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An Experimental Analysis of the Prize-Probability Tradeoff in Stopping Problems

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  • Antler, Yair
  • Arad, Ayala

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.

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  • Antler, Yair & Arad, Ayala, 2021. "An Experimental Analysis of the Prize-Probability Tradeoff in Stopping Problems," CEPR Discussion Papers 15973, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15973
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    References listed on IDEAS

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    Keywords

    Commitment; Risky processes; Stopping problems; Type classification;
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