Noisy retrievers and the four-fold reaction to rare events

Davide Marchiori (), Sibilla Di Guida () and Ido Erev ()
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Davide Marchiori: Department of Management, Università Ca' Foscari Venezia
Sibilla Di Guida: SBS-EM, ECARES, Universite Libre de Bruxelles
Ido Erev: Faculty of Industrial Engineering and Management, Technion

No 3, Working Papers from Venice School of Management - Department of Management, Università Ca' Foscari Venezia

Abstract: Previous research documents two pairs of inconsistent reactions to rare events: 1) Studies of probability judgment reveal conservatism which implies overestimation of rare events, and overconfidence which implies underestimation of rare events. 2) Studies of choice behavior reveal overweighting of rare events in one-shot tasks, and the opposite bias in decisions from experience. The current analysis and experimental results demonstrate that the coexistence and relative importance of the four biases can be captured with simple models that share the assumption that judgments and decisions are made based on the information conveyed by small and noisy samples of past experiences.

Keywords: Black swan; prospect theory; experience-description gap; case-based decision theory; overgeneralization (search for similar items in EconPapers)
JEL-codes: C79 C91 D81 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2013-04
New Economics Papers: this item is included in nep-cbe, nep-dcm and nep-upt
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