Remembering the best and worst of times: Memories for extreme outcomes bias risky decisions

Abstract

When making decisions on the basis of past experiences, people must rely on their memories. Human memory has many well-known biases, including the tendency to better remember highly salient events. We propose an extreme-outcome rule, whereby this memory bias leads people to overweight the largest gains and largest losses, leading to more risk seeking for relative gains than for relative losses. To test this rule, in two experiments, people repeatedly chose between fixed and risky options, where the risky option led equiprobably to more or less than did the fixed option. As was predicted, people were more risk seeking for relative gains than for relative losses. In subsequent memory tests, people tended to recall the extreme outcome first and also judged the extreme outcome as having occurred more frequently. Across individuals, risk preferences in the risky-choice task correlated with these memory biases. This extreme-outcome rule presents a novel mechanism through which memory influences decision making.

The Role of Memory in Distinguishing Risky Decisions from Experience and Description

“…Specifically, we predicted that people would show a memory bias in which the extreme outcomes would be more accessible in memory and their frequency would be over-estimated relative to the equiprobable non-extreme outcomes, as has been found in our previous work (e.g., Madan et al, 2014).…”

“…Each door/option appeared equally often on either side of the screen. Performance of lower than 60% on catch trials in either decisions from description or experience across the whole experiment was used as an exclusion criterion, following established protocol from previous experiments (Ludvig et al, 2014a(Ludvig et al, , 2014bLudvig & Spetch, 2011;Madan et al, 2014Madan et al, , 2015. Data from 18 of the 256 participants were thus excluded.…”

“…In previous work with such a partialfeedback design, we showed that when these experienced risky options potentially lead to an extreme, but common, outcome (i.e., the highest and lowest outcomes in a context), people are more risk seeking for gains than for losses-the opposite of the usual reflection effect in description (e.g., Ludvig et al, 2014a). Moreover, the degree of risk preference in both the gain and loss domains for these decisions from experience correlates with inter-individual differences in the memory for the extreme outcomes (Madan et al, 2014).…”

“…Hertwig and Erev (2009) suggested several possible reasons why experience and description might differ, including sampling error, recency effects, and estimation error. Other recent studies have investigated how different aspects of memory influence decisions from experience (e.g., Frey et al, 2015;Gibson & Zielaskowski, 2013;Gonzalez & Dutt, 2011;Ludvig et al, 2015;Madan et al, 2014;Plonsky et al, 2015;Rakow et al, 2008). For example, outcome recency generally impacts choice in decisions from experience, with more recent outcomes influencing choice more strongly (e.g., Frey et al, 2015;Hertwig et al, 2004;Madan et al, 2014;Rakow et al, 2008;but see Abdellaouai, 2011).…”

“…Other recent studies have investigated how different aspects of memory influence decisions from experience (e.g., Frey et al, 2015;Gibson & Zielaskowski, 2013;Gonzalez & Dutt, 2011;Ludvig et al, 2015;Madan et al, 2014;Plonsky et al, 2015;Rakow et al, 2008). For example, outcome recency generally impacts choice in decisions from experience, with more recent outcomes influencing choice more strongly (e.g., Frey et al, 2015;Hertwig et al, 2004;Madan et al, 2014;Rakow et al, 2008;but see Abdellaouai, 2011). Working memory capacity, however, seems to have little influence on decisions from experience in the sampling protocol (e.g., Frey et al, 2015;Wulff et al, 2015aWulff et al, , 2015b).…”