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Beware Of Black Swans And Do Not Ignore White Ones?

Author

Listed:
  • André de Palma

    (ENS Cachan - École normale supérieure - Cachan, X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique)

  • Mohammed Abdellaoui

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Giuseppe Attanasi

    () (BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique)

  • Moshe Ben-Akiva

    (MIT - Massachusetts Institute of Technology)

  • Helga Fehr-Duda

    (ETH Zürich - Eidgenössische Technische Hochschule - Swiss Federal Institute of Technology in Zürich [Zürich])

  • Ido Erev

    (Technion - Israel Institute of Technology [Haifa])

  • Dennis Fok

    (Erasmus University Rotterdam - Tinbergen Institute and CESifo)

  • Ralph Hertwig

    (Max-Planck-Institut)

  • Nathalie Picard

    (X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique, THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique)

  • Martin Weber

    (Universität Mannheim [Mannheim])

  • Craig Fox

    (UCLA-CS - Computer Science Department [UCLA] - UCLA - University of California [Los Angeles] - University of California)

  • P.P. Wakker

    (Erasmus University Rotterdam - Tinbergen Institute and CESifo)

  • A.L. Walker

    (Department of Mathematics [Berkeley] - University of California [Berkeley] - University of California)

Abstract

Uncertainty pervades most aspects of life. From selecting a new technology to choosing a career, decision makers often ignore the outcomes of their decisions. In the last decade a new paradigm has emerged in behavioral decision research in which decisions are "experienced" rather than "described", as in standard decision theory. The dominant finding from studies using the experience-based paradigm is that decisions from experience exhibit "black swan effect", i.e. the tendency to neglect rare events. Under prospect theory, this results in an experience-description gap. We show that several tentative conclusions can be drawn from our interdisciplinary examination of the putative experience-description gap in decision under uncertainty. Several insights are discussed. First, while the major source of under-weighting of rare events may be sampling error, it is argued that a robust experience-description gap remains when these factors are not at play. Second, the residual experience-description gap is not only about experience per se, but also about the way in which information concerning the probability distribution over possible outcomes is learned.Additional econometric and empirical work might be required to fully flech out these tentative conclusions. However, there was a consensus that an initially polemical literature turns out to be constructive in drawing researcher towards greater rapprochements.

Suggested Citation

  • André de Palma & Mohammed Abdellaoui & Giuseppe Attanasi & Moshe Ben-Akiva & Helga Fehr-Duda & Ido Erev & Dennis Fok & Ralph Hertwig & Nathalie Picard & Martin Weber & Craig Fox & P.P. Wakker & A.L. W, 2014. "Beware Of Black Swans And Do Not Ignore White Ones?," Working Papers hal-01092090, HAL.
  • Handle: RePEc:hal:wpaper:hal-01092090
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01092090
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    Keywords

    probabilistic choices; (non)-expected utility; Black swans; risk; ambiguity; four-fold pattern; experience-based decision making; description-based decision making.;

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