Keep or trade? An experimental study of the exchange paradox

Abstract

The “exchange paradox”—also referred to in the literature by a variety of other names, notably the “two-envelopes problem”—is notoriously difficult, and experts are not all agreed as to its resolution. Some of the various expressions of the problem are open to more than one interpretation; some are stated in such a way that assumptions are required in order to fill in missing information that is essential to any resolution. In three experiments several versions of the problem were used, in each of which the information given was sufficient to determine an optimal choice strategy when it exists or to justify indifference regarding keeping or trading when such a strategy does not exist. College students who were presented with the various versions of the problem tended to base their choices on simple heuristics and to give little evidence of understanding the probabilistic implications of the differences in the problem statements.

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