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

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    Onkal_European_Journal_of_Operational_Research.pdf (578.6Kb)
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    Publication date
    2018-04
    Author
    Goodwin, P.
    Onkal, Dilek
    Stekler, H.O.
    Keyword
    Decision processes; Bayes' theorem; Judgmental biases; Risk
    Rights
    © 2017 Elsevier. Reproduced in accordance with the publisher's self-archiving policy. This manuscript version is made available under the CC-BY-NC-ND 4.0 license.
    Peer-Reviewed
    Yes
    
    Metadata
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    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.
    URI
    http://hdl.handle.net/10454/13512
    Version
    Accepted Manuscript
    Citation
    Goodwin P, Onkal D and Stekler HO (2018) What if you are not Bayesian? The consequences for decisions involving risk. European Journal of Operational Research. 266(1): 238-246.
    Link to publisher’s version
    https://doi.org/10.1016/j.ejor.2017.09.027
    Type
    Article
    Collections
    Management and Law Publications

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