Monday, September 26, 2011

Teaching Experiment

Tried a teaching experiment today covering consumer choice and behavioral economics. It was good for the micro class, but I was surprised how well it worked later the same day to illustrate some of the things that drive volatility in investment. (It was originally designed for statistics by Andrew Gelman)
Setup: everyone draws (randomly) a number (10 or 65 with equal probability) from an envelope.
Objective: see how people sometimes make "irrational" adjustments to their assessment based on useless information.
Instructions: Write down your number on a blank piece of paper that you can turn in (scraps are fine, and names are not necessary). Then, answer the following questions:


  1. Do
    you think that the
    percentage
    of countries, among all of those in the United Nations, that are in Africa is
    higher or lower than the
    number you drew?






  2. Give
    your best
    guess
    of
    the
    percentage of
    countries, among all of those in the United Nations, that are in Africa.


Invariably, those with the number 65 guess, on average, higher than those with the number 10. The idea is that their guess is "anchored" by the seemingly useless information that should otherwise be disregarded. The correct answer is about 2

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