Perfect Bayesian vs. Imperfect Bayesian in Small Decision Making Problems

Abstract

This is an experimental economics research on human behaviour in “small decision making”. I set up ambiguity treatments in which there are two states of nature: a favourable state and an unfavourable state, but only one of them obtains on any given trial. The decision makers’ basic task is a binary choice between a risky option with higher expected value and a riskless option with lower expected value. The one-person game is iterated hundreds of times. Experimental results are reported with several findings, such as underweighting of rare events and deviations from expected value maximisation. Finally, I investigate the imperfect Bayesian decision makers observed in the experiments by exploring to what extent they can update prior probabilities and reflect it in making decisions.