Do People (Want to) Plan?

Central to many theoretical accounts of the process by which (rational) people tackle dynamic decision problems is the concept of a plan: a set of conditional decisions as to what would be decided under certain conditions (imposed by Nature). The notion of a plan is clearly central to theories of dynamic decision making in which backward induction and the Principle of Optimality are invoked. To many theorists, the adoption and subsequent implementation of a plan are almost axioms of rational behaviour. These theorists ask two questions: how can dynamic decisions be taken in the absence of a plan; why would anyone want to change the plan once it is embarked upon. Experimental economists have begun to explore the implications of these notions. For example, work by Robin Cubitt and his associates has investigated whether the way a dynamic decision problem is formulated and presented to the subjects has any effect on the decisions taken by the subjects; if the subjects have a plan, and implement it in the sense discussed above, there should be no effect. Cubitt and his associates find some effect. With Massimo Paradiso I have investigated whether subjects have preferences over different formulations and presentations, for example, whether subjects prefer to be forced to pre-commit themselves (to a plan) or whether they prefer the flexibility of not being pre-committed. Of course, if subjects have a plan in the sense discussed above they should be indifferent between all such alternative formulations (of the same choice problem). However, we find they are not. Of course, subjects could behave the same yet have differing preferences; they could, conceivably also have identical preferences but behave differently, but neither of these types of experiments casts direct light on the key question as to whether subjects have plans and implement them. This is the purpose of the new experiments reported in this paper. These experiments were difficult to design because of the difficulty of observing correctly whether a plan exists in the subject’s mind, and particularly because of the difficulty of getting the subject to honestly reveal the existence and nature of a plan. The problem is simple: if the subject is not going to be forced to follow the announced plan, what incentive is there for reporting it honestly? And if the subject is forced to follow the announced plan, then the dynamic choice problem has been transformed into a static (pre-commitment) choice problem - and the very thing that we want to examine has been transformed away. We have an experimental design which overcomes these problems. The paper reports on the results of an experiment carried out by ESSE (Economia Sperimentale al Sud d’Europa) in Bari.

Are People in Groups More Farsighted than Individuals?

A dynamic decision making experiment recently conducted on individuals suggested that people may look ahead but seem either unable or unwilling to predict their own future behaviour. In order to distinguish between these two possibilities, we repeated the experiment with pairs of individuals. The experiment consisted of two decision nodes (interleaved with two chance nodes), with one of the pair choosing at the first decision node and the second of the pair choosing at the second. Given the structure of the experiment, it was simple for the first player to predict the decisions of the second player. Nevertheless, the decisions of the first player indicate strongly that the first player does not in fact do so. It seems that people are unwilling to predict not only their own future behaviour but also the future behaviour of others.Planning; prediction; dynamic decision making; pairs; individuals

What Price Compromise? Testing a Possibly Surprising Impliction of Nash Bargaining Theory

This paper provides a very simple experimental test of a prediction of Nash Bargaining Theory that seems counterintuitive. The context is a simple bargaining problem between two players who have to agree a choice from three alternatives. One alternative favors one player and a second favors the other. The third is a fair compromise, but is excluded as an agreed choice by Nash Bargaining Theory. Our experimental results show that agreement on this third outcome occurs rather often. So the Nash theory is not well-supported by our evidence, although neither is a Strategic explanation of the data. The Nash-precluded outcome appeals because of its compromise nature; indeed, players are prepared to pay a price which is (according to the Nash theory) irrationally high, in order to reach a fair compromise.

A Simple Risk-Sharing Experiment

This paper reports on an experiment designed to test whether pairs of individuals are able to exploit efficiency gains in the sharing of a risky financial prospect. Observations from a previous experiment had suggested a general rejection of efficiency in favour of ex post equality. The present experiment explores some possible explanations for this. The results indicate that fairness is not a significant consideration, but rather that having to choose between prospects diverts partners from allocating the chosen prospect efficiently.Risk-sharing; experiments; bargaining, fairness.

How Far Ahead Do People Plan?

We report on a simple experiment which enables us to infer how far people plan ahead when taking decisions in a dynamic risky context. Usually economic theory assumes that people plan right to the end of the planning horizon. We find that this is true for a little over half of the subjects in the experiment, while a little under one half seem not to plan ahead at all.Planning, dominance, myopia, naivety, sophistication

Dynamic Choice and Timing-Independence: an experimental investigation

Timing-independence implies that individuals are indifferent between a sequential choice problem and a planned choice problem which are strategically equivalent except for the timing of resolution of the uncertainty. This paper reports an experiment in which we investigate whether the timing of resolution of the uncertainty affects individual preferences. We elicit individual preferences for three strategically equivalent decisions problems. The experimental results suggest that timing- independence is an inappropriate assumption of individual preferences. The paper discusses possible implications of such findings.

Two Experiments to Test a Model of Herd Behaviour

We carry out two experiments to test a model of herd behaviour based on the work of Banerjee (1992). He shows that herding occurs as a result of people observing the actions of others and using this information in their own decision rule. However, in our experiments herding does not occur as frequently as Banerjee predicts. Contrary to his results, the subjects' behaviour appears to depend on the probabilities of receiving a signal and of this signal being correct. Furthermore, he finds that the pattern of decision making over a number of rounds of the game is volatile whereas we find that decision making is volatile within rounds.

Myopic, Naive, Resolute or Sophisticated? A study of how people take dynamic decisions

Potentially dynamically-inconsistent individuals create particular problems for economics, as their behaviour depends upon whether and how they attempt to resolve their potential inconsistency. This paper reports on the results of a new experiment designed to help us distinguish between the different types that may exist. We classify people into four types: myopic, naive, resolute and sophisticated. We implement a new and simple experimental design in which subjects are asked to take two sequential decisions (interspersed by a random move by Nature) concerning the allocation of a given sum of money. The resulting data enables us to classify the subjects. We find that the majority are resolute, a significant minority are sophisticated and rather few are naive or myopic.dynamic inconsistency, sequential choice, myopic, naive, resolute, sophisticated

Do People Plan?

We report the results of an experimental investigation of a key axiom of economic theories of dynamic decision making – namely, that agents plan. Inferences from previous investigations have been confounded with issues concerning the preference functionals of the agents. Here, we present an innovative experimental design which is driven purely by dominance- if preferences satisfy dominance, we can infer whether subjects are planning or not. We implement three sets of experiments: the first two (the Individual Treatments) in which the same player takes decisions both in the present and the future; and the third (the Pairs Treatment) in which different players take decisions at different times. The two Individual treatments differed in that, in one, the subjects played sequentially, while, in the other, the subjects had to pre-commit to their future move. In all contexts, according to economic theory, the players in the present should anticipate the decision of the player in the future. We find that over half the participants in all three experimental treatments do not appear to be planning ahead; moreover, their ability to plan ahead does not improve with experience, except possibly when we force subjects to pre-commit to their future decision. These findings identify an important lacuna in economic theories, both for individual behaviour and for behaviour in games.

Which Error Theory is Best?

Two recent papers, Harless and Camerer (1994) and Hey and Orme (1994), are both addressed to the same question: which is the `best' theory of decision making under risk? As an essential part of their separate approaches to an answer to this question, both sets of authors had to make an assumption about the underlying stochastic nature of their data. In this context this implied an assumption about the `errors' made by the subjects in the experiments generating the data under analysis. The two different sets of authors adopted different assumptions: the purpose of this current paper is to compare and contrast these two different error stories - in an attempt to discover which of the two is `best'.