CeDEx workshop - Yaakov Kareev and Judith Avrahami (Hebrew University)

Short-lived regret and its effect on repeated decisions

We propose that impulsive, short-lived reaction to regret, as captured by the rule “No-regret – Stay, Regret – Shift” can account for many puzzling behaviors observed in the context of repeated choices. I will demonstrate how the rule can explain why behavior in simple two-armed bandit problems exhibits over-matching, but not maximizing choices of the superior option, why behavior in more general two-armed bandit problems exhibits apparently inconsistent risk preferences and underweighting of small probabilities, and why in group foraging for a scarce resource distributed over a number of locations the overall behavior is characterized by under-matching of the most abundant location. Furthermore, the rule predicts quick, automatic reaction to changes. I will also present the results of two recent studies aimed directly at testing the model’s predictions in individual and in strategic decision making.