Bayes Rule as a Descriptive Model: The Representative Heuristic,Quarterly

Results of experiments designed to test the claim of psychologists that expected utility theory does not provide a good descriptive model are reported. The deviation from tested theory is that, in revising beliefs, individuals ignore prior or base-rate in-formation contrary to Bayes rule. Flaws in the evidence in the psychological literature are noted, an experiment avoiding these difficulties is designed and carried out, and the psychologists ' predictions are stated in terms of a more general model. The psy-chologists ' predictions are confirmed for inexperienced or financially unmotivated subjects, but for others the evidence is less clear. There are a number of areas of economic research for which the nature of individual decision processes is important. In addition, there are some substantive areas to which economic theory has been applied in which market forces cannot be relied upon to "discipline " the be-havior of economic agents. Recently economists have begun to study the sensitivity of market equilibria to imperfect information. These studies have considered labor markets [Mortensen, 1976, and Wilde, 1977] and consumer products market [Salop and Stiglitz, 1977, and Wilde and Schwartz, 1979). One of the conclusions which has emerged from this literature is that the properties of market equilibria are sensitive to the search strategies used by individual consumers or workers. For example, consider Salop and Stiglitz [1977] versus Wilde and Schwartz [1979]. Knowledge about individual behavior under uncertainty can also be of importance in several policy areas. Exam-ples are interventions in markets where information is incomplete [Schwartz and Wilde, 1979], the provision of insurance against natural disasters [Slovic et al., 1977b], a variety of "truth in lending " or la-beling-type issues, etc. Also, note the use of economic theory in non-market settings, e.g., the analysis of voting [Riker and Ordeshook, 1973], and legislative behavior [Fiorina, 1974]. In addition, there are situations to which economic theory of individual behavior has been applied in which no trades or arbitrage is possible, e.g., such areas a