Experimental Economics and the Theory of Decision Making Under Risk and Uncertainty
Author: Hey, J.D.
Source: The GENEVA PAPERS on Risk and Insurance Theory, Volume 27, Number 1, June 2002 , pp. 5-21(17)
Abstract:Following a brief review of the main experimental work into the economics of risk and uncertainty, both static and dynamic, this paper reports the results of an experiment testing one of the key assumptions of the theory of dynamic economic behaviour—that people have a plan and implement it. Using a unique design which enables the plan (if one exists) to be revealed by the first move, the experiment was implemented via the Internet on a subset of the University of Tilburg's ongoing family expenditure survey panel. The advantages of using such a set of subjects for the experiment are twofold: the demographic characteristics of the set are known and therefore demographic inferences can be made; the representativeness of the set is known and therefore inferences about populations can be made. The results suggest that at least 36% of the subjects had behaviour inconsistent with the hypothesis under test: that people formulate plans and then implement them. Interestingly demographic variables are unable to explain the consistency or inconsistency of individuals. One conclusion is that subjects simply make errors. An alternative conclusion, consistent with previous experimental research, is that people are unable to predict their own future decisions. The implications for dynamic theory (particularly relating to savings and pensions decisions) are important.
Document Type: Research Article
Affiliations: Department of Economics and Related Studies, Universities of Bari and York, Helsington, York YO10 500, UK
Publication date: June 2002