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Noisy retrievers and the four-fold reaction to rare events

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  • Davide Marchiori

    ()
    (Department of Management, Università Ca' Foscari Venezia)

  • Sibilla Di Guida

    ()
    (SBS-EM, ECARES, Universite Libre de Bruxelles)

  • Ido Erev

    ()
    (Faculty of Industrial Engineering and Management, Technion)

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    Abstract

    Previous research documents two pairs of inconsistent reactions to rare events: 1) Studies of probability judgment reveal conservatism which implies overestimation of rare events, and overconfidence which implies underestimation of rare events. 2) Studies of choice behavior reveal overweighting of rare events in one-shot tasks, and the opposite bias in decisions from experience. The current analysis and experimental results demonstrate that the coexistence and relative importance of the four biases can be captured with simple models that share the assumption that judgments and decisions are made based on the information conveyed by small and noisy samples of past experiences.

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    File URL: http://virgo.unive.it/wpideas/storage/2013wp3.pdf
    File Function: First version, 2013
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    Bibliographic Info

    Paper provided by Department of Management, Università Ca' Foscari Venezia in its series Working Papers with number 3.

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    Length: 36 pages
    Date of creation: Apr 2013
    Date of revision:
    Handle: RePEc:vnm:wpdman:39

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    Web page: http://www.unive.it/dip.management
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    Related research

    Keywords: Black swan; prospect theory; experience-description gap; case-based decision theory; overgeneralization;

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    References

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    1. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
    2. Colin Camerer & Teck-Hua Ho, 1999. "Experience-weighted Attraction Learning in Normal Form Games," Econometrica, Econometric Society, vol. 67(4), pages 827-874, July.
    3. Drew Fudenberg & David K. Levine, 1998. "The Theory of Learning in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061945, January.
    4. Ido Erev & Ira Glozman & Ralph Hertwig, 2008. "What impacts the impact of rare events," Journal of Risk and Uncertainty, Springer, vol. 36(2), pages 153-177, April.
    5. Gayer, Gabrielle, 2010. "Perception of probabilities in situations of risk: A case based approach," Games and Economic Behavior, Elsevier, vol. 68(1), pages 130-143, January.
    6. Fox, Craig R & Tversky, Amos, 1995. "Ambiguity Aversion and Comparative Ignorance," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 585-603, August.
    7. Reinhard Selten & Thorsten Chmura, 2005. "Stationary Concepts for Experimental 2x2 Games," Bonn Econ Discussion Papers bgse33_2005, University of Bonn, Germany.
    8. Viscusi, W Kip, 1989. " Prospective Reference Theory: Toward an Explanation of the Paradoxes," Journal of Risk and Uncertainty, Springer, vol. 2(3), pages 235-63, September.
    9. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
    10. Itzhak Gilboa & David Schmeidler, 1992. "Case-Based Decision Theory," Discussion Papers 994, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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