Strategies, heuristics, and the relevance of risk-aversion in a dynamic decision problem

In this paper a complex decision problem where subjects have to cope with a time horizon of uncertain duration and must update their termination probabilities which depend on stochastic events during "life" is considered. First it is described how economic theory suggests to solve the decision problem. But since real decision makers can hardly be expected to behave according to the theoretical solution in the problem at hand, several heuristics or rules of thumb are described and their theoretical performance investigated. Then observed behavior and the way how people tackled the problem are described. In the second part of the paper I discuss how much of the data can be explained by assuming that experimental subjects are risk-averse. (C) 2001 Published by Elsevier Science B.V.