Tuesday, September 3, 2013

Superstitions and markets

The game of heads and tails with a coin toss is universally recognized as a game where the odds of each outcome are exactly 50%. In monetary terms and in expectation, nothing can be gained from this gamble, and in utility terms (again in expectation) one can only lose. Yet, people keep playing it for gain.

Silvia Bou, Jordi Brandts, Magda Cayón and Pablo Guillén devise a laboratory experiment where after an initial phase of five coin toss guesses, some students are asked to bet who will get the most guesses right in a second round of tosses. The subtlety of the experiment is that by default, the students are assigned the worst guesser of the first phase, and switching to another one is expensive. Yet almost all switched. This means that they were thinking that a lucky streak of right guesses in the first phase would continue in the second. And these were finance students, who should really know better.

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