Author(s): Arya Gaduh, Peter McGee & Alexander Ugarov
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We conduct a laboratory experiment to study preferences over false-positive and false-negative rates of warning signals for an adverse event with a known prior probability. We find that subjects decrease their willingness-to-pay with signal quality, but less than predicted by our theory. They also disproportionately reduce their willingness-to-pay for signals with high false-negative rates for rare events, while the opposite holds true for frequent events. We explore potential channels and show that both risk preference and Bayesian updating skills cannot fully explain our results, which are most consistent with a decision-making heuristic in which subjects do not distinguish between false-positive and false-negative errors.
Published: 2024-12-03 11:48:19 PT
Stage: Working Paper
Fields: Experimental Economics
Research Group(s): Playground
Referee Reports: Report 1 (Add your report)
Versions: v1 (12/03/2024)