Rare and Extreme Outcomes in Risky Choice

Alice Mason, Elliot A. Ludvig, Marcia L. Spetch, Christopher R. Madan

Research output: Contribution to journalArticlepeer-review

Abstract

Many real-world decisions involving rare events also involve extreme outcomes. Despite this confluence, decisions-from-experience research has only examined the impact of rarity and extremity in isolation. With rare events, people typically choose as if they underestimate the probability of a rare outcome happening. Separately, people typically overestimate the probability of an extreme outcome happening. Here, for the first time, we examine the confluence of these two biases in decisions-from-experience. In a between-groups behavioural experiment, we examine people’s risk preferences for rare extreme outcomes and for rare non-extreme outcomes. When outcomes are both rare and extreme, people’s risk preferences shift away from traditional risk patterns for rare events: they show reduced underweighting for events that are both rare and extreme. We simulate these results using a small-sample model of decision-making that accounts for both the underweighting of rare events and the overweighting of extreme events. These separable influences on risk preferences suggest that to understand real-world risk for rare events we must also consider the extremity of the outcomes.

Original languageEnglish
JournalPsychonomic Bulletin & Review
Early online date16 Nov 2023
DOIs
Publication statusPublished - 16 Nov 2023

Keywords

  • Decisions-from-experience
  • Extreme outcomes
  • Rare outcomes
  • Risky choice
  • Sampling models

ASJC Scopus subject areas

  • Experimental and Cognitive Psychology
  • Developmental and Educational Psychology

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