Decisions from Experience and the Effect of Rare Events in Risky Choice

6 Pages Posted: 17 Nov 2008 Last revised: 31 Aug 2011

See all articles by Ralph Hertwig

Ralph Hertwig

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Human Development

Gregory M. Barron

Lax Sebenius LLC; Harvard Business School - Negotiation, Organizations & Markets Unit

Elke U. Weber

Princeton University - Department of Psychology

Ido Erev

Technion-Israel Institute of Technology - William Davidson Faculty of Industrial Engineering & Management

Date Written: November 13, 2008

Abstract

When people have access to information sources such as newspaper weather forecasts, drug-package inserts, and mutual-fund brochures, all of which provide convenient descriptions of risky prospects, they can make decisions from description. When people must decide whether to back up their computer's hard drive, cross a busy street, or go out on a date, however, they typically do not have any summary description of the possible outcomes or their likelihoods. For such decisions, people can call only on their own encounters with such prospects, making decisions from experience. Decisions from experience and decisions from description can lead to dramatically different choice behavior. In the case of decisions from description, people make choices as if they overweight the probability of rare events, as described by prospect theory. We found that in the case of decisions from experience, in contrast, people make choices as if they underweight the probability of rare events, and we explored the impact of two possible causes of this underweighting-reliance on relatively small samples of information and overweighting of recently sampled information. We conclude with a call for two different theories of risky choice.

Suggested Citation

Hertwig, Ralph and Barron, Gregory M. and Weber, Elke U. and Erev, Ido, Decisions from Experience and the Effect of Rare Events in Risky Choice (November 13, 2008). Psychological Science, Vol. 15, No. 8, 2004. Available at SSRN: https://ssrn.com/abstract=1301100 or http://dx.doi.org/10.2139/ssrn.1301100

Ralph Hertwig

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Human Development ( email )

Lentzeallee 94
D-14195 Berlin
Germany

Gregory M. Barron

Lax Sebenius LLC ( email )

200 Baker Avenue, Suite 301
Concord, MA 01742
United States
9782875007 (Phone)

Harvard Business School - Negotiation, Organizations & Markets Unit ( email )

Soldiers Field
Boston, MA 02163
United States

Elke U. Weber (Contact Author)

Princeton University - Department of Psychology

Green Hall
Princeton, NJ 08540
United States

Ido Erev

Technion-Israel Institute of Technology - William Davidson Faculty of Industrial Engineering & Management ( email )

Haifa 32000
Israel

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