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Bandit with similarity information

Author

Listed:
  • Benjamin Radoc

    (Philippine Competition Commission and Department of Economics, Ateneo de Manila University)

Abstract
In problem situations, it is unlikely that a decision maker possesses knowledge on all states of the world so that use of information gathered from past similar experience is plausible. This analogical thinking is formalised by case-based decision theory (CBDT) which suggests that under uncertainty, a decision maker acts based on her memory of past actions and the associated outcomes in past similar situations. A unique experimental setting that makes similarity information in the problem situation salient was created, while providing a fair chance for either Bayesian or case-based decisions to emerge. Consider a two-armed bandit with similarity information. If the similarity cue offers irrelevant information on the payoff distribution of the two arms, it is easy for a Bayesian decision maker to ignore the cue and recognise that the distribution of payoffs of the two arms are identical. But if the similarity cue triggers a decision maker to perceive the two arms as separate, there are two possibilities: (i) more frequent positive payoffs on one arm may be used to put a higher valuation on a similar arm consistent with the prediction of CBDT, or (ii) given past positive payoffs on one arm, the other arm may be valued lower if the subsequent likelihood of success is perceived as lower. The experiment results suggest that although participants in general correctly updated their expectation of a positive payoff based on past experience, the pattern in the decisions shows that participants systematically used the irrelevant similarity cue in a manner that cannot be explained by CBDT but consistent with the gambler’s fallacy or the biased belief that the pattern of past outcomes will reverse.

Suggested Citation

  • Benjamin Radoc, 2020. "Bandit with similarity information," Department of Economics, Ateneo de Manila University, Working Paper Series 202002, Department of Economics, Ateneo de Manila University.
    • Handle: RePEc:agy:dpaper:202002
    as

    Download full text from publisher

    File URL: https://www.ateneo.edu/sites/default/files/2022-06/ADMU%20WP%202020-02.pdf
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    References listed on IDEAS

    as
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    8. Andrea Isoni & Graham Loomes & Robert Sugden, 2011. "The Willingness to Pay—Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations: Comment," American Economic Review, American Economic Association, vol. 101(2), pages 991-1011, April.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Bayesian reasoning; case-based decisions; gambler's fallacy; expectation; similarity;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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