DP15973 An Experimental Analysis of the Prize-Probability Tradeoff in Stopping Problems

Author(s): Yair Antler, Ayala Arad
Publication Date: March 2021
Keyword(s): commitment, risky processes, stopping problems, type classification
JEL(s):
Programme Areas: Organizational Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15973

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.