The use of expected value in pricing judgments

Abstract

Previous research has examined the extent to which decisions made in binary choice situations are consistent with expected value. Li (2003) reports that decisions in multiple‐play gambles are well explained by expected value, while single‐play gambles are not consistent with expected value. The present study extends previous work by examining the use of expected value in the pricing of gambles. The results show that subjects' pricing decisions are much more consistent with expected value in multiple‐play situations than in single‐play situations, particularly when the subjects are provided with a simple decision aid (i.e. a very brief description of expected value and the calculated amount of the expected value). Additionally, substantially fewer subjects in our study made decisions consistent with expected value than in Li's (2003) study, suggesting that binary choice studies may overstate the extent of expected value usage.