Irrational diversification in multiple decision problems

Ariel Rubinstein

    Research output: Contribution to journalArticlepeer-review

    Abstract

    The paper deals with multiple decision problems, which are similar to the task of guessing the color outcomes of five independent spinnings of a roulette wheel, 60% of whose slots are red and 40% white. Each correct guess yields a prize of $1. The guess of 5 Reds clearly first order stochastic dominates any other strategy. In contrast, subjects diversify their choices when facing a multiple decision problem in which the choice is between lotteries with clear objective probabilities. The diversification is stronger when the subjects face uncertainty without objective probabilities and weaker when the choice problem involves real life actions.

    Original languageEnglish (US)
    Pages (from-to)1369-1378
    Number of pages10
    JournalEuropean Economic Review
    Volume46
    Issue number8
    DOIs
    StatePublished - Sep 2002

    Keywords

    • Diversification
    • Matching probabilities
    • Multiple decision problem

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

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