23 - experience under uncertainty

Question 1

what are anomalies

Answer 1

choice behaviour that violates standard of rationality embedded in orthodox economics

Question 2

what is CRE - form of allais paradox behaviour

Answer 2

tendency to choose safe option in problem 1 - and risky option in problem 2 when probabilities of non-zero outcomes are scaled down by multiplying by common ratio

Question 3

what does CRE violate

Answer 3

expected utility theory

Question 4

why does CRE occur

Answer 4

subjects evaluating options using decision weights that depart from probability
- overweight rare events
- underweight common events

Question 5

what is the difference between task experience and outcome experience

Answer 5

task experience = repeating the choice task - familiarity

outcome experience = knowing the outcome of the chosen option - seeing it be resolved and the consequence

Question 6

Kuilen & Wakker 2006

aim

Answer 6

does outcome experience make a difference to prevalence of CRE

• experience of die rolling, outcomes, foregone outcomes

Question 7

Kuilen & Wakker

design

Answer 7

• subjects repeatedly make choices between lotteries each round - choices have a common ration structure - face choice pairs
• 2 groups
• no feedback = make choices each round but dont see outcome of chosen lotteries until the end - gain task experience (from repeating)
• feedback = after each round, subjects roll a die to determine outcome of lottery

Question 8

Kuilen & Wakker
results

Answer 8

with feedback
- outcome experience reduces incidence of anomaly - less EUT violations
- downward trend
- percentage of people choosing consistently with expected value maximisation increases

no feedback
- no trend in level of EUT violations
- task experience does not affect incidence

Question 9

why does feedback reduce CRE?

Kuilen & wakker

Answer 9

• die rolling - learn how high probability 0.8 is likely to 0.2
• learn from outcomes - that you are more likely to do well in risky option in problem 1 - so switch
• comparing outcome achieved with outcome foregone

Question 10

Bone et al 1999
design

Answer 10

stage 1. individuals make 12 choices in 4 common ration triples

stage 2. payoffs doubled and subjects in pairs - must discuss and agree their choices

stage 3. same as stage 1

Question 11

Bone 1999

aim

Answer 11

• are groups / pairs more consistent than individuals
• compare stage 1 and 2
• does experience of group discussion improve the subsequent decisions of indivuals
• comparing stage 1 and stage 3

Question 12

Bone et al

findings

Answer 12

group is less consistent with EUT than individuals
- proportion of EUT decisions decreases from stage 1 to stage 2
- more CRE

• little evidence of experience of group discussion raising conformity of individuals to EUT
• no difference between 1 and 3
• no evidence of teaching effect - someone who is EUT consistent doesnt teach partner

Question 13

from papers

does experience reduce the incidence of CRE - and violations of EUT

Answer 13

doesnt
* task repetition
* task discussion

• outcome experience = does

Question 14

how to consider if descriptions of risks make a difference?

Answer 14

• are patterns of risk preference seen in experiments the same when awareness of uncertainty is learned by experience
• instead arent told the probabilities - gradually learn them yourself - more like in field

Question 15

why would choices change
depending on whether they discover about risks from complete descriptions or by sampling resolutions

Answer 15

1. sampling bias - wont match true probabilities
2. people have uncertainty about uncertainty

Question 16

what is an example of discovering about risks from sampling resolutions

Answer 16

rolling a die
1 = bad
2-10 = good

• most people in sample would never see bad outcome
• from description you learn of the small chance of bad outcome

Question 17

Cubitt et al (2022)

Answer 17

• choose between 2 options, each option has 2 outcomes
• options are resolved by drawing cards from virtual deck 1/40 - 2 colours

Question 18

Cubitt

what are the 3 treatment groups
and the control

what do they test for

Answer 18

control = see descriptions of options and probabilities expressed as %s of the deck

unambiguous = subjects see all the 40 cards - know its full deck

ambiguous = subjects dont know that the 40 cards are the whole deck - tests for lack of certainty

restricted = sample is only 18 cards - tests for small sample bias

Question 19

Cubitt

results
shape of probability weighting function

small effects

Answer 19

• small effect of changing presentation of equivalent information (description vs shown deck)
• small effect of whether subjects know they have seen whole deck (unambiguous vs ambiguous)

Question 20

Cubitt

results
shape of probability weighting function

large effects

Answer 20

• large effect between ambiguous and restricted
• when restricted sample under represents low probability event they under weight it - dont overweight low probabilities

Question 21

Cubitt

takeaway

Answer 21

choices and probability weights are affected by whether uncertainties described to subjects or inferred by them from sampling experience

• small sample bias - underweights low probability events
• inverse S probability weighting not artefact of description