Judgment under Uncertainty: Heuristics and Biases

Amos Tversky and Daniel Kahneman

Chapter 15 in Handbook of the Fundamentals of Financial Decision Making:In 2 Parts, 2013, pp 261-268 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Many decisions are based on beliefs concerning the likelihood of uncertain events such as the outcome of an election, the guilt of a defendant, or the future value of the dollar. These beliefs are usually expressed in statements such as “I think that … ”, “chances are … ”, “it is unlikely that … ”, and so forth. Occasionally, beliefs concerning uncertain events are expressed in numerical form as odds or subjective probabilities. What determines such beliefs? How do people assess the probability of an uncertain event or the value of an uncertain quantity? This article shows that people rely on a limited number of heuristic principles which reduce the complex tasks of assessing probabilities and predicting values to simpler judgmental operations. In general, these heuristics are quite useful, but sometimes they lead to severe and systematic errors…

Keywords: Financial Decision Making; Asset Pricing; Prospect Theory; Utility Theory; Risk Aversion; Static Portfolio Theory; Stochastic Dominance; Dynamic Modeling; Dynamic Portfolio Theory; Tactical Asset Allocation; Kelly Strategy; Capital Growth (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (6)

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