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Why do people pay for useless advice?

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  • Powdthavee, Nattavudh
  • Riyanto, Yohanes E.

Abstract

We investigated experimentally whether people can be induced to believe in a non-existent expert, and subsequently pay for what can only be described as transparently useless advice about future chance events. Consistent with the theoretical predictions made by Rabin (2002) and Rabin and Vayanos (2010), we show empirically that the answer is yes and that the size of the error made systematically by people is large.

Suggested Citation

  • Powdthavee, Nattavudh & Riyanto, Yohanes E., 2012. "Why do people pay for useless advice?," LSE Research Online Documents on Economics 121779, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:121779
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    References listed on IDEAS

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    1. Theo Offerman & Joep Sonnemans, 2004. "What’s Causing Overreaction? An Experimental Investigation of Recency and the Hot‐hand Effect," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(3), pages 533-554, October.
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    4. Matthew Rabin, 2002. "Inference by Believers in the Law of Small Numbers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(3), pages 775-816.
    5. Sigrid Suetens & Claus B. Galbo-Jørgensen & Jean-Robert Tyran, 2016. "Predicting Lotto Numbers: A Natural Experiment On The Gambler'S Fallacy And The Hot-Hand Fallacy," Journal of the European Economic Association, European Economic Association, vol. 14(3), pages 584-607, June.
    6. Fama, Eugene F, 1991. "Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
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    Cited by:

    1. Victor Haghani & Richard Dewey, 2017. "Rational Decision-Making Under Uncertainty: Observed Betting Patterns on a Biased Coin," Papers 1701.01427, arXiv.org.
    2. Ibrahim Filiz & Thomas Nahmer & Markus Spiwoks & Kilian Bizer, 2018. "Portfolio diversification: the influence of herding, status-quo bias, and the gambler’s fallacy," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 32(2), pages 167-205, May.
    3. Andrea Leuermann & Benjamin Roth, 2012. "Does Good Advice Come Cheap?: On the Assessment of Risk Preferences in the Lab and in the Field," SOEPpapers on Multidisciplinary Panel Data Research 475, DIW Berlin, The German Socio-Economic Panel (SOEP).
    4. Leuermann, Andrea & Roth, Benjamin, 2012. "Does good advice come cheap? - On the assessment of risk preferences in the lab and the field," Working Papers 0534, University of Heidelberg, Department of Economics.

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    More about this item

    Keywords

    behavioral finance; hot-hand; random streak; expertise; information; wellbeing;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D00 - Microeconomics - - General - - - General

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