Experimental Investigation of Percieved Risk in Random Walk Processes

U. Gneezy, J.W.M. Das

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Abstract

The hypothesis that, on average, people accurately estimate probabilities in random walk processes is experimentally investigated.Individuals are confronted with a process that starts with $X, and in every stage either goes up or down by $1, with probabilities p and 1 - p respectively.For different values of p, individuals were asked to estimate what is the chance that after 10 stages the system will be at a point higher than or equal to $X.Systematic mistakes in estimations were observed.In particular, estimations were centered around the stage-by-stage probability (p) rather then around the actual probability. Implication of this result to random walk processes in finance is considered.
Original languageEnglish
Place of PublicationTilburg
PublisherEconometrics
Number of pages12
Volume1996-85
Publication statusPublished - 1996

Publication series

NameCentER Discussion Paper
Volume1996-85

Keywords

  • random walks
  • risk

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    Gneezy, U., & Das, J. W. M. (1996). Experimental Investigation of Percieved Risk in Random Walk Processes. (CentER Discussion Paper; Vol. 1996-85). Econometrics.