Rare and extreme outcomes in risky choice

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

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.

Citation

Mason, A., Ludvig, E. A., Spetch, M. L., & Madan, C. R. (2024). Rare and extreme outcomes in risky choice. Psychonomic Bulletin and Review, 31, 1301-1308. https://doi.org/10.3758/s13423-023-02415-x

• Journal Article Type: Article
• Acceptance Date: Oct 21, 2023
• Online Publication Date: Nov 16, 2023
• Publication Date: 2024-06
• Deposit Date: Nov 20, 2023
• Journal: Psychonomic Bulletin and Review
• Print ISSN: 1069-9384
• Electronic ISSN: 1531-5320
• Publisher: Springer Verlag
• Peer Reviewed: Peer Reviewed
• Volume: 31
• Pages: 1301-1308
• DOI: https://doi.org/10.3758/s13423-023-02415-x
• Keywords: Rare outcomes · Risky choice · Decisions-from-experience · Extreme outcomes · Sampling models
• Public URL: https://nottingham-repository.worktribe.com/output/27380822
• Publisher URL: https://link.springer.com/article/10.3758/s13423-023-02415-x
• Additional Information: Accepted: 21 October 2023; First Online: 16 November 2023