"Decisions from experience" = sampling error + prospect theory: Reconsidering Hertwig, Barron, Weber & Erev (2004)
AbstractAccording 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).
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Bibliographic InfoArticle provided by Society for Judgment and Decision Making in its journal Judgment and Decision Making.
Volume (Year): 1 (2006)
Issue (Month): (November)
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decisions from experience; uncertainty; Prospect Theory; two-stage model; probability learning; decision weights.;
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- Kahneman, Daniel & Tversky, Amos, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Econometric Society, vol. 47(2), pages 263-91, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- Craig R. Fox & Amos Tversky, 1998. "A Belief-Based Account of Decision Under Uncertainty," Management Science, INFORMS, vol. 44(7), pages 879-895, July.
- Stephen B. Broomell & Budescu, David V. & Han-Hui Por, 2011. "Pair-wise comparisons of multiple models," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 6(8), pages 821-831, December.
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