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What is more important, the outcome or the probability?

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  • Tal Shavit
  • Mosi Rosenboim
  • Yaniv Shani

Abstract

According to basic economic theory, people wish to maximize their expected utility. In order to do so they should integrate the likelihood (i.e. probability) and the possible outcomes (good or bad). Nevertheless, research has shown that people do not always account for their decisions on the basis of a rational or a cold evaluation of utility. We suggest that when choosing between two risky alternatives people determine the relative perceived importance of the outcomes and probabilities before making their choice. If the outcome is more important, they will tend to choose the option with the best outcome. If the probability is more important, they will tend to choose the option with the higher probability for the desirable outcome, or the option with the lower probability for the undesirable outcome. This means that people maximize their utility based on their perceived importance of probabilities and outcomes. To test our argument, we conducted an experiment in which we asked the participants to decide between two uncertain outcomes. The results support our claim that the importance of the probability and the importance of the outcome affect the choice between two risky alternatives.

Suggested Citation

  • Tal Shavit & Mosi Rosenboim & Yaniv Shani, 2013. "What is more important, the outcome or the probability?," Applied Economics Letters, Taylor & Francis Journals, vol. 20(2), pages 127-130, February.
    • Handle: RePEc:taf:apeclt:v:20:y:2013:i:2:p:127-130
    DOI: 10.1080/13504851.2012.684782
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    References listed on IDEAS

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    1. Rettinger, David A. & Hastie, Reid, 2001. "Content Effects on Decision Making," Organizational Behavior and Human Decision Processes, Elsevier, vol. 85(2), pages 336-359, July.
    2. van Dijk, Wilco W. & van der Pligt, Joop, 1997. "The Impact of Probability and Magnitude of Outcome on Disappointment and Elation," Organizational Behavior and Human Decision Processes, Elsevier, vol. 69(3), pages 277-284, March.
    3. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    4. Rottenstreich, Yuval & Kivetz, Ran, 2006. "On decision making without likelihood judgment," Organizational Behavior and Human Decision Processes, Elsevier, vol. 101(1), pages 74-88, September.
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    Cited by:

    1. Savadori, Lucia & Mittone, Luigi, 2015. "Temporal distance reduces the attractiveness of p-bets compared to $-bets," Journal of Economic Psychology, Elsevier, vol. 46(C), pages 26-38.

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