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On the Weighting of Rare Events and the Economics of Small Decisions

In: Developments on Experimental Economics

Author

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  • Ido Erev

    (Technion - Israel Institute of Technology)

Abstract

Experimental research suggests that decision makers tend to overweight low probability (rare) events when they rely on a description of the possible outcomes (e.g., the situations addressed by Kahneman & Tversky [19]), but to underweight low probability events when they rely on personal experience (e.g., Barron & Erev [3]). The current chapter summarizes two lines of research designed to evaluate the implications of this pattern. The first line includes an experimental examination of the two contradicting effects. The results suggest that the two effects do not cancel each other. Rather, it is possible to predict which effect is likely to occur in a particular situation. The second line of research explores if the understanding of the experimental results can be used to derive practical implications. Four examples are presented that demonstrate that the experimental pattern can shed light on the economics of small decisions.

Suggested Citation

  • Ido Erev, 2007. "On the Weighting of Rare Events and the Economics of Small Decisions," Lecture Notes in Economics and Mathematical Systems, in: Sobei Hidenori Oda (ed.), Developments on Experimental Economics, pages 59-73, Springer.
    • Handle: RePEc:spr:lnechp:978-3-540-68660-6_4
    DOI: 10.1007/978-3-540-68660-6_4
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    Citations

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    Cited by:

    1. Kpegli, Yao Thibaut & Corgnet, Brice & Zylbersztejn, Adam, 2023. "All at once! A comprehensive and tractable semi-parametric method to elicit prospect theory components," Journal of Mathematical Economics, Elsevier, vol. 104(C).
    2. Brice Corgnet & Camille Cornand & Nobuyuki Hanaki, 2021. "Emotional Markets: Competitive Arousal, Overbidding and Bubbles," Working Papers 2117, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    3. Brice Corgnet & Camille Cornand & Nobuyuki Hanaki, 2020. "Negative Tail Events, Emotions & Risk Taking," Working Papers 2016, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    4. Brice Corgnet & Camille Cornand & Nobuyuki Hanaki, 2021. "Risk-Taking and Tail Events Across Trading Institutions," Working Papers halshs-03357898, HAL.
    5. Brice Corgnet & Camille Cornand & Nobuyuki Hanaki, 2020. "Tail events, emotions and risk taking," Working Papers halshs-02613344, HAL.
    6. Wafa Elias, 2021. "The Effectiveness of Different Incentive Programs to Encourage Safe Driving," Sustainability, MDPI, vol. 13(6), pages 1-14, March.
    7. Ploner, Matteo & Saredi, Viola, 2020. "Exploration and delegation in risky choices," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 88(C).
    8. Brice Corgnet & Camille Cornand & Nobuyuki Hanaki, 2021. "Risk-Taking and Tail Events Across Trading Institutions," Working Papers hal-03468913, HAL.
    9. Caballero, Adrián & López-Pérez, Raúl, 2022. "Heterogeneous primacy and recency effects in frequency estimation," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 182-203.

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