Decision Making under Uncertainty: An Experimental Study in Market Settings
When making financial decisions under uncertain conditions, do people actually behave as widely used theories predict?
Subjective expected utility theory, or SEU, is the workhorse model of decision making under uncertainty, and economists assume routinely that agents behave according to its precepts. This study evaluates SEU’s empirical validity in experimental settings in which subjects were asked to make decisions resembling portfolio allocations. The study design allowed the researchers to quantify how far each individual subject’s choices were from what the theory would suggest, compare results across subject populations, and gauge the relationship between subjects’ choices and sociodemographic characteristics.
The researchers conducted two studies with similar structures involving two different populations: undergraduate students in the laboratory, and a representative sample of the U.S. population drawn from a large-scale panel. In addition to studying SEU, the researchers considered max-min expected utility (MEU), the most commonly used alternative to SEU. They found MEU has no additional explanatory power.