What if you are not Bayesian? The consequences for decisions involving risk
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2018-04Rights
© 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
YesOpen Access status
openAccessAccepted for publication
18/09/2017
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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.Version
Accepted manuscriptCitation
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 Version of Record
https://doi.org/10.1016/j.ejor.2017.09.027Type
Articleae974a485f413a2113503eed53cd6c53
https://doi.org/10.1016/j.ejor.2017.09.027