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|
|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.