IDEAS home Printed from https://ideas.repec.org/p/mpg/wpaper/2008_5.html

Do People Make Decisions Under Risk Based on Ignorance? An Empirical Test of the Priority Heuristic against Cumulative Prospect Theory

Author

Listed:
  • Andreas Glöckner

    (Max Planck Institute for Research on Collective Goods, Bonn)

  • Tilmann Betsch

    (University of Erfurt)

Abstract

Brandstätter, Gigerenzer and Hertwig (2006) put forward the priority heuristic (PH) as a fast and frugal heuristic for decisions under risk. According to the PH, individuals do not make trade-offs between gains and probabilities, as proposed by expected utility models such as cumulative prospect theory (CPT), but use information in a non-compensatory manner and ignore information. We conducted three studies to test the PH empirically by analyzing individual choice patterns, decision times and information search parameters in diagnostic decision tasks. Results on all three dependent variables conflict with the predictions of the PH and can be better explained by the CPT. The predictive accuracy of the PH was high for decision tasks in which the predic-tions align with the predictions of the CPT but very low for decision tasks in which this was not the case. The findings indicate that earlier results supporting the PH might have been caused by the selection of decision tasks that were not diagnostic for the PH as compared to CPT.

Suggested Citation

  • Andreas Glöckner & Tilmann Betsch, 2008. "Do People Make Decisions Under Risk Based on Ignorance? An Empirical Test of the Priority Heuristic against Cumulative Prospect Theory," Discussion Paper Series of the Max Planck Institute for Behavioral Economics 2008_05, Max Planck Institute for Behavioral Economics.
    • Handle: RePEc:mpg:wpaper:2008_5
    as

    Download full text from publisher

    File URL: http://www.coll.mpg.de/pdf_dat/2008_05online.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Herbert A. Simon, 1955. "A Behavioral Model of Rational Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 69(1), pages 99-118.
    2. Lohse, Gerald L. & Johnson, Eric J., 1996. "A Comparison of Two Process Tracing Methods for Choice Tasks," Organizational Behavior and Human Decision Processes, Elsevier, vol. 68(1), pages 28-43, October.
    3. Glimcher, Paul W. & Dorris, Michael C. & Bayer, Hannah M., 2005. "Physiological utility theory and the neuroeconomics of choice," Games and Economic Behavior, Elsevier, vol. 52(2), pages 213-256, August.
    4. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    5. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    6. Newell, Ben R. & Weston, Nicola J. & Shanks, David R., 2003. "Empirical tests of a fast-and-frugal heuristic: Not everyone "takes-the-best"," Organizational Behavior and Human Decision Processes, Elsevier, vol. 91(1), pages 82-96, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Charles-Cadogan, G., 2018. "Losses loom larger than gains and reference dependent preferences in Bernoulli’s utility function," Journal of Economic Behavior & Organization, Elsevier, vol. 154(C), pages 220-237.
    2. Kim Kaivanto, 2014. "The Effect of Decentralized Behavioral Decision Making on System‐Level Risk," Risk Analysis, John Wiley & Sons, vol. 34(12), pages 2121-2142, December.
    3. Michael H. Birnbaum & Jeffrey P. Bahra, 2012. "Separating response variability from structural inconsistency to test models of risky decision making," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 7(4), pages 402-426, July.
    4. Stephen B. Broomell & Budescu, David V. & Han-Hui Por, 2011. "Pair-wise comparisons of multiple models," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 6(8), pages 821-831, December.
    5. Pieterse, Arwen H. & de Vries, Marieke & Kunneman, Marleen & Stiggelbout, Anne M. & Feldman-Stewart, Deb, 2013. "Theory-informed design of values clarification methods: A cognitive psychological perspective on patient health-related decision making," Social Science & Medicine, Elsevier, vol. 77(C), pages 156-163.
    6. Ivan Moscati, 2022. "Behavioral and heuristic models are as-if models too — and that’s ok," BAFFI CAREFIN Working Papers 22177, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    7. Andreas Glöckner & Tilmann Betsch, 2008. "Multiple-Reason Decision Making Based on Automatic Processing," Discussion Paper Series of the Max Planck Institute for Behavioral Economics 2008_12, Max Planck Institute for Behavioral Economics.
    8. Auriol, Emmanuelle & Mesnard, Alice & Perrault, Tiffanie, 2023. "Weeding out the dealers? The economics of cannabis legalization," Journal of Economic Behavior & Organization, Elsevier, vol. 216(C), pages 62-101.
    9. Michael H. Birnbaum & Jeffrey P. Bahra, 2012. "Testing transitivity of preferences using linked designs," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 7(5), pages 524-567, September.
    10. Tomasz Potocki, 2012. "Cumulative Prospect Theory as a model of economic rationality," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 31.
    11. Glenn W. Harrison & J. Todd Swarthout, 2023. "Cumulative Prospect Theory in the Laboratory: A Reconsideration," Research in Experimental Economics, in: Models of Risk Preferences: Descriptive and Normative Challenges, volume 22, pages 107-192, Emerald Group Publishing Limited.
    12. Alexander Morell & Andreas Glöckner & Emanuel Towfigh, 2009. "Sticky Rebates: Rollback Rebates Induce Non-Rational Loyalty in Consumers," Discussion Paper Series of the Max Planck Institute for Behavioral Economics 2009_23, Max Planck Institute for Behavioral Economics, revised Feb 2013.
    13. Clintin P. Davis-Stober & Nicholas Brown, 2011. "A shift in strategy or "error"? Strategy classification over multiple stochastic specifications," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 6(8), pages 800-813, December.
    14. Nathaniel J. S. Ashby & Stephan Dickert & Andreas Glockner, 2012. "Focusing on what you own: Biased information uptake due to ownership," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 7(3), pages 254-267, May.
    15. Venkatraman, Vinod & Payne, John W. & Huettel, Scott A., 2014. "An overall probability of winning heuristic for complex risky decisions: Choice and eye fixation evidence," Organizational Behavior and Human Decision Processes, Elsevier, vol. 125(2), pages 73-87.
    16. Andreas Glockner & Benjamin E. Hilbig, 2011. "Editorial: Methodology in judgment and decision making research," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 6(8), pages 705-710, December.
    17. John R. Doyle & Catherine H. Chen & Krishna Savani, 2011. "New designs for research in delay discounting," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 6(8), pages 759-770, December.
    18. Auriol, Emmanuelle & Mesnard, Alice & Perrault, Tiffanie, 2019. "Defeating Crime? An Economic Analysis of Cannabis Legalization Policies," CEPR Discussion Papers 13814, Centre for Economic Policy Research.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Glöckner, Andreas & Betsch, Tilmann, 2008. "Do people make decisions under risk based on ignorance? An empirical test of the priority heuristic against cumulative prospect theory," Organizational Behavior and Human Decision Processes, Elsevier, vol. 107(1), pages 75-95, September.
    2. Daniel Fonseca Costa & Francisval Carvalho & Bruno César Moreira & José Willer Prado, 2017. "Bibliometric analysis on the association between behavioral finance and decision making with cognitive biases such as overconfidence, anchoring effect and confirmation bias," Scientometrics, Springer;Akadémiai Kiadó, vol. 111(3), pages 1775-1799, June.
    3. Francesco GUALA, 2017. "Preferences: Neither Behavioural nor Mental," Departmental Working Papers 2017-05, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    4. Driver Tania & Brimble Mark & Freudenberg Brett & Hunt Katherine, 2018. "Insurance Literacy in Australia: Not Knowing the Value of Personal Insurance," Financial Planning Research Journal, Sciendo, vol. 4(1), pages 53-75.
    5. Eduard Marinov, 2017. "The 2017 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 117-159.
    6. Nobel Prize Committee, 2017. "Richard H. Thaler: Integrating Economics with Psychology," Nobel Prize in Economics documents 2017-1, Nobel Prize Committee.
    7. Yan Li & David Ahlstrom, 2020. "Risk-taking in entrepreneurial decision-making: A dynamic model of venture decision," Asia Pacific Journal of Management, Springer, vol. 37(3), pages 899-933, September.
    8. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-372, June.
    9. Robin Maximilian Stetzka & Stefan Winter, 2023. "How rational is gambling?," Journal of Economic Surveys, Wiley Blackwell, vol. 37(4), pages 1432-1488, September.
    10. Metcalfe, Robert & Dolan, Paul, 2012. "Behavioural economics and its implications for transport," Journal of Transport Geography, Elsevier, vol. 24(C), pages 503-511.
    11. Frederiks, Elisha R. & Stenner, Karen & Hobman, Elizabeth V., 2015. "Household energy use: Applying behavioural economics to understand consumer decision-making and behaviour," Renewable and Sustainable Energy Reviews, Elsevier, vol. 41(C), pages 1385-1394.
    12. Leković Milјan, 2020. "Cognitive Biases as an Integral Part of Behavioral Finance," Economic Themes, Sciendo, vol. 58(1), pages 75-96, March.
    13. Thomas J. Brennan & Andrew W. Lo & Ruixun Zhang, 2018. "Variety Is the Spice of Life: Irrational Behavior as Adaptation to Stochastic Environments," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 1-39, September.
    14. Schunk, Daniel, 2009. "Behavioral heterogeneity in dynamic search situations: Theory and experimental evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 33(9), pages 1719-1738, September.
    15. Patalano Roberta, 2003. "Beyond rationality: images as guide-lines to choice," CESMEP Working Papers 200305, University of Turin.
    16. Sudeep Bhatia & Graham Loomes & Daniel Read, 2021. "Establishing the laws of preferential choice behavior," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 16(6), pages 1324-1369, November.
    17. Tian, Ye & Li, Yudi & Sun, Jian, 2022. "Stick or carrot for traffic demand management? Evidence from experimental economics," Transportation Research Part A: Policy and Practice, Elsevier, vol. 160(C), pages 235-254.
    18. Tramontana, Fabio, 2021. "When a boundedly rational monopolist meets consumers with reference dependent preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 184(C), pages 30-45.
    19. Avner Seror, 2026. "A Random Rule Model," Papers 2603.04105, arXiv.org, revised Apr 2026.
    20. Ng, Yew-Kwang & Wang, Jianguo, 2001. "Attitude choice, economic change, and welfare," Journal of Economic Behavior & Organization, Elsevier, vol. 45(3), pages 279-291, July.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mpg:wpaper:2008_5. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Marc Martin (email available below). General contact details of provider: https://edirc.repec.org/data/mppggde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.