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Biased probability judgment: Evidence of incidence and relationship to economic outcomes from a representative sample

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  • Dohmen, Thomas
  • Falk, Armin
  • Huffman, David
  • Marklein, Felix
  • Sunde, Uwe

Abstract

Many economic decisions involve a substantial amount of uncertainty, and therefore crucially depend on how individuals process probabilistic information. In this paper, we investigate the capability for probability judgment in a representative sample of the German population. Our results show that almost a third of the respondents exhibits systematically biased perceptions of probability. The findings also indicate that the observed biases are related to individual economic outcomes, which suggests potential policy relevance of our findings.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 72 (2009)
Issue (Month): 3 (December)
Pages: 903-915

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Handle: RePEc:eee:jeborg:v:72:y:2009:i:3:p:903-915

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Web page: http://www.elsevier.com/locate/jebo

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Keywords: Bounded rationality Probability judgment Gambler's fallacy Hot hand fallacy Representative design Long-term unemployment Financial decision making;

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References

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  1. Matthew Rabin, 2001. "Inference by Believers in the Law of Small Numbers," Method and Hist of Econ Thought 0012002, EconWPA.
  2. Lusardi, Annamaria & Mitchell, Olivia S., 2007. "Baby Boomer retirement security: The roles of planning, financial literacy, and housing wealth," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 205-224, January.
  3. Grether, David M, 1980. "Bayes Rule as a Descriptive Model: The Representativeness Heuristic," The Quarterly Journal of Economics, MIT Press, vol. 95(3), pages 537-57, November.
  4. Oechssler, Jörg & Roider, Andreas & Schmitz, Patrick W., 2009. "Cognitive abilities and behavioral biases," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 147-152, October.
  5. Richard H. Thaler & Cass R. Sunstein, 2003. "Libertarian Paternalism," American Economic Review, American Economic Association, vol. 93(2), pages 175-179, May.
  6. Charness, Gary & Levin, Dan, 2003. "When Optimal Choices Feel Wrong: A Laboratory Study of Bayesian Updating, Complexity, and Affect," University of California at Santa Barbara, Economics Working Paper Series qt7g63k28w, Department of Economics, UC Santa Barbara.
  7. Victor Stango & Jonathan Zinman, 2009. "Exponential Growth Bias and Household Finance," Journal of Finance, American Finance Association, vol. 64(6), pages 2807-2849, December.
  8. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
  9. B. Douglas Bernheim & Antonio Rangel, 2005. "Behavioral Public Economics: Welfare and Policy Analysis with Non-Standard Decision-Makers," Discussion Papers 04-033, Stanford Institute for Economic Policy Research.
  10. Robin Hogarth, 2005. "The challenge of representative design in psychology and economics," Journal of Economic Methodology, Taylor & Francis Journals, vol. 12(2), pages 253-263.
  11. Bertrand, Marianne & Shafir, Eldar & Mullainathan, Sendhil, 2004. "A Behavioral Economics View of Poverty," Scholarly Articles 2907437, Harvard University Department of Economics.
  12. Sunstein, Cass R. & Thaler, Richard H., 2003. "Libertarian Paternalism Is Not An Oxymoron," Working paper 320, Regulation2point0.
  13. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  14. Annamaria Lusardi & Olivia S. Mitchell, 2008. "Planning and Financial Literacy: How Do Women Fare?," CeRP Working Papers 72, Center for Research on Pensions and Welfare Policies, Turin (Italy).
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Citations

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Cited by:
  1. Thomas Stöckl & Jürgen Huber & Michael Kirchler & Florian Lindner, 2013. "Hot Hand Belief and Gambler's Fallacy in Teams: Evidence from Investment Experiments," Working Papers 2013-04, Faculty of Economics and Statistics, University of Innsbruck.
  2. Bjørnskov, Christian & Dreher, Axel & Fischer, Justina A.V. & Schnellenbach, Jan & Gehring, Kai, 2013. "Inequality and happiness: When perceived social mobility and economic reality do not match," Journal of Economic Behavior & Organization, Elsevier, vol. 91(C), pages 75-92.
  3. Bjornskov, Christian & Dreher, Axel & Fischer, Justina AV & Schnellenbach, Jan, 2009. "On the relation between income inequality and happiness: Do fairness perceptions matter?," MPRA Paper 19502, University Library of Munich, Germany.
  4. Klemens Keldenich & Marcus Klemm, 2011. "Double or Nothing!? Small Groups Making Decisions Under Risk in “Quiz Taxi”," Ruhr Economic Papers 0278, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  5. Suetens, S. & Tyran, J.R., 2011. "The Gambler's Fallacy and Gender," Discussion Paper 2011-011, Tilburg University, Center for Economic Research.
  6. Falk, Armin & Zimmermann, Florian, 2011. "Preferences for Consistency," CEPR Discussion Papers 8519, C.E.P.R. Discussion Papers.
  7. Albrecht, Konstanze & Von Essen, Emma & Parys, Juliane & Szech, Nora, 2011. "Updating, Self-Confidence and Discrimination," IZA Discussion Papers 6203, Institute for the Study of Labor (IZA).
  8. repec:got:cegedp:91 is not listed on IDEAS
  9. Menapace, Luisa & Colson, Gregory, 2012. "On the Validity of Gamble Tasks to Assess Farmers' Risk Attitudes," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124601, Agricultural and Applied Economics Association.

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