Are People Bayesian? Uncovering Behavioral Strategies

Economists and psychologists have recently been developing new theories of decision making under uncertainty that can accommodate the observed violations of standard statistical decision theoretic axioms by experimental subjects. We propose a procedure which finds a collection of decision rules that best explain the behavior of experimental subjects. The procedure is a combination of maximum likelihood estimation of the rules together with an implicit classification of subjects to the various rules, and a penalty for having too many rules. We apply our procedure to data on probabilistic updating by subjects in four different universities. We get remarkably robust results which show that the most important rules used by the subjects (in order of importance) are Bayes's rule, a representativeness rule (ignoring the prior), and to a lesser extent, conservatism (over-weighting the prior).