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Decision processes for low probability events: Policy implications

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  • Colin F. Camerer
  • Howard Kunreuther
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    Abstract

    This survey describes the impact of judgements and choices about low probability, high consequence events on the policymaking process. Empirical evidence indicates that normative models of choice, such as expected utility theory, are inadequate descriptions of individual choices. The ambiguity of low probabilities also affects decisions in ways that are not normative. Further, people exhibit biases in judgments about risks and probabilities. These findings have stimulated development of new theories, such as prospect theory and generalized utility theories incorporating attributes such as regret. The authors survey many of these empirical results and explore their implications for policy. They consider the role of information, economic incentives, compensation, and regulation in inducing socially desirable effects through the reframing of outcomes. They suggest that surveys and experiments can help analysts better understand the decision process for low probability events and design more effective public policies.

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    File URL: http://hdl.handle.net/10.2307/3325045
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    Bibliographic Info

    Article provided by John Wiley & Sons, Ltd. in its journal Journal of Policy Analysis and Management.

    Volume (Year): 8 (1989)
    Issue (Month): 4 ()
    Pages: 565-592

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    Handle: RePEc:wly:jpamgt:v:8:y:1989:i:4:p:565-592

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    Web page: http://www3.interscience.wiley.com/journal/34787/home

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    1. Camerer, Colin F, 1989. " An Experimental Test of Several Generalized Utility Theories," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 61-104, April.
    2. James S. Dyer & Rakesh K. Sarin, 1982. "Relative Risk Aversion," Management Science, INFORMS, vol. 28(8), pages 875-886, August.
    3. George F. Loewenstein, 1988. "Frames of Mind in Intertemporal Choice," Management Science, INFORMS, vol. 34(2), pages 200-214, February.
    4. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-24, December.
    5. Machina, Mark J., 1984. "Temporal risk and the nature of induced preferences," Journal of Economic Theory, Elsevier, vol. 33(2), pages 199-231, August.
    6. Chew, Soo Hong, 1983. "A Generalization of the Quasilinear Mean with Applications to the Measurement of Income Inequality and Decision Theory Resolving the Allais Paradox," Econometrica, Econometric Society, vol. 51(4), pages 1065-92, July.
    7. Akerlof, George A & Dickens, William T, 1982. "The Economic Consequences of Cognitive Dissonance," American Economic Review, American Economic Association, vol. 72(3), pages 307-19, June.
    8. Kreps, David M. & Porteus, Evan L., 1979. "Temporal von neumann-morgenstern and induced preferences," Journal of Economic Theory, Elsevier, vol. 20(1), pages 81-109, February.
    9. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
    10. Paul Slovic & Sarah Lichtenstein & Baruch Fischhoff, 1984. "Modeling the Societal Impact of Fatal Accidents," Management Science, INFORMS, vol. 30(4), pages 464-474, April.
    11. Kunreuther, Howard & Kleindorfer, Paul & Knez, Peter J. & Yaksick, Rudy, 1987. "A compensation mechanism for siting noxious facilities: Theory and experimental design," Journal of Environmental Economics and Management, Elsevier, vol. 14(4), pages 371-383, December.
    12. Grether, David M & Plott, Charles R, 1979. "Economic Theory of Choice and the Preference Reversal Phenomenon," American Economic Review, American Economic Association, vol. 69(4), pages 623-38, September.
    13. Eric J. Johnson & David A. Schkade, 1989. "Bias in Utility Assessments: Further Evidence and Explanations," Management Science, INFORMS, vol. 35(4), pages 406-424, April.
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