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

  • Dohmen, Thomas

    ()

    (University of Bonn)

  • Falk, Armin

    ()

    (University of Bonn)

  • Huffman, David B.

    ()

    (University of Oxford)

  • Marklein, Felix

    ()

    (Federal Ministry of Finance)

  • Sunde, Uwe

    ()

    (University of Munich)

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://ftp.iza.org/dp4170.pdf
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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4170.

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Length: 29 pages
Date of creation: May 2009
Date of revision:
Publication status: published in: Journal of Economic Behavior and Organization, 2009, 72 (3), 903-915
Handle: RePEc:iza:izadps:dp4170
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  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.
  2. Annamaria Lusardi & Olivia S. Mitchell, 2008. "Planning and Financial Literacy: How Do Women Fare?," NBER Working Papers 13750, National Bureau of Economic Research, Inc.
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  7. Cass R. Sunstein & Richard H. Thaler, 2003. "Libertarian paternalism is not an oxymoron," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 48(Jun).
  8. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  9. Gary Charness & Dan Levin, 2005. "When Optimal Choices Feel Wrong: A Laboratory Study of Bayesian Updating, Complexity, and Affect," American Economic Review, American Economic Association, vol. 95(4), pages 1300-1309, September.
  10. 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.
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  12. Bertrand, Marianne & Shafir, Eldar & Mullainathan, Sendhil, 2004. "A Behavioral Economics View of Poverty," Scholarly Articles 2907437, Harvard University Department of Economics.
  13. Rabin, Matthew, 2000. "Inference by Believers in the Law of Small Numbers," Department of Economics, Working Paper Series qt4sw8n41t, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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  15. 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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