Changing Decision Rules

Abstract

We use the Estimation Classification (EC) estimator first introduced and utilised in El-Gamal and Grether (1995) to study the extent to which individual decision making under uncertainty is shaped by the simplicity of application of various heuristics. In particular, we consider the representativeness heuristic, which figured prominently in earlier empirical results. We study two sets of data from two experiments conducted recently at the University of Wisconsin at Madison, where we employed two designs. One of the designs was used in our previous research and makes the representativeness heuristic readily available to the subjects, whereas the other design does not. In one experimental session, we started with the first design and switched to the second, and in the other session the order of the designs was reversed. We find strong evidence that the ease with which subjects can use the representativeness heuristic influences their tendency to use it. This is evidence for a long-held view in the bounded rationality literature that — other things constant — individuals tend to use heuristics which are more readily available to them.

This research was funded by NSF grant SBR-9320497. We are grateful to our colleagues at the University of Wisconsin in Madison’s Economics Department for allowing us to recruit subjects in their classes.