Preferences for Warning Signal Quality: Experimental Evidence

We use a laboratory experiment to study preferences over false-positive and false-negative rates of warning signals for an adverse event with a known prior. We find that subjects decrease their demand with signal quality, but less than predicted by our theory. There is asymmetric under-responsiveness by prior: for a low (high) prior, their willingness-to-pay does not fully adjust for the increase in the false-positive (false-negative) costs. We show that neither risk preference nor Bayesian updating skills can fully explain our results. Our results are most consistent with a decision-making heuristic in which subjects do not distinguish between false-positive and false-negative errors.