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

Author Info

Listed author(s):
  • 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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File URL: http://www.sciencedirect.com/science/article/pii/S0167-2681(09)00195-4
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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
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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

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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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  1. Falk, Armin & Huffman, David B. & Sunde, Uwe, 2006. "Self-Confidence and Search," IZA Discussion Papers 2525, Institute for the Study of Labor (IZA).
  2. 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.
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  6. Falk, Armin & Huffman, David B. & Sunde, Uwe, 2006. "Do I Have What It Takes? Equilibrium Search with Type Uncertainty and Non-Participation," IZA Discussion Papers 2531, Institute for the Study of Labor (IZA).
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  13. Terrell, Dek, 1994. "A Test of the Gambler's Fallacy: Evidence from Pari-mutuel Games," Journal of Risk and Uncertainty, Springer, vol. 8(3), pages 309-317, May.
  14. B. Douglas Bernheim & Antonio Rangel, 2005. "Behavioral Public Economics: Welfare and Policy Analysis with Non-Standard Decision-Makers," NBER Working Papers 11518, National Bureau of Economic Research, Inc.
  15. David M. Grether, 1980. "Bayes Rule as a Descriptive Model: The Representativeness Heuristic," The Quarterly Journal of Economics, Oxford University Press, vol. 95(3), pages 537-557.
  16. Victor Stango & Jonathan Zinman, 2009. "Exponential Growth Bias and Household Finance," Journal of Finance, American Finance Association, vol. 64(6), pages 2807-2849, December.
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