Abstract
How do people cope with tail risk? In a lab experiment that removed informational and incentive confounds, subjects overwhelmingly behaved like Bayesian learners. The results of simulations further revealed that if one is to survive under tail risk, one needs to follow the Bayesian approach, as all boundedly rational alternatives fail. These findings support the Bayesian assumption commonly made in prior studies on tail risk and model uncertainty, and they also demonstrate the importance of optimal learning under tail risk. Received February 15, 2017; editorial decision December 24, 2017 by Editor Andrew Karolyi. Authors have furnished supplementary data and code, which are available on the Oxford University Press Web site next to the link to the final published paper online.
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