Experimental Evidence on the Irreversibility Effect

Abstract

This paper presents the results of an experimental investigation on how increased expected information affects subjects' choices. We show that Claude Henry's (1974) result (the ''Irreversibility Effect'') is strongly supported by our experimental data. According to the Irreversibility Effect a rational (expected utility maximizing) agent who anticipates more information before making his future choices, will take a less irreversible position today. In our experiment, present and future choices are framed respectively as portfolio and investment decisions. The degree of irreversibility (or flexibility) chosen by experimental subjects in response to additional information indicated that subjects react to anticipated information as predicted by theory.