What if you are not Bayesian? The consequences for decisions involving risk

Paul Goodwin, Dilek Onkal, Herman O. Stekler

Research output: Contribution to journalArticle

1 Citation (Scopus)
26 Downloads (Pure)

Abstract

Many studies have examined the extent to which individuals’ probability judgments depart from Bayes’ theorem when revising probability estimates in the light of new information. Generally, these studies have not considered the implications of such departures for decisions involving risk. We identify when such departures will occur in two common types of decisions. We then report on two experiments where people were asked to revise their own prior probabilities of a forthcoming economic recession in the light of new information. When the reliability of the new information was independent of the state of nature, people tended to overreact to it if their prior probability was low and underreact if it was high. When it was not independent, they tended to display conservatism. We identify the circumstances where discrepancies in decisions arising from a failure to use Bayes’ theorem were most likely to occur in the decision context we examined. We found that these discrepancies were relatively rare and, typically, were not serious.

Original languageEnglish
Article numberEOR_14705
Pages (from-to)238-246
Number of pages9
JournalEuropean Journal of Operational Research
Volume266
Issue number1
Early online date22 Sep 2017
DOIs
Publication statusPublished - 1 Apr 2018

Keywords

  • Bayes’ theorem
  • Decision processes
  • Judgmental biases
  • Risk

ASJC Scopus subject areas

  • Modelling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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