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

Abstract

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.

Seeing is believing: Trustworthiness as a dynamic belief

“…Because the model-predicted ratings update based on experience, they were also better able to predict the post-experiment probability ratings than the initial trustworthiness ratings. These findings support and extend previous research, which has found that experience overwhelms description in risky choice (Barron & Erev, 2003;Hertwig, Barron, Weber, & Erev, 2004;Jessup, Bishara, & Busemeyer, 2008). While this notion of dynamically updating beliefs is certainly not new, this study provides, to our knowledge, support for the first computational model of this effect in an iterative social exchange.…”

Decision making and learning while taking sequential risks.

“…How people learn about choice options influences their preferences and consequently their risk-taking behavior (see Barron & Erev, 2003;Denrell, 2007;Erev & Barron, 2005;Hertwig et al, 2004;March, 1996;Weber et al, 2004). During the Iowa Gambling Task (Bechara et al, 1994), the learning process even dissociates between different clinical populations and the risks they take.…”

“…It can, for example, create an aversion toward risky alternatives in the gain domain and an attraction toward risky alternatives in the loss domain-a pattern typically attributed to how DMs evaluate outcomes (Denrell, 2007;March, 1996). The learning process can even produce the opposite pattern (Erev & Barron, 2005;Hertwig, Barron, Weber, & Erev, 2004;Weber, Shafir, & Blais, 2004).Applying theories of decision making to the Balloon Analogue Risk Task (BART; Lejuez et al, 2002) or to the Iowa Gambling Task (Bechara, Damasio, Damasio, & Anderson, 1994) also exposes the necessity of learning. Clinicians use these laboratorybased gambling tasks to study and identify people with specific clinical or neurological deficits.…”

“…It can, for example, create an aversion toward risky alternatives in the gain domain and an attraction toward risky alternatives in the loss domain-a pattern typically attributed to how DMs evaluate outcomes (Denrell, 2007;March, 1996). The learning process can even produce the opposite pattern (Erev & Barron, 2005;Hertwig, Barron, Weber, & Erev, 2004;Weber, Shafir, & Blais, 2004).…”

Evolutionary role of the nucleus

“…Judgments (probability estimations) appear to reflect over-sensitivity to rare events (Erev, Wallsten et al 1994). On the other hand, decision-making from experience tends to reflect underweighting of (insensitivity to) rare events (Barron and Erev 2003, Hertwig, Barron et al 2004, Weber, Shafir et al 2004). …”