing strategy. Economic theory implies that such offers inhibit price search, making markets less competitive. We investigate experimentally whether this effect is intensified by behavioural factors – specifically, feedback-conditional regret, reduced decision quality due to time constraints, and aversion to small-scale risk. Participants choose from a sequence of alternative price offers, one of which might be time-limited, under various conditions. These price search problems were matched with equivalent, time-unconstrained binary choices between lotteries. We find no evidence of regret effects. Surprisingly, time-limited offers are more likely to be chosen when the time available for decision-making is longer. Overall, individuals show aversion to small-scale risk; this is stronger in price search than lottery choice. Allowing for this, choices in the two types of task tend to be mutually consistent at the individual level, even when decision-making is subject to tight time constraints.
Thesis
The objective of this thesis is to present four essays in behavioral and experimental economics on decision-making under risk and ambiguity. The first essay presents a synthesis and a point of view on the representativeness of experimental results regarding individual preferences: social preferences and risk and time preferences, in developed countries as well as in developing countries. The second essay explores experimentally the effect of risk and ambiguity on job search behavior in an infinite horizon. The results show that in risk and ambiguity, reservation wages are lower than the theoretical values and decrease during the search process. Similarly, subjects behave as ambiguity neutral agents. The third and fourth essay examine the effect of the social context and the correlation of payments on attitudes towards risk and ambiguity respectively in gain, loss and mixed domain. The results show that the introduction of the social context has a significant effect on attitudes towards risk in all three domains. Nevertheless, the correlation of risks has an effect on risk attitudes only in the mixed domain. As for ambiguity, ambiguity attitudes vary across domains. The correlation of payments decreases ambiguity aversion.
Article
We propose a committee extension of the individual sequential search model called the “secretary problem,” where collective decisions on when to stop the search are reached via a prespecified voting rule. We offer a game-theoretic analysis of our model and then report two experiments on three-person committees with either uncorrelated or perfectly correlated preferences under three different voting rules followed by a third experiment on single decision makers. Relative to equilibrium predictions, committees with uncorrelated preferences oversearched under minority and majority voting rules but, otherwise, undersearched or approximated equilibrium play. Individually, committee members were often less strategic when their preferences were uncorrelated than when they were perfectly correlated. Collectively, committees’ decisions were more strategic than single decision makers’ only under the unanimity rule, although still not significantly better in terms of the decision makers’ welfare. Finally, across our experiments that involved committee search, the unanimity rule always optimized committee welfare. This paper was accepted by Yan Chen, behavioral economics.
Article
In response to population aging, pay-as-you-go pensions are being reduced in almost all developed countries. In many countries, governments aim to fill the resulting gap with subsidized private pensions. This paper exploits the recent German pension reform to shed new light on the uptake of voluntary, but heavily subsidized private pension schemes. Specifically, we investigate how the uptake of the recently introduced “Riester pensions” depends on state-provided saving incentives, and how well the targeting to families and low-income households works in practice. We show that, after a slow start, private pension plans took off very quickly. While saving incentives were effective in reaching parents, they were less successful in attracting low-income earners, although Riester pensions exhibit a more equal pattern by income than occupational pensions and unsubsidized private pension plans. We also provide circumstantial evidence on displacement effects between saving for old-age provision and other purposes. Households who plan to purchase housing are less likely to have a Riester pension. The same holds for households who attach high importance to a bequest motive. Occupational pensions and other forms of private pensions, however, act as complements rather than as substitutes.
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This paper surveys the contributions of laboratory experiments to labor economics. We begin with a discussion of methodological issues: why (and when) is a lab experiment the best approach; how do laboratory experiments compare to field experiments; and what are the main design issues? We then summarize the substantive contributions of laboratory experiments to our understanding of principal-agent interactions, social preferences, union-firm bargaining, arbitration, gender differentials, discrimination, job search, and labor markets more generally.
Article
In the classic Secretary Problem it has been established that people tend to search somewhat less than is optimal, and a number of explanations have been suggested. Here we propose a new explanation, the Similar-But-Incorrect Intuitions Hypothesis, which says that suboptimal search behavior is to be expected because optimal strategies vary disproportionately with subtle details of the search problem setup, whereas people seem to entertain general intuitions about optimal search. We find support for this hypothesis in experiments on a new search problem, the Explore-and-Collect Problem, where the player collects utility from an option every time it is tried and options can be recalled. Although the optimal search effort in this problem is much smaller than for the Secretary Problem, people tend to search only marginally less. This is not predicted by previous explanations for suboptimal search.
Article
We compare three different elicitation methods for measuring risk attitudes of French farmers in a field experiment setting. We consider two experiments based on the lottery choices initially proposed by Holt and Laury (2002) and by Eckel and Grossman (2002,2008), a risk-taking psychological questionnaire and a self-reporting of perceived risk attitudes for different domains. The main empirical results from this within-subject study are the following. First, within the class of lottery choices, risk preference measures are affected by the type of mechanism used. In particular, farmers appear to be more risk averse using the Eckel and Grossman lottery than using the Holt and Laury one. However attitudes towards risk are significantly correlated across lotteries which means that the ranking of risk preferences seems to be preserved. Second, risk preferences appear to be context-dependent. French farmers are highly risk averse for decisions belonging to financial and ethical domains. They report a higher willingness to take risk for professional decisions. Lastly, using the psychological questionnaire, we find that the risk attitude elicited through lottery choices often correlates with risk attitude toward investments. These findings contribute to the literature which addresses the stability of risk preferences across elicitation methods. The authors thank Jérôme Duruy for having conducted the field survey. We are grateful to Olivier Armantier, Giuseppe Attanasi, Cécile Aubert, Astrid Hopfensitz, Christoph Heinzel and to all participants of the 2010 IMEBE conference at Bilbao for their relevant comments on a preliminary draft. This work has been completed within the UMT-EAU which associates the French Agronomic Research Institute (INRA) and two farmer advisor structures (Arvalis Institut du Végétal and CETIOM). Financial support from the research program "Eaux et Territoires" and the Midi-Pyrénées region for the research projet EAUSAGE-quant is recognized.
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The aim of this study is to investigate the nature of the link associating the risk propensity of smoking and overweight. For example, a person who is a smoker and obese does not have to be more prone to risk than another person who is obese and a non-smoker. The data was taken from the German Questionnaire on Personality and Daily (Cross section for the period 2005). This questionnaire was selected because it collects individual data on the sociodemographic characteristic, behaviours, risk attitudes, lottery games, and health status. Our main contribution is to analyse the role of risk propensity taking into account smoking and overweight. Risk propensity encourages smoking, and to smoke and be overweight are positively associated. When the role of the unobserved characteristics are greater, the lower is the correlation between smoking and overweight. Although the risk propensity is an important determining factor of individual behaviour (smoking and overweight), its inclusion does not decrease the influence of personal circumstances and conditions. The need to define other measurements to be able to analyse the risk propensity of risk specific to risk behaviour is also highlighted. To reduce the number of smokers would require interventions in life styles. Given that overweight is an important determining factor in the decision to smoke, to encourage healthy behaviours, such as physical exercise or balanced diets, could improve the health status of the population on reducing obesity rates, and consequently the number of smokers.
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In this study, we investigate the nexus between career risk aversion and unemployment duration based on German survey data (GSOEP). Using a direct measurement of career risk aversion, we do not find a statistically significant linear effect from risk aversion on unemployment duration. However, we find significant effects when controlling for a non-linear or time varying correlation between risk aversion and unemployment duration. Our results show that risk aversion is important when deciding when to leave unemployment. This research takes into account the high complexity involved in how risk aversion enters an individual’s decision process during a job search.
Article
Riester pensions are voluntary, but heavily subsidized private pension schemes in Germany. They were designed as a matching defined contribution scheme to fill the emerging “pension gap” that is being generated by the gradually declining generosity of the public pay-as-you-go pensions in response to population aging. This paper investigates how the uptake of the recently introduced “Riester pensions” depends on the state-provided saving incentives and how well the targeting to families and low-income households has worked in practice. It documents the costs of the scheme, and collects circumstantial evidence on displacement effects between saving for old-age provision and other purposes.After a slow start and several design changes, Riester pension plans took off very quickly. While saving incentives were effective in reaching parents, they were somewhat less successful in attracting low-income earners, although Riester pensions exhibit a more equal pattern by income than occupational pensions and unsubsidized private pension plans. Riester pension savings totaled €9.4bn in 2010 with an associated cost of €3.5bn. One average one Euro of subsidies is thus associated with 2 Euros of households’ own Riester saving.There is no evidence that Riester pensions have crowded out other saving. While households who plan to purchase housing and who attach high importance to a bequest motive are less likely to have a Riester pension, several regression results show that occupational pensions and other forms of private pensions act as complements rather than as substitutes. Aggregate national saving has increased since the introduction of Riester pensions.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
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The attitudes toward global risks are considered as personal or group characteristics of anticipating, experiencing and interpreting not only the global risks themselves, but also the activities of in-group or outgroup that are directed on preventing or creating and using them. The article examines the psychological aspects that affect evaluation and prevention of global risks: lack of experience in autobiographic or collective memory; discounting them as a distant future; oversimplified solutions provoked by collective anxiety; need for assets that are hard to mobilize quickly (social trust, global identity, group reflexivity); corruption of personal and group belief in ability to control own future; psychological ambivalence of means of prevention; embeddedness in the inter-group relations and susceptibility to manipulations. The structure of individual and group attitudes toward global risks are proposed (motivational, cognitive, affective, behavioral). The socio-psychological antecedents of global risks prevention are analysed. A positive image of future and clarification of opportunities are more effective in global long-term risk prevention then alarmist approach. The role of global social identity and online communities in global risks prevention is discussed. The directions for further psychological research are proposed.
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The objective of this paper is to design a laboratory experiment for an infinite-horizon sequential committee search model in order to test some of the implications obtained by the model in Albrecht, Anderson, and Vroman (2010) (AAV). We find that, compared with single-agent search, the search duration is longer for committee search under the unanimity rule, but is shorter for committee search in which at least one vote is required to stop searching. In addition, according to estimates from round-based search decisions, subjects are more likely to vote to stop searching in committee search than in single-agent search. This confirms that agents are less picky in committee search. Overall, the experimental outcomes are consistent with the implications suggested by the AAV model. However, despite the prediction from the AAV model, we could not obtain a significant outcome in relation to the size order of the probabilities of voting to stop searching in committee search for the various plurality voting rules.
Article
IntroductionThe aim of this study is to investigate the nature of the link associating the risk propensity of smoking and overweight. For example, a person who is a smoker and obese does not have to be more prone to risk than another person who is obese and a non-smoker.Material and methodsThe data was taken from the German Questionnaire on Personality and Daily (Cross section for the period 2005). This questionnaire was selected because it collects individual data on the sociodemographic characteristic, behaviours, risk attitudes, lottery games, and health status. Our main contribution is to analyse the role of risk propensity taking into account smoking and overweight.ResultsRisk propensity encourages smoking, and to smoke and be overweight are positively associated. When the role of the unobserved characteristics are greater, the lower is the correlation between smoking and overweight. Although the risk propensity is an important determining factor of individual behaviour (smoking and overweight), its inclusion does not decrease the influence of personal circumstances and conditions. The need to define other measurements to be able to analyse the risk propensity of risk specific to risk behaviour is also highlighted.DiscussionTo reduce the number of smokers would require interventions in life styles. Given that overweight is an important determining factor in the decision to smoke, to encourage healthy behaviours, such as physical exercise or balanced diets, could improve the health status of the population on reducing obesity rates, and consequently the number of smokers.
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While standard theory assumes rational, optimizing agents under full information, the latter is rarely found in reality. Information has to be acquired and processed—both involving costs. In rational-inattentiveness models agents update their information set only when the benefit outweighs the information cost. We test the rational-inattentiveness model in a controlled laboratory environment. Our design is a forecasting task with costly information and a clear cost–benefit structure. While we find numerous deviations from the model predictions on the individual level, the aggregate results are consistent with rational-inattentiveness and sticky information models rejecting simpler behavioral heuristics.
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In this paper we empirically investigate the feasibility of using peer-designed agents PDAs instead of people for the purpose of mechanism evaluation. This approach has been increasingly advocated in agent research in recent years, mainly due to its many benefits in terms of time and cost. Our experiments compare the behavior of 31 PDAs and 150 people in a legacy eCommerce-based price-exploration setting, using different price-setting mechanisms and diverse performance measures. The results show a varying level of similarity between the aggregate behavior obtained when using people and when using PDAs. In some settings similar results were obtained, in others the use of PDAs rather than people yielded substantial differences. This suggests that the ability to generalize results from one successful implementation of PDA-based systems to another, regarding the use of PDAs as a substitute for people in system evaluations, is quite limited. The decision to prefer PDAs for mechanism evaluation is therefore setting dependent and the applicability of the approach must be re-evaluated when switching to a new setting or using a different measure. Furthermore, we show that even in settings where the aggregate behavior is found to be similar, the individual strategies used by agents in each group highly vary. Finally, we report the results of an extensive comparative analysis of the level of optimality reflected in people's and PDAs' individual decisions in our decision making setting. The results show that the decisions of both groups are far from optimal, however the use of PDAs results in strategies that are more than twice as close to the optimal ones.
Conference Paper
In this paper we empirically investigate the feasibility of using peer-designed agents (PDAs) instead of people for the purpose of mechanism evaluation. This latter approach has been increasingly advocated in agent research in recent years, mainly due to its many benefits in terms of time and cost. Our experiments compare the behavior of 31 PDAs and 150 people in a legacy eCommerce-based price-exploration setting, using different price-setting mechanisms and different performance measures. The results show a varying level of similarity between the aggregate behavior obtained when using people and when using PDAs--in some settings similar results were obtained, in others the use of PDAs rather than people yields substantial differences. This suggests that the ability to generalize results from one successful implementation of PDA-based systems to another, regarding the use of PDAs as a substitute to people in systems evaluation, is quite limited. The decision to prefer PDAs for mechanism evaluation is therefore setting dependent and the applicability of the approach must be re-evaluated whenever switching to a new setting or using a different measure. Furthermore, we show that even in settings where the aggregate behavior is found to be similar, the individual strategies used by agents in each group highly vary.
Article
This paper proposes the use of restructuring information about choices to improve the performance of computer agents on recurring sequentially dependent decisions. The intended situations of use for the restructuring methods it defines are website platforms such as electronic marketplaces in which agents typically engage in sequentially dependent decisions. With the proposed methods, such platforms can improve agents’ experience, thus attracting more customers to their sites. In sequentially-dependent-decisions settings, decisions made at one time may affect decisions made later; hence, the best choice at any point depends not only on the options at that point, but also on future conditions and the decisions made in them. This “problem restructuring” approach was tested on sequential economic search, which is a common type of recurring sequentially dependent decision-making problem that arises in a broad range of areas. The paper introduces four heuristics for restructuring the choices that are available to decision makers in economic search applications. Three of these heuristics are based on characteristics of the choices, not of the decision maker. The fourth heuristic requires information about a decision-makers prior decision-making, which it uses to classify the decision-maker. The classification type is used to choose the best of the three other heuristics. The heuristics were extensively tested on a large number of agents designed by different people with skills similar to those of a typical agent developer. The results demonstrate that the problem-restructuring approach is a promising one for improving the performance of agents on sequentially dependent decisions. Although there was a minor degradation in performance for a small portion of the agents, the overall and average individual performance improved substantially. Complementary experimentation with people demonstrated that the methods carry over, to some extent, also to human decision makers. Interestingly, the heuristic that adapts based on a decision-maker’s history achieved the best results for computer agents, but not for people.
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We revisit the sequential search problem by Hey (J Econ Behav Organ 8:137-144, 1987). In a 2 2 factorial design, varying fixed and random cost treatments with and without recall, we address open research questions that were originally stated by Hey (1987). Our results provide clear evidence for Hey's (1987) conjecture that recall negatively affects performance in sequential search. With experience, however, search behavior with and without recall converges toward the optimal reservation rule. We further find that the utilization of optimal reservation rules is independent from the stochastic nature of the search cost.
Article
The objective of this study is to design a laboratory experiment to explore the effect of ambiguity on a subject’s search behavior in a finite-horizon sequential search model. In so doing, we employ a strategy to observe the potential trend of reservation points that is usually unobserved. We observe that subjects behaving consistently across treatments reduce their reservation points in the face of ambiguity over point distribution. Our result is consistent with the theoretical implication obtained by Nishimura and Ozaki (J Econ Theory 119:299-333, 2004).
Conference Paper
We study the use of inverse reinforcement learning (IRL) as a tool for recognition of agents on the basis of observation of their sequential decision behavior. We model the problem faced by the agents as a Markov decision process (MDP) and model the observed behavior of an agent in terms of forward planning for the MDP. The reality of the agent’s decision problem and process may not be expressed by the MDP and its policy, but we interpret the observation as optimal actions in the MDP. We use IRL to learn reward functions for the MDP and then use these reward functions as the basis for clustering or classification models. Experimental studies with GridWorld, a navigation problem, and the secretary problem, an optimal stopping problem, show algorithms’ performance in different learning scenarios for agent recognition where the agents’ underlying decision strategy may be expressed by the MDP policy or not. Empirical comparisons of our method with several existing IRL algorithms and with direct methods that use feature statistics observed in state-action space suggest it may be superior for agent recognition problems, particularly when the state space is large but the length of the observed decision trajectory is small.
Chapter
The objective of this chapter is to design a laboratory experiment for an infinite-horizon sequential committee search model in order to test some of the implications obtained by the model in Albrech et al. (J Econ Theory 145:1386–1407, 2010) (AAV). We find that, compared with single-agent search, the search duration is longer for committee search under the unanimity rule, but is shorter for committee search in which at least one vote is required to stop searching. In addition, according to estimates from round-based search decisions, subjects are more likely to vote to stop searching in committee search than in single-agent search. This confirms that agents are less picky in committee search. Overall, the experimental outcomes are consistent with the implications suggested by the AAV model. However, despite the prediction from the AAV model, we could not obtain a significant outcome in relation to the size order of the probabilities of voting to stop searching in committee search for the various plurality voting rules.
Article
We explore the implications of two central human biases studied in behavioral economics, reference points and loss aversion, in optimal stopping problems. In such problems, people evaluate a sequence of options in one pass, either accepting the option and stopping the search or giving up on the option forever. Here we assume that the best option seen so far sets a reference point that shifts as the search progresses, and a biased decision-maker's utility incurs an additional penalty when they accept a later option that is below this reference point. Our results include tight bounds on the performance of a biased agent in this model relative to the best option obtainable in retrospect (a type of prophet inequality for biased agents), as well as tight bounds on the ratio between the performance of a biased agent and the performance of a rational one.
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More frequent risk taking among young men than women has been explained as a sexually selected trait, perhaps advertising male quality. We investigated this hypothesis in three studies. (1) Young men and women rated how attractive they would find it if a potential partner took various specific risks. A domain-specific risk inventory allowed us to distinguish whether risk taking is attractive generally or only in certain domains. Both sexes reported social and recreational risk taking as attractive (the latter not always significantly so), but other domains of risk taking as unattractive (ethics, gambling, and health) or neutral (investment). The sexes differed markedly little. Parallel studies in Germany and the United States yielded very similar results. (2) We asked subjects to predict how attractive the other sex would find it if the subject performed each risky behavior. Both sexes were rather accurate (which could be merely because they assume that the other sex feels as they do) and sex differences in attractive risk taking are not explicable by sex differences either in attraction or in beliefs about what others find attractive. However, our data could explain why unattractive risks are more often taken by men than women (men slightly underestimated the degree of unattractiveness of such risks, whereas U.S. women overestimated it, perhaps because they themselves found such risk taking more unattractive than did U.S. men). (3) Both members of 25 couples reported their likelihood of engaging in specific risky behaviors, their perception of these risks, and how attractive they would have found these behaviors in their partner. One hypothesis was that, for instance, a woman afraid of heights would be particularly impressed by a man oblivious to such risks. Instead we found positive assortment for risk taking, which might be explained by a greater likelihood of encountering people with similar risk attitudes (e.g. members of the same clubs) or a greater compatibility between such mates. Finally, contrary to the assumption that taking a low risk is likely to be less revealing of an individual's quality than taking a high risk, we found a strong negative
Chapter
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examines efforts to understand how individuals differ in risk taking / begin by outlining six conceptual approaches to studying risk taking / our review of research using these approaches finds evidence of both individual and situational differences in risk taking, i.e. understanding risk taking requires understanding both individual traits and risk-taking situations / organize our survey of individual differences in risk taking by situational categories, follow this with a look at several intersituational studies and what they find, and end with a general discussion and summary of these efforts personality characteristic or situation / risk as physical sensation / risk in games and lotteries / risk in everyday life experiences / risk in business and finance (PsycINFO Database Record (c) 2012 APA, all rights reserved)
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Virtually all current theories of choice under risk or uncertainty are cognitive and consequentialist. They assume that people assess the desirability and likelihood of possible outcomes of choice alternatives and integrate this information through some type of expectation-based calculus to arrive at a decision. The authors propose an alternative theoretical perspective, the risk-as-feelings hypothesis, that highlights the role of affect experienced at the moment of decision making. Drawing on research from clinical, physiological, and other subfields of psychology, they show that emotional reactions to risky situations often diverge from cognitive assessments of those risks. When such divergence occurs, emotional reactions often drive behavior. The risk-as-feelings hypothesis is shown to explain a wide range of phenomena that have resisted interpretation in cognitive-consequentialist terms.
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A German-language scale assessing tendencies to engage in risky behaviors, as well as perceptions of risks and expected benefits from such behaviors, is derived from an English version and validated on 532 German participants. The scale contains 40 items in six distinct domains of risk taking: ethical, recreational, health, social, investing, and gambling. Following a risk-return model of risk taking, perceived-risk attitude is inferred by regressing risk-taking on perceived risk and expected benefits. Risk-taking as well as perceptions of risks and benefits were domain-specific, while perceived-risk attitudes were more similar across domains, thus supporting the use of a risk-return framework for interpreting risk-taking propensity. Gender and cultural comparisons are drawn, and we discuss possibilities for future cross-cultural applications of the scale.
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We present a psychometric scale that assesses risk taking in five content domains: financial decisions (separately for investing versus gambling), health/safety, recreational, ethical, and social decisions. Respondents rate the likelihood that they would engage in domain-specific risky activities (Part I). An optional Part II assesses respondents’ perceptions of the magnitude of the risks and expected benefits of the activities judged in Part I. The scale’s construct validity and consistency is evaluated for a sample of American undergraduate students. As expected, respondents’ degree of risk taking was highly domain-specific, i.e. not consistently risk-averse or consistently risk-seeking across all content domains. Women appeared to be more risk-averse in all domains except social risk. A regression of risk taking (likelihood of engaging in the risky activity) on expected benefits and perceived risks suggests that gender and content domain differences in apparent risk taking are associated with differences in the perception of the activities’ benefits and risk, rather than with differences in attitude towards perceived risk.
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The strategy method is becoming an important tool in experimental methodology. This study examines how well this method works in an individual decision experiment. Subjects are faced with a sequential search problem. After extensive practice in solving the problem and formulating strategies, they play 20 periods for money. In each period the subjects first make decisions by hand, after that their strategy operates on the same sequence of bids. In each period, only one of the results is paid out (randomly determined). After each period, subjects can change their strategy. This method makes a direct comparison between strategies and decisions possible.
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This note emphasizes the special role of prospect theory in drawing psychophysical considerations into theories of decision making with respect to risk. An example of such a consideration is the dependence of outcome value on a reference point and the increased sensitivity of loss relative to gain (i.e., loss aversion). Loss aversion can explain the St. Petersburg paradox without requiring concave utility, it has the correct psychological foundation, it is theoretically useful, and it is a parsimonious principle that can explain many puzzles. A few open questions are whether loss aversion is a stable feature of preference, whether it is an expression of fear, and what are its properties.
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We challenge the prevailing notion that risk taking is a stable trait, such that individuals show consistent risk-taking/aversive behavior across domains. We subscribe to an alternative approach that appreciates the domain-specific nature of risk taking. More important, we recognize heterogeneity of risk profiles among experimental samples and introduce a new methodology that takes this heterogeneity into account. Rather than using a convenient subject pool (i.e., university students), as is typically done, we specifically targeted relevant subsamples to provide further validation of the domain-specific nature of risk taking. Our research shows that individuals who exhibit high levels of risk-taking behavior in one content area (e.g., bungee jumpers taking recreational risks) can exhibit moderate levels in other risky domains (e.g., financial). Furthermore, our results indicate that risk taking among targeted subsamples can be explained within a cost-benefit framework and is largely mediated by the perceived benefit of the activity, and to a lesser extent by the perceived risk.
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This paper presents results of experiments designed to test several of the hypotheses present in the theoretical literature on “optimal” economic search. First we test whether the subjects (searchers) actually search for wages in ways that are consistent with setting an optimal reservation wage. We then proceed to determine experimentally the effects of risk aversion, increased search costs, changes in risk (brought about by a mean-preserving transformation of the distribution of wage offers), the presence or absence of recall, the existence of a finite horizon, and the searcher's state of knowledge about the underlying distribution of wages. In general, we find that the searchers exhibit behavior that is consistent with that predicted by theory. Differences between risk neutral and risk averse searchers are found, and the responses of both groups to changes in search costs, in the degree of risk, or in the state of knowledge are consistent with theoretical predictions.
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Part I of this survey presents a comprehensive and inte- grated analysis of job search. The labor market is characterized by incomplete information and search is conducted in an optimal manner. A variety of job search models are studied in this microeconomic setting. The paper contains a number of new results. Part 11 of the survey [to appear in the September 1976 issue of Economic Inquiry] addresses the empirical and policy implications of search theory.
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We develop a new version of prospect theory that employs cumulative rather than separable decision weights and extends the theory in several respects. This version, called cumulative prospect theory, applies to uncertain as well as to risky prospects with any number of outcomes, and it allows different weighting functions for gains and for losses. Two principles, diminishing sensitivity and loss aversion, are invoked to explain the characteristic curvature of the value function and the weighting functions. A review of the experimental evidence and the results of a new experiment confirm a distinctive fourfold pattern of risk: risk aversion for gains and risk seeking for losses of high probability; risk seeking for gains and risk aversion for losses of low probability. Copyright 1992 by Kluwer Academic Publishers
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There is much evidence that people willingly violate expected utility theory when making choices. Several axiomatic theories have been proposed to explain some of this evidence, but there are few data that discriminate between the theories. To gather such data, an experiment was conducted using pairs of gambles with three levels of outcomes and many combinations of probabilities. Most typical findings were replicated, including the common consequence effect and different risk attitudes for gains and losses. There is evidence of both fanning out and fanning in of indifference curves, and both quasiconcavity and quasiconvexity of preferences. No theory can explain all the data, but prospect theory and the hypothesis that indifference curves fan out can explain most of them.
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Across many real-world domains, men engage in more risky behaviors than do women. To examine some of the beliefs and preferences that underlie this difference, 657 participants assessed their likelihood of engaging in various risky activities relating to four different domains (gambling, health, recreation, and social), and reported their perceptions of (1) probability of negative outcomes, (2) severity of potential negative outcomes, and (3) enjoyment expected from the risky activities. Women's greater perceived likelihood of negative outcomes and lesser expectation of enjoyment partially mediated their lower propensity toward risky choices in gambling, recreation, and health domains. Perceptions of severity of potential outcomes was a partial mediator in the gambling and health domains. The genders did not differ in their propensity towards taking social risks. A fifth domain of activities associated with high potential payoffs and fixed minor costs was also assessed. In contrast to other domains, women reported being more likely to engage in behaviors in this domain. This gender difference was partially mediated by women's more optimistic judgments of the probability of good outcomes and of
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I test the disposition effect, the tendency of investors to hold losing investments too long and sell winning investments too soon, by analyzing trading records for 10,000 accounts at a large discount brokerage house. These investors demonstrate a strong preference for realizing winners rather than losers. Their behavior does not appear to be motivated by a desire to rebalance portfolios, or to avoid the higher trading costs of low priced stocks. Nor is it justified by subsequent portfolio performance. For taxable investments, it is suboptimal and leads to lower after-tax returns. Tax-motivated selling is most evident in December. Copyright The American Finance Association 1998.
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We use laboratory experiments to investigate the effect that assuming rational expectations has on structural inference in a dynamic discrete decision problem. Our design induces preferences up to the subjective rate of time preference, leaving unrestricted both this parameter and subjects' decision rules. We estimate subjects' discount rates under the assumption that all subjects use the rational expectations decision rule, and under weaker behavioral assumptions that allow decision rule heterogeneity. We find that certain sophisticated heuristics fit subjects' decisions statistically significantly better than rational expectations. However, the rational expectations assumption does not distort inferences about the cross-sectional discount rate distribution.
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Two experiments are designed to examine the strategies people use in search behavior. In the first experiment an electronic information board is used to register on which aspects of the situation subjects focus their attention and after that subjects also submit a formal strategy. Although efficiency is rather high, most subjects do not use the theoretical optimal strategy. Many subjects seem to focus on the total earnings instead of the marginal return of another draw. On an average, subjects stop searching too early. This cannot totally be explained by risk aversion. The second experiment shows that the tendency to search too little can be (partly) explained by learning processes.
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This paper presents the findings of some preliminary ‘laboratory’ investigations into ‘actual’ search behavior. Specifically we looked at situations in which searchers' initial information about the distributions was negligible. It seemed likely that simple ‘rules of thumb’ would be used in such situations. Our findings confirmed this view: we identified five such rules which between them ‘accounted’ for a high proportion of observed behaviour. Moreover, these rules although not ‘optimal’) appear to be reasonably good and may be fairly robust; jointly, they may constitute a better explanation (and predictor) of actual search behaviour than do the currently popular supposedly optimal rules.
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The Economics of Search has made rapid progress in recent years and its results have contributed siginificantly to economic knowledge. Recent work has been particularly marked for the steadily increasing realism of the assumptions describing the environment surrounding the searcher. However, concomitant with this improvement has been a steady growth in the technical complexity of the problem supposedly solved by the searcher. Indeed, many of the recent models are so complicated that their solutions are beyond the capacity of even modern-day computers. After elaborating on this impracticability of optimal search rules, the paper goes on to consider two more realistic and practical alternatives — the adoption of either ‘suboptimal’ or ‘reasonable’ rules. Paradoxically, reasonable rules may, in some circumstances, be better than ‘optimal’ rules. The paper contains a preliminary discussion of what might be meant by ‘reasonable’ behaviour, and shows that a minimal set of criteria for reasonableness leads to the major qualitative conclusions at a market level of optimal search theory.
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This paper presents the results of four economic experiments involving 41 undergraduate students who were assigned the task of searching for the lowest price from a known distribution of prices. Economic theory predicts that individuals should continue to draw until the expected gain of another search is less than the marginal search cost. Additionally, once individuals have made a draw and then continued, they should never return to a price drawn earlier (exercise recall). Both of these predictions are tested in the paper and the results show that behavior is not always consistent with them. It appears that individuals are making decisions based on the total return from searching, rather than simply the marginal return from another draw.
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For many years experimental observations have raised questions about the rationality of economic agents--for example, the Allais Paradox or the Equity Premium Puzzle. The problem is a narrow notion of rationality that disregards fear. This article extends the notion of rationality with new axioms of choice under uncertainty and the decision criteria they imply (Chichilnisky, G., 1996a. An axiomatic approach to sustainable development. Social Choice andWelfare 13, 257-321; Chichilnisky, G., 2000. An axiomatic approach to choice under uncertainty with Catastrophic risks. Resource and Energy Economics; Chichilnisky, G., 2002. Catastrophical Risk. Encyclopedia of Environmetrics, vol. 1. John Wiley & Sons, Ltd., Chicester). In the absence of catastrophes, the old and the new approach coincide, and both lead to standard expected utility. A sharp difference emerges when facing rare events with important consequences, or catastrophes. Theorem 1 establishes that a classic axiom of choice under uncertainty - Arrow's Monotone Continuity axiom, or its relatives introduced by DeGroot, Villegas, Hernstein and Milnor - postulate rational behavior that is [`]insensitive' to rare events as defined in (Chichilnisky, G., 1996a. An axiomatic approach to sustainable development. Social Choice andWelfare 13, 257-321; Chichilnisky, G., 2000. An axiomatic approach to choice under uncertainty with Catastrophic risks. Resource and Energy Economics; Chichilnisky, G., 2002. Catastrophical Risk. Encyclopedia of Environmetrics, vol. 1. John Wiley & Sons, Ltd., Chicester). Theorem 2 replaces this axiom with another that allows extreme responses to extreme events, and characterizes the implied decision criteria as a combination of expected utility with extremal responses. Theorems 1 and 2 offer a new understanding of rationality consistent with previously unexplained observations about decisions involving rare and catastrophic events, decisions involving fear, the Equity Premium Puzzle, [`]jump di
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Different people may use different strategies, or decision rules, when solving complex decision problems. We provide a new Bayesian procedure for drawing inferences about the nature and number of decision rules present in a population, and use it to analyze the behaviors of laboratory subjects confronted with a difficult dynamic stochastic decision problem. Subjects practiced before playing for money. Based on money round decisions, our procedure classifies subjects into three types, which we label "Near Rational,""Fatalist," and "Confused." There is clear evidence of continuity in subjects' behaviors between the practice and money rounds: types who performed best in practice also tended to perform best when playing for money. However, the agreement between practice and money play is far from perfect. The divergences appear to be well explained by a combination of type switching (due to learning and/or increased effort in money play) and errors in our probabilistic type assignments. Copyright The Econometric Society 2004.
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The theoretical literature on the search behavior of workers and consumers typically considers three search strategies. These strategies are characterized by alternative assumptions about the temporal and atemporal intensity of search. The first strategy is an atemporally intensive fixed-sample-size strategy which restricts the agent to collecting exactly one sample of contemporaneous offers but allows him to choose the sample size. The second strategy is a temporally intensive pure-sequential strategy which allows the agent to collect as many samples as he chooses but restricts the size of each to unity. The third strategy is a variable-sample-size strategy, a generalization of the first two which allows the agent to sequentially choose both how many samples to take and the size of each sample. We report an experimental comparison and evaluation of these three search strategies. Copyright 1990 by Royal Economic Society.
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Forecasts are an inherent part of economic science and the quest for perfect foresight occupies economists and researchers in multiple fields. The release of economic forecasts (and its revisions) is a popular and often publicized event, with a multitude of institutions and think-tanks devoted almost exclusively to that task. The European Central Bank (ECB) also publishes its forecasts for the euro area, however ECB’s forecast accuracy is not a deeply researched theme. The ECB forecasts’ accuracy is the main point developed in this paper, which tries to contribute to understand the nature of the errors committed by the ECB forecasts and its main differences compared to other projections. What we try to infer is whether the ECB is accurate in its projections, making less errors than the others, maybe due to some informational advantage. We conclude that the ECB seems to consistently underestimate the HICP inflation rate and overestimate GDP growth. Comparing it with the others, the ECB shows a superior performance, committing almost always fewer errors. So, this signals a possible informational advantage from the ECB. Since the forecasting errors could jeopardize ECB’s credibility public criticism could be avoided if the ECB simply let forecasts for the others. Naturally, this change should be weighted against the benefits of publishing forecasts.