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Biased Probability Judgment: Evidence of Incidence and Relationship to Economic Outcomes from a Representative Sample

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Author Info
Dohmen, Thomas () (ROA, Maastricht University)
Falk, Armin () (University of Bonn)
Huffman, David () (Swarthmore College)
Marklein, Felix () (Federal Ministry of Finance)
Sunde, Uwe () (University of St. Gallen)

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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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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4170.

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Length: 2009 pages
Date of creation: May 2009
Date of revision:
Publication status: published in: Journal of Economic Behavior & Organization, 2009, 72 (3), 903-915
Handle: RePEc:iza:izadps:dp4170

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Related research
Keywords: financial decision making; bounded rationality; probability judgment; gambler's fallacy; hot hand fallacy; representative design; long-term unemployment;

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Find related papers by JEL classification:
C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
D00 - Microeconomics - - General - - - General
D10 - Microeconomics - - Household Behavior - - - General
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
H00 - Public Economics - - General - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Robin Hogarth, 2004. "The Challenge of Representative Design in Psychology and Economics," Economics Working Papers 751, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2005. [Downloadable!]
  2. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  4. Robin Hogarth, 2005. "The challenge of representative design in psychology and economics," Journal of Economic Methodology, Taylor and Francis Journals, vol. 12(2), pages 253-263, June. [Downloadable!] (restricted)
  5. Marianne Bertrand & Sendhil Mullainathan & Eldar Shafir, 2004. "A Behavioral-Economics View of Poverty," American Economic Review, American Economic Association, vol. 94(2), pages 419-423, May. [Downloadable!]
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