To maximize or randomize? An experimental study of probability matching in financial decision making
<jats:p>Probability matching, also known as the “matching law” or Herrnstein’s Law, has long puzzled economists and psychologists because of its apparent inconsistency with basic self-interest. We conduct an experiment with real monetary payoffs in which each participant plays a computer game...
| Main Authors: | , , |
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| Other Authors: | |
| Format: | Article |
| Language: | English |
| Published: |
Public Library of Science (PLoS)
2021
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| Online Access: | https://hdl.handle.net/1721.1/135585 |
| _version_ | 1826190403980754944 |
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| author | Lo, Andrew W Marlowe, Katherine P Zhang, Ruixun |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Lo, Andrew W Marlowe, Katherine P Zhang, Ruixun |
| author_sort | Lo, Andrew W |
| collection | MIT |
| description | <jats:p>Probability matching, also known as the “matching law” or Herrnstein’s Law, has long puzzled economists and psychologists because of its apparent inconsistency with basic self-interest. We conduct an experiment with real monetary payoffs in which each participant plays a computer game to guess the outcome of a binary lottery. In addition to finding strong evidence for probability matching, we document different tendencies towards randomization in different payoff environments—as predicted by models of the evolutionary origin of probability matching—after controlling for a wide range of demographic and socioeconomic variables. We also find several individual differences in the tendency to maximize or randomize, correlated with wealth and other socioeconomic factors. In particular, subjects who have taken probability and statistics classes and those who self-reported finding a pattern in the game are found to have randomized more, contrary to the common wisdom that those with better understanding of probabilistic reasoning are more likely to be rational economic maximizers. Our results provide experimental evidence that individuals—even those with experience in probability and investing—engage in randomized behavior and probability matching, underscoring the role of the environment as a driver of behavioral anomalies.</jats:p> |
| first_indexed | 2024-09-23T08:39:44Z |
| format | Article |
| id | mit-1721.1/135585 |
| institution | Massachusetts Institute of Technology |
| language | English |
| last_indexed | 2024-09-23T08:39:44Z |
| publishDate | 2021 |
| publisher | Public Library of Science (PLoS) |
| record_format | dspace |
| spelling | mit-1721.1/1355852023-10-05T19:32:54Z To maximize or randomize? An experimental study of probability matching in financial decision making Lo, Andrew W Marlowe, Katherine P Zhang, Ruixun Sloan School of Management Sloan School of Management. Laboratory for Financial Engineering Massachusetts Institute of Technology. Computer Science and Artificial Intelligence Laboratory <jats:p>Probability matching, also known as the “matching law” or Herrnstein’s Law, has long puzzled economists and psychologists because of its apparent inconsistency with basic self-interest. We conduct an experiment with real monetary payoffs in which each participant plays a computer game to guess the outcome of a binary lottery. In addition to finding strong evidence for probability matching, we document different tendencies towards randomization in different payoff environments—as predicted by models of the evolutionary origin of probability matching—after controlling for a wide range of demographic and socioeconomic variables. We also find several individual differences in the tendency to maximize or randomize, correlated with wealth and other socioeconomic factors. In particular, subjects who have taken probability and statistics classes and those who self-reported finding a pattern in the game are found to have randomized more, contrary to the common wisdom that those with better understanding of probabilistic reasoning are more likely to be rational economic maximizers. Our results provide experimental evidence that individuals—even those with experience in probability and investing—engage in randomized behavior and probability matching, underscoring the role of the environment as a driver of behavioral anomalies.</jats:p> 2021-10-27T20:24:08Z 2021-10-27T20:24:08Z 2021 2021-09-13T12:11:24Z Article http://purl.org/eprint/type/JournalArticle https://hdl.handle.net/1721.1/135585 en 10.1371/journal.pone.0252540 PLOS ONE Creative Commons Attribution 4.0 International license https://creativecommons.org/licenses/by/4.0/ application/pdf Public Library of Science (PLoS) PLoS |
| spellingShingle | Lo, Andrew W Marlowe, Katherine P Zhang, Ruixun To maximize or randomize? An experimental study of probability matching in financial decision making |
| title | To maximize or randomize? An experimental study of probability matching in financial decision making |
| title_full | To maximize or randomize? An experimental study of probability matching in financial decision making |
| title_fullStr | To maximize or randomize? An experimental study of probability matching in financial decision making |
| title_full_unstemmed | To maximize or randomize? An experimental study of probability matching in financial decision making |
| title_short | To maximize or randomize? An experimental study of probability matching in financial decision making |
| title_sort | to maximize or randomize an experimental study of probability matching in financial decision making |
| url | https://hdl.handle.net/1721.1/135585 |
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