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When diversification clashes with the reinforcement heuristic: An experimental investigation

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  • Sautua, Santiago I.

Abstract

I experimentally investigate how diversification decisions are affected by information about historical outcomes. In the experiment, subjects have the opportunity to diversify between two simple binary gambles. When subjects lack information about previous outcomes, a vast majority diversify. By contrast, only a minority diversify after learning that one of the gambles has experienced better outcomes than the other in the past. Subjects’ posterior beliefs about winning probabilities predict the propensity to diversify. However, most of the subjects who do not diversify tend to chase the gamble with better historical outcomes, regardless of their beliefs. This behavior is consistent with subjects following a reinforcement heuristic.

Suggested Citation

  • Sautua, Santiago I., 2020. "When diversification clashes with the reinforcement heuristic: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 174(C), pages 196-211.
    • Handle: RePEc:eee:jeborg:v:174:y:2020:i:c:p:196-211
    DOI: 10.1016/j.jebo.2020.04.018
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    Cited by:

    1. López-Guzmán, Silvia & Sautua, Santiago I., 2024. "Effects of a fearful emotional state on financial decisions in the presence of prior outcome information," Journal of Economic Psychology, Elsevier, vol. 101(C).

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    More about this item

    Keywords

    Uncertainty; Diversification; Beliefs; Reinforcement heuristic;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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