To maximize or randomize? An experimental study of probability matching in financial decision making
Name
journal.pone.0252540.pdf
Description
Published version
Size
1.27 MB
Format
Adobe PDF
Checksum (MD5)
c029f146c3027094e49b3fe4a3fd8a94
Author(s)
Lo, Andrew W
Marlowe, Katherine P
Zhang, Ruixun
Date Issued
2021
Journal
PLOS ONE
Publisher
Public Library of Science (PLoS)
Version
Final published version
Abstract
Probability matching, also known as the “matching law” or Herrnstein’s Law, has long puzzled economists and psychologists because of its apparent inconsistency with basic self-interest. We conduct an experiment with real monetary payoffs in which each participant plays a computer game to guess the outcome of a binary lottery. In addition to finding strong evidence for probability matching, we document different tendencies towards randomization in different payoff environments—as predicted by models of the evolutionary origin of probability matching—after controlling for a wide range of demographic and socioeconomic variables. We also find several individual differences in the tendency to maximize or randomize, correlated with wealth and other socioeconomic factors. In particular, subjects who have taken probability and statistics classes and those who self-reported finding a pattern in the game are found to have randomized more, contrary to the common wisdom that those with better understanding of probabilistic reasoning are more likely to be rational economic maximizers. Our results provide experimental evidence that individuals—even those with experience in probability and investing—engage in randomized behavior and probability matching, underscoring the role of the environment as a driver of behavioral anomalies.
MIT Department
Sloan School of Management
Sloan School of Management. Laboratory for Financial Engineering
Massachusetts Institute of Technology. Computer Science and Artificial Intelligence Laboratory
Terms of Use
Creative Commons Attribution 4.0 International license
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1371/journal.pone.0252540
