Decision irrationalities involving deadly risks
- 98 Downloads
This article provides an experimental analysis of two-armed bandit problems that have a different structure in which the first unsuccessful outcome leads to termination of the game. It differs from a conventional two-armed bandit problem in that there is no opportunity to alter behavior after an unsuccessful outcome. Introducing the risk of death into a sequential decision problem alters the structure of the problem. Even though play ends after an unsuccessful outcome, Bayesian learning after successful outcomes has a potential function in this class of two-armed bandit problems. Increasing uncertainty boosts the chance of long-term survival since ambiguous probabilities of survival are increased more after each successful outcome. In the independent choice experiments, a slim majority of participants displayed a preference for greater risk ambiguity. Particularly in the interdependent choice experiments, participants were overly deterred by ambiguity. For both independent and interdependent choices, there were several dimensions on which participants displayed within session rationality. However, participants failed to learn and improve their strategy over a series of rounds, which is consistent with evidence of bounded rationality in other challenging games.
KeywordsTwo-armed bandit Risk Uncertainty Bayesian learning Ambiguity aversion Belief updating
JEL ClassificationsD80 D91 C91
The authors are indebted to Gary Charness for superb suggestions that greatly improved the manuscript.
- Charness, G., & Levin, D. (2009). The origin of the winner’s curse: A laboratory study. American Economic Journal: Microeconomics, 1(1), 207–236.Google Scholar
- Knight, F. H. (1921). Risk, uncertainty, and profit. Chicago: University of Chicago Press.Google Scholar
- Machina, M. J., & Siniscalchi, M. (2014). Ambiguity and ambiguity aversion. In M. J. Machina & W. K. Viscusi (Eds.), Handbook of the economics of risk and uncertainty (Vol. 1, pp. 729–807). Amsterdam: Elsevier B.V.Google Scholar
- Park, H. M. (2009). Comparing group means: T-tests and one-way ANOVA using STATA, SAS, R, and SPSS. Working Paper. The University Information Technology Services (UITS) Center for Statistical and Mathematical Computing, Indiana University.Google Scholar
- Viscusi, W. K. (1979). Employment hazards: An investigation of market performance. Cambridge: Harvard University Press.Google Scholar
- Yakowitz, S. J. (1969). Mathematics of adaptive control processes. New York: American Elsevier.Google Scholar