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Dual process theories: A key for understanding the diversification bias?

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  • Christoph Kogler
  • Anton Kühberger

Abstract

The diversification bias in repeated lotteries is the finding that a majority of participants fail to select the option offering the highest probability. This phenomenon is systematic and immune to classical manipulations (e.g. monetary rewards). We apply dual process theories and argue that the diversification bias is a consequence of System 1 (automatic, intuitive, associative) triggering a matching response, which fails to be corrected by System 2 (intentional, analytic, rational). Empirically, supporting the corrective functions of System 2 through appropriate contextual cues (describing the task as a statistical test rather than as a lottery) led to a decrease of diversification. Copyright Springer Science+Business Media, LLC 2007

Suggested Citation

  • Christoph Kogler & Anton Kühberger, 2007. "Dual process theories: A key for understanding the diversification bias?," Journal of Risk and Uncertainty, Springer, vol. 34(2), pages 145-154, April.
    • Handle: RePEc:kap:jrisku:v:34:y:2007:i:2:p:145-154
    DOI: 10.1007/s11166-007-9008-7
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    References listed on IDEAS

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    1. Arkes, Hal R. & Dawes, Robyn M. & Christensen, Caryn, 1986. "Factors influencing the use of a decision rule in a probabilistic task," Organizational Behavior and Human Decision Processes, Elsevier, vol. 37(1), pages 93-110, February.
    2. Loomes, Graham, 1998. "Probabilities vs Money: A Test of Some Fundamental Assumptions about Rational Decision Making," Economic Journal, Royal Economic Society, vol. 108(447), pages 477-489, March.
    3. Rubinstein, Ariel, 2002. "Irrational diversification in multiple decision problems," European Economic Review, Elsevier, vol. 46(8), pages 1369-1378, September.
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    2. Zhou, Jing, 2024. "Does correlation matter in probability matching? A laboratory investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 224(C), pages 876-894.

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    Keywords

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    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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