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Familiarity and decision making: The unclear role of noise in accept/reject decisions
Author(s) -
Miao ChunHui,
Sandford Jeremy
Publication year - 2015
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/0038-4038-2013.103
Subject(s) - mistake , noise (video) , decision maker , quality (philosophy) , signal (programming language) , computer science , psychology , mathematics , operations research , artificial intelligence , political science , law , philosophy , epistemology , image (mathematics) , programming language
A decision maker (DM) observes a noisy signal of the quality of a project before deciding to accept or reject the project. We show (i) as the amount of noise increases, the minimum signal required for acceptance may either increase or decrease, and may be nonmonotonic. (ii) Consequently, the average quality of accepted projects may either increase or decrease in the amount of noise. (iii) The effect of increased noise on decisions depends in a straightforward way on which kind of mistake leaves the DM worse off, a rejection of a good project or an acceptance of a bad project.