Testing Bayes Rule and the Representativeness Heuristic: Some Experimental Evidence

The psychological literature has identified a number of heuristics which individuals may use in making judgments or choices under uncertainty. Mathematically equivalent problems may be treated differently depending upon details of the decision setting (Gigerenzer et al. (1988), Hinz et al. (1988), Birnbaum and Mellers (1983), Ginossar and Trope (1987)) or upon how the decisions are framed (Tversky and Kahneman (1986)). The results presented in this paper are consistent with those findings and are unsettling. In equivalent problems subjects appear to adopt different strategies in response to observing different data. All problems were inference problems about populations represented by bingo cages and all randomization was operational and observed by the subjects. Thus one cannot explain the change of decision strategy by appeal to changing reference points nor should difference between surface and deep structure of problems apply (Wagenaar et al. (1988)). A striking observation from the experiments is the result of employing financial incentives. Some experiments included financial incentives for accuracy and some did not. In the latter experiments the number of nonsense or incoherent responses increased by a factor of three. The majority of subjects in both treatments behaved reasonably, but of those lacking financial incentives a larger proportion gave obviously absurd responses. This suggests that data from decision experiments in which no financial incentives were should be treated as possibly contaminated and statistical methods robust against outliers employed

Financial Incentive Effects and Individual Decision-making

Though much of the literature of experimental psychology covers topics that seem relevant to economics, the literature is generally ignored by economists. Possibly the reason for this is that psychologists seldom use financial incentives to motivate subjects' choices. This paper provides an example of an individual decision-making experiment in which the presence or absence of financial incentives affects the subjects' behavior. The observed effects are not marginal but often involve qualitatively different types of responses

A Note on Distributed Lags, Prediction, and Signal Extraction

[No abstract

Research and Development Expenditures as a Competitive Strategy

Making a better mousetrap has been one of the standard methods of achieving competitive advantages in American industries. Of course, making an equally good mousetrap with lower costs can be just as effective. To the extent that businesses compete with each other with product and process improvements, then one would expect investment in these activities (research and development [R&D]) to be a primary competitive tool. It is natural to ask which types of firms tend to engage heavily in R&D. A clearly related question one might ask is which market structures are conducive to R&D activity and which are not. In addition, it is important to remember that market structure itself may be affected by firms' R&D activities--raising the question of R&D's impact on market structure (see the related paper by Preston in this volume). The most obvious situation in which market structure is affected by R&D activity is, of course, that of a monopoly position achieved and maintained by patents. This latter question; that is, essentially asking if market structure is really exogenous, is often not directly addressed in the literature. The purpose of this paper is to survey one portion of the so-called market structure literature, viz., the empirical literature dealing with the relation between market structure and the level of research and development activity. Weiss (1969) has surveyed the empirical literature in the entire field of industrial organization, and Kamien and Schwartz (1975) more recently surveyed the literature concerning innovative activity in general. In order to allow for an intensive examination of one body of literature, the scope of this paper has been kept narrow. Readers interested in other issues, for example, the rate of adoption or imitation and the diffusion of technological information, are referred to these other studies

Distributed Lags, Prediction, and Signal Extraction

A wide variety of economic models includes expectational variables among the list of variables determining behavior. In this paper it is shown that for a large class of time series, expectations about the future of observed series or about unobserved components of economic time series may lead to rational lag distributions. Specifically it is shown that rational distributed lags arise whenever the series (or the ρ-th difference of the series) have autoregressive, moving average representations and linear least squares forecasts are calculated. The orders of the lag distributions are also given. In Section 4 an example is given that shows the application of these results to an inventory adjustment model. One of the difficulties with distributed lag models with a rational function of the lag operator is that the order of the operator is frequently not known a priori, though in some cases one may need this information in order to identify the structural parameters of interest. The results presented here show that the orders of the operators depend in a simple way upon the structure of the series being forecast or estimated, and, thus, the results should be useful in the formulation and estimation of distributed lag models

The Effects of Market Practices in Oligopolistic Markets: An Experimental Examination of the Ethyl Case

This study reports on the performance of experimental markets characterized by industrial structure and practices similar to those at issue in the Ethyl case. The central question is whether price competition is affected by the practices of advanced notification of price changes and ''most-favored nation" contracts or is determined by industrial organization and concentration alone