Biased Probability Judgment: Evidence of Incidence and Relationship to Economic Outcomes from a Representative Sample

29 Pages Posted: 19 May 2009

See all articles by Thomas J. Dohmen

Thomas J. Dohmen

Institute for the Study of Labor (IZA); Maastricht University - Business Investment Research Center (BIRC)

Armin Falk

briq - Institute on Behavior & Inequality

David Huffman

IZA Institute of Labor Economics; Swarthmore College

Felix Marklein

IZA Institute of Labor Economics

Uwe Sunde

Ludwig Maximilian University of Munich (LMU)

Abstract

Many economic decisions involve a substantial amount of uncertainty, and therefore crucially depend on how individuals process probabilistic information. In this paper, we investigate the capability for probability judgment in a representative sample of the German population. Our results show that almost a third of the respondents exhibits systematically biased perceptions of probability. The findings also indicate that the observed biases are related to individual economic outcomes, which suggests potential policy relevance of our findings.

Keywords: long-term unemployment, representative design, hot hand fallacy, gambler's fallacy, probability judgment, bounded rationality, financial decision making

JEL Classification: C90, D00, D10, D80, D81, H00

Suggested Citation

Dohmen, Thomas and Falk, Armin and Huffman, David and Marklein, Felix and Sunde, Uwe, Biased Probability Judgment: Evidence of Incidence and Relationship to Economic Outcomes from a Representative Sample. IZA Discussion Paper No. 4170. Available at SSRN: https://ssrn.com/abstract=1405938

Thomas Dohmen (Contact Author)

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Maastricht University - Business Investment Research Center (BIRC) ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31-43-388 3832 (Phone)
+31-43-388 4856 (Fax)

Armin Falk

briq - Institute on Behavior & Inequality

Schaumburg-Lippe-Stra├če 5-9
Bonn, 53113
Germany

HOME PAGE: http://www.briq-institute.org/

David Huffman

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Swarthmore College

500 College Ave
Swarthmore, PA 19081
United States

Felix Marklein

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Uwe Sunde

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

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