Our choices apparently under-weigh rare events when we experience track records, even though we accurately estimate the frequencies of those events. We over-weigh rare events, however, when we are told their probabilities. Simple explanations of these anomalies are shot down in a recent Psychological Science:
When making decisions involving risky outcomes on the basis of verbal descriptions of the outcomes and their associated probabilities, people behave as if they overweight small probabilities. In contrast, when the same outcomes are instead experienced in a series of samples, people behave as if they underweight small probabilities. We present two experiments showing that the existing explanations of the underweighting observed in decisions from experience are not sufficient to account for the effect. Underweighting was observed when participants experienced representative samples of events, so it cannot be attributed to undersampling of the small probabilities. In addition, earlier samples predicted decisions just as well as later samples did, so underweighting cannot be attributed to recency weighting. Finally, frequency judgments were accurate, so underweighting cannot be attributed to judgment error. Furthermore, we show that the underweighting of small probabilities is also reflected in the best-fitting parameter values obtained when prospect theory, the dominant model of risky choice, is applied to the data.
3 Comments
Robin, I find this type of post–targeted and evidence-based–to be excellent and more in the original spirit of Overcoming Bias. (Not that some of the other stuff hasn’t been good too). But it’s hard to integrate a sprinkling of rather-specific biases into a useful picture. Can you recommend a book or textbook with a more comprehensive introduction to the field?
Firefox just lost the original in a crash, so excuse this being so short:
As a future answer to Jess’ good question, I hope these sorts of posts will be near-instant starters in the LessWrong wiki. Down the road, there could be a book sprint that would lead to a GPL-ish released book.
Jess, have you looked for the usual subjects in the usual places, via Wikipedia’s behavioral economics page? It lists and places the key scholars in context. I don’t know of any very recent books, but Advances in Behavioral Economics seems to set the scene pretty well–it’s a collection of seminal papers.
I try to pay some attention to faculty pages as well, e.g. Dan Ariely lists all his work, and it’s usually accessible.
Thanks for the reply, Stan. I definitely don’t feel competent to dive into the literature, nor do think it would do me much good unless I had a huge amount of time to devote to it. Advances in Behavioral Economics looks closer to what I am looking for, especially in terms of comprehensiveness, but is still a bit formidable.
Also, I should mention that I am most interested in the field for instrumental reasons. So I’m not really interested in the strictly economic aspect of behavior science, except insofar as it helps illustrate more general principles. I’m looking for insight into how people make mistakes in decision-making.
It’s possible my imagined text just does not exist because the field is too young to have an established, pedagogical canon.