Vecon Lab Bayes' Rule Experiment: Introduction

This program sets up a decision task in which each person obtains a private signal about which of two events has ocurred ("Red" or "Blue") and must report a probability for one of the events, which can be compared with Bayes' Rule predictions. The optimal decision is to report one's true belief, regardelss of risk attitudes, using a probability-based variant of the Becker/Degroot/Marshack procedure. The BDM selling price procedure is explained more fully in Chapter 30 of Holt (2007) Markets, Games, and Strategic Behavior, Addison-Wesley, and in Holt and Smith (2009) "An Update on Bayesian Updating," JEBO. Alternative options for belief elicitation include the popular Quadratic Scoring Rule and a Choice Menu option presents subjects with an ordered list of simple binary lotteries; ("Belief Elicitation with a Simple Menu of Lottery Choices," Holt and Smith, 2012).

The experiment can be used to illustrate the importance of combining different sources of information and the possible effects of psychological biases or probability weighting. For hints on classroom discussion of these topics, see Anderson and Holt (JEP, 1996) "Classroom Games: Understanding Bayes' Rule." This paper explains Bayes' rule in the context of a simple counting heuristic.

Vecon Lab - December 4, 2023