“Decisions from experience” = sampling error + prospect theory: Reconsidering Hertwig, Barron, Weber & Erev (2004)

According to prospect theory, people overweight low probability events and underweight high probability events. Several recent papers (notably, Hertwig, Barron, Weber & Erev, 2004) have argued that although this pattern holds for “description-based” decisions, in which people are explicitly provided with probability distributions over potential outcomes, it is actually reversed in “experience-based” decisions, in which people must learn these distributions through sampling. We reanalyze the data of Hertwig et al. (2004) and present a replication to determine the extent to which their phenomenon can be attributed to sampling error (a statistical rather than psychological phenomenon) versus underestimation of rare events (i.e., judgmental bias) versus actual underweighting of judged probabilities. We find that the apparent reversal of prospect theory in decisions from experience can be attributed almost entirely to sampling error, and are consistent with prospect theory and the two-stage model of decision under uncertainty (Fox & Tversky, 1998).