Working Paper: CEPR ID: DP15973
Authors: Yair Antler; Ayala Arad
Abstract: We experimentally examine how individuals stop risky processes such as the evolution of prices when they have commitment power. We find types who consistently choose stopping rules with large potential losses and small potential gains to induce a high winning probability (L-types), although such choices entail a considerable downside risk. A smaller proportion of types choose stopping rules with the opposite characteristics. While the latter pattern is consistent with cumulative prospect theory, the former pattern is inconsistent with prominent decision theories. We suggest that L-types solve the prize-probability tradeoff in a qualitative manner, putting more emphasis on the winning probability.
Keywords: commitment; risky processes; stopping problems
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| emotional factors (D91) | decision-making processes (D70) |
| l-types (L00) | left-biased stopping rules (D72) |
| r-types (R50) | right-biased stopping rules (D72) |
| baseline lottery is unfair (D63) | tendency to choose left-biased rules (D91) |
| commitment power (D70) | choice of stopping rules (C52) |
| choice of stopping rules (C52) | probability of winning (C25) |
| choice of stopping rules (C52) | potential gains or losses (G11) |