Irrational diversification in multiple decision problems

The paper deals with multiple decision problems, which are similar to the task of guessing the color outcomes of five independent spinnings of a roulette wheel, 60% of whose slots are red and 40% white. Each correct guess yields a prize of $1. The guess of 5 Reds clearly first order stochastic domin...

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Bibliographic Details
Published inEuropean economic review Vol. 46; no. 8; pp. 1369 - 1378
Main Author Rubinstein, Ariel
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.09.2002
Elsevier
Elsevier Sequoia S.A
SeriesEuropean Economic Review
Subjects
Decision analysis
Decision making
Decision theory
Diversification
Economic theory
Economics
Game theory
Lotteries
Matching probabilities
Multiple decision problem
Probability
Students
Studies
Multiple decision problem
Matching probabilities
Diversification
C9
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Summary:The paper deals with multiple decision problems, which are similar to the task of guessing the color outcomes of five independent spinnings of a roulette wheel, 60% of whose slots are red and 40% white. Each correct guess yields a prize of $1. The guess of 5 Reds clearly first order stochastic dominates any other strategy. In contrast, subjects diversify their choices when facing a multiple decision problem in which the choice is between lotteries with clear objective probabilities. The diversification is stronger when the subjects face uncertainty without objective probabilities and weaker when the choice problem involves real life actions.
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ISSN:0014-2921
1873-572X
DOI:10.1016/S0014-2921(01)00186-6