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

Goodwin, Paul, Önkal, Dilek and Stekler, Herman O. (2018) What if you are not Bayesian? The consequences for decisions involving risk. European Journal of Operational Research, 266 (1). pp. 238-246. ISSN 0377-2217

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Official URL: http://dx.doi.org/10.1016/j.ejor.2017.09.027

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.

Item Type: Article
Uncontrolled Keywords: Decision processes; Bayes’ theorem; Judgmental biases; Risk
Subjects: N900 Others in Business and Administrative studies
Department: Faculties > Business and Law > Newcastle Business School > Business and Management
Depositing User: Paul Burns
Date Deposited: 05 Nov 2018 17:31
Last Modified: 05 Nov 2018 17:31
URI: http://nrl.northumbria.ac.uk/id/eprint/36510

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