London Judgment and Decision Making Seminar
Ido Erev (Technion Israel Institute of Technology)
“Six Contradicting Deviations from Rational Choice, and the Impact of Experience”
To help predict choice behavior, behavioral economics research tries to identify robust deviations from rational choice. Our analysis questions the value of this convention and proposes an alternative. First, we demonstrate that six well-known deviations from rationality are not robust; they can be reversed by small changes in the incentive structure. For example, behavior consistent with loss aversion becomes behavior consistent with overconfidence (the opposite bias) when changing the correlation between the outcomes. We present six pairs of contradicting deviations. Then, we highlight the potential of focusing on the impact of experience: A simple model assuming reliance on small samples of experiences captures all 12 contradicting deviations and provides useful ex-ante predictions. These predictable effects of experience on behavior can facilitate design of public policies.