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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. Charness, Gary & Levin, Dan, 2003. "When Optimal Choices Feel Wrong: A Laboratory Study of Bayesian Updating, Complexity, and Affect," University of California at Santa Barbara, Economics Working Paper Series qt7g63k28w, Department of Economics, UC Santa Barbara.
  2. Richard H. Thaler & Cass R. Sunstein, 2003. "Libertarian Paternalism," American Economic Review, American Economic Association, vol. 93(2), pages 175-179, May.
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  5. Annamaria Lusardi, 2006. "Planning and Financial Literacy: How Do Women Fare?," Working Papers wp136, University of Michigan, Michigan Retirement Research Center.
  6. Victor Stango & Jonathan Zinman, 2009. "Exponential Growth Bias and Household Finance," Journal of Finance, American Finance Association, vol. 64(6), pages 2807-2849, December.
  7. Oechssler, Jörg & Roider, Andreas & Schmitz, Patrick W., 2008. "Cognitive Abilities and Behavioral Biases," IZA Discussion Papers 3481, Institute for the Study of Labor (IZA).
  8. 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).
  9. Cass R. Sunstein & Richard H. Thaler, 2003. "Libertarian paternalism is not an oxymoron," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 48(Jun).
  10. Lusardi, Annamaria & Mitchell, Olivia S., 2007. "Baby Boomer retirement security: The roles of planning, financial literacy, and housing wealth," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 205-224, January.
  11. Bertrand, Marianne & Shafir, Eldar & Mullainathan, Sendhil, 2004. "A Behavioral Economics View of Poverty," Scholarly Articles 2907437, Harvard University Department of Economics.
  12. 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.
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  15. Robin Hogarth, 2005. "The challenge of representative design in psychology and economics," Journal of Economic Methodology, Taylor & Francis Journals, vol. 12(2), pages 253-263.
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