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How do people make the judgments and how do they assign...
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People overestimate the probabilities of unlikely events. People overweight unlikely events in their decisions.
When you thought about the unlikely victory of a third-party candidate, your associative system worked in its usual confirmatory mode, selectively retrieving evidence, instances, and images that would make the statement true.
Your judgment of probability was ultimately determined by the cognitive ease, or fluency, with which a plausible scenario came to mind.
The probability of a rare event is most likely to be overestimated when the alternative is not fully specified.
psychologist Craig Fox conducted while he was Amos’s student. Fox recruited fans of professional basketball and elicited several judgments and decisions concerning the winner of the NBA playoffs.
The result: the probability judgments generated successively for the eight teams added up to 240%! This pattern is absurd, of course, because the sum of the chances of the eight events must add up to 100%.
These findings shed new light on the planning fallacy and other manifestations of optimism. The successful execution of a plan is specific and easy to imagine when one tries to forecast the outcome of a project.
As we have seen, prospect theory differs from utility theory in the relationship it suggests between probability and decision weight.
In utility theory, decision weights and probabilities are the same.
The decision weight of a sure thing is 100, and the weight that corresponds to a 90% chance is exactly 90, which is 9 times more than...
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In prospect theory, variations of probability have less effect on decision weights. An experiment that I mentioned earlier found that the decision weight for a 90% chance was 71.2 and the decision weight for a 10% chance was 18.6. The ratio of the probabilities was 9.0, but the ratio of the decision weights was only 3.83, indicating insufficient sensitivity to probability in...
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Both theories predict that the decision weight for a 90% chance is the same for winning $100, receiving a dozen roses, or getting an electric shock. This th...
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published an article with the attractive title “Money, Kisses, ...
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On the Affective Psycholog...
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when you hold a vivid image of an event, the possibility of its not occurring is also represented vividly, and overweighted.
The bias has been given several names; following Paul Slovic I will call it denominator neglect.
Vivid imagery contributes to denominator neglect, at least as I experience it. When I think of the small urn, I see a single red marble on a vaguely defined background of white marbles.
When I think of the larger urn, I see eight winning red marbles on an indistinct background of white marbles, which creates a more hopeful feeling.
The distinctive vividness of the winning marbles increases the decision weight of that event, enha...
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The idea of denominator neglect helps explain why different ways of communicating risks vary so much in their effects.
You read that “a vaccine that protects children from a fatal disease carries a 0.001% risk of permanent disability.”
The risk appears small. Now consider another description of the same risk: “One of 100,000 vaccinated childre...
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it calls up the image of an individual child who is permanently d...
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the 99,999 safely vaccinated children have faded int...
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As we have seen, System 1 is much better at dealing with individuals than categories.
Life, however, is usually a between-subjects experiment, in which you see only one formulation at a time. It would take an exceptionally active System 2 to generate alternative formulations of the one you see and to discover that they evoke a different response.
Patients similar to Mr. Jones are estimated to have a 10% probability of committing an act of violence against others during the first several months after discharge. Of every 100 patients similar to Mr. Jones, 10 are estimated to commit an act of violence against others during the first several months after discharge.
The professionals who saw the frequency format were almost twice as likely to deny the discharge (41%, compared to 21% in the probability format).
probability. The power of format creates opportunities for manipulation, which people with an axe ...
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they want to frighten the general public about violence by people with mental disorder, in the hope that this fear will translate into increased funding for mental health services.”
As expected from prospect theory, choice from description yields a possibility effect—rare outcomes are overweighted relative to their probability.
overweighting is never observed in choice from experience, and underweighting is common.
The probability of a rare event will (often, not always) be overestimated, because of the confirmatory bias of memory.
A rational agent will of course engage in broad framing, but Humans are by nature narrow framers.
The great Paul Samuelson—a giant among the economists of the twentieth century—famously asked a friend whether he would accept a gamble on the toss of a coin in which he could lose $100 or win $200.
But I’ll take you on if you promise to let me make 100 such bets.”
Matthew Rabin and Richard Thaler pointed out that “the aggregated gamble of one hundred 50–50 lose $100/gain $200 bets has an expected return of $5,000, with only a 1/2,300 chance of losing any money and merely a 1/62,000 chance of losing more than $1,000.”
It works when the gambles are genuinely independent of each other; it does not apply to multiple investments in the same industry, which would all go bad together. It works only when the possible loss does not cause you to worry about your total wealth. If you would take the loss as significant bad news about your economic future, watch it! It should not be applied to long shots, where the probability of winning is very small for each bet.
This advice is not impossible to follow. Experienced traders in financial markets live by it every day, shielding themselves from the pain of losses by broad framing.
The combination of loss aversion and narrow framing is a costly curse. Individual investors can avoid that curse, achieving the emotional benefits of broad framing while also saving time and agony, by reducing the frequency with which they check how well their investments are doing.
In addition to improving the emotional quality of life, the deliberate avoidance of exposure to short-term outcomes improves the quality of both decisions and outcomes.
A commitment not to change one’s position for several periods (the equivalent of “locking in” an investment) improves financial performance.
The outside view and the risk policy are remedies against two distinct biases that affect many decisions:
the exaggerated optimism of the planning fallacy and the exaggerated caution induced by loss aversion.
Exaggerated optimism protects individuals and organizations from the paralyzing effects of loss aversion; loss aversion protects them from...
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The combination of the outside view with a risk policy should be the goal.
“I would like all of them to accept their risks.” In the context of that conversation, it was natural for the CEO to adopt a broad frame that encompassed all 25 bets.
Except for the very poor, for whom income coincides with survival, the main motivators of money-seeking are not necessarily economic. For the billionaire looking for the extra billion, and indeed for the participant in an experimental economics project looking for the extra dollar, money is a proxy for points on a scale of self-regard and achievement.
Mental accounts come in several varieties.
