An experiment on casebased decision making

Authors: Brit Grosskopf Rajiv Sarin Elizabeth Watson

Publish Date: 2015/03/17

Volume: 79, Issue: 4, Pages: 639-666

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Abstract

We experimentally investigate the disposition of decision makers to use casebased reasoning as suggested by Hume An enquiry concerning human understanding 1748 and formalized by casebased decision theory Gilboa and Schmeidler in Q J Econ 110605–639 1995 Our subjects face a monopoly decision problem about which they have very limited information Information is presented in a manner which makes similarity judgements according to the feature matching model of Tversky Psychol Rev 84327–352 1977 plausible We provide subjects a “history” of cases In the 2times 2 betweensubject design we vary whether information about the current market is given and whether immediate feedback about obtained profits is provided The results provide support for the predictions of casebased decision theory particularly when no immediate feedback is providedWe thank Gerd Gigerenzer and the audiences at the Max Planck Institute for Human Development the Department of Economics at Texas AM the ESA meetings in Atlanta Rome and Tucson and the Second Santa Barbara Workshop in Experimental Economics for helpful suggestions and discussions Financial support from the Department of Economics and the Melbern G Glasscock Center for Humanities Research at Texas AM and the NSF is gratefully acknowledgedThis is an experiment in the economics of decision making Texas AM University has provided funds for this research If you follow the instructions and make good decisions you can earn an appreciable amount of money At the end of today’s session you will be paid your earnings in private and in cashIt is important that you remain silent and do not look at other people’s work If you have any questions or need assistance of any kind please raise your hand and an experimenter will come to you If you talk laugh exclaim out loud etc you will be asked to leave and you will not be paid We expect and appreciate your cooperationDuring this session you will be acting as a firm who is selling a good You will be selling your good to 30 independent markets You can think of these as 30 geographically separated islands In each of the 30 markets islands you are the only seller of the good This means that nothing any other seller or firm does can affect you or your market Each period represents a new market and you will have to make a decision about how many units you want to produce for that market It is costly to produce this good and if you produce units that do not get sold in that market you will not be able to keep those units for use in other markets At the end of each period you will earn profits on the units of your good that you do sell in that marketAt the beginning of each period you will receive a marketing report that contains information regarding some market conditions for the current market You can think of this as information about the market that has been gathered for you by the marketing department of your firm Gathering this data is costly to your firm as such your marketing department is not able to gather all information in every market Therefore the information that your marketing department does collect can vary from market to market However nothing you or anyone else does can change what information is gathered in any marketAfter gathering the data the marketing department sends it to you Unfortunately there is an error that occurs during that transmission Instead of receiving the actual data all you receive is a list of the market conditions that were collected and a table of symbols representing the actual data Fortunately the error is consistent This means that identical symbols for a given market condition represent the same actual data For instance if the marketing department gathers data that says median income is 35000 and a blue triangle gets transmitted then whenever the marketing department reports 35000 for median income it will be transmitted as a blue triangle in the marketing report However a blue triangle can also appear for other market conditions where it does not necessarily stand for 35000 For example if the marketing department gathers data on a high inflation rate and this information gets transmitted as a blue triangle then all marketing reports with a high inflation rate will have a blue triangle in the table for inflation rateAfter you have received the current marketing report you will be asked to choose a production Value of 50 100 150 or 200 units Your profits each period depend on your production value and may also depend upon some of the market conditions After you have made your production choice you will be informed of your profits for that market You will then proceed to the next market where you will be given the new market’s current marketing report You will then be asked to choose a production value for that market The session will continue in this manner until you have made production choices for 30 markets

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