Rational forward looking behavior requires solving complex problems involving
computation of the expected maximum future valuations across choice alternatives
(Emax computations). We conduct an experiment to measure the share of subjects
able to perform these computations as well as the share of subjects using two alter-
native (sub-optimal) rules of computation which ignore correlation between future
valuations. The first alternative rule captures subjects who perform Emax computa-
tions ignoring correlation between unobservables in the information set. The second
alternative rule captures subjects computing the maximum of the expected future
valuations (maxE computations), akin to the option-value model of Stock and Wise
(1990). Our experimental design exploits different correlation structures between
future valuations to separate the share of subjects using each rule. The experiment
was conducted with a large and heterogenous sample of subjects, allowing to relate
the propensity to use a given rule to a rich set of socio-economic characteristics.
Our results suggest that 28% of subjects are able to perform Emax computations
exploiting the correlation structure, 20% of subjects perform Emax computations
ignoring correlation, while 52% of subjects perform maxE computations. Moreover,
we find that the propensity to use a given rule significantly varies across educa-
tion levels { higher educated subjects a significantly more likely to perform Emax
computations. We discuss implications for models of labor market outcomes.
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