BEWARE OF BLACK SWANS AND DO NOT IGNORE WHITE ONES?

André de Palma (), Mohammed Abdellaoui, Giuseppe Attanasi, Moshe Ben-Akiva, Helga Fehr-Duda, Ido Erev, Dennis Fok, Ralph Hertwig, Nathalie Picard, Martin Weber, Craig Fox, Peter Wakker and A.L. Walker
Additional contact information
Moshe Ben-Akiva: MIT - Massachusetts Institute of Technology
Helga Fehr-Duda: ETH Zürich - Eidgenössische Technische Hochschule - Swiss Federal Institute of Technology [Zürich]
Ido Erev: Technion - Israel Institute of Technology [Haifa]
Ralph Hertwig: Max-Planck-Institut
Craig Fox: UCLA-CS - Computer Science Department [UCLA] - UCLA - University of California [Los Angeles] - UC - University of California
A.L. Walker: Department of Mathematics [Berkeley] - UC Berkeley - University of California [Berkeley] - UC - University of California

Working Papers from HAL

Abstract: Uncertainty pervades most aspects of life. From selecting a new technology to choosing a career, decision makers often ignore the outcomes of their decisions. In the last decade a new paradigm has emerged in behavioral decision research in which decisions are "experienced" rather than "described", as in standard decision theory. The dominant finding from studies using the experience-based paradigm is that decisions from experience exhibit "black swan effect", i.e. the tendency to neglect rare events. Under prospect theory, this results in an experience-description gap. We show that several tentative conclusions can be drawn from our interdisciplinary examination of the putative experience-description gap in decision under uncertainty. Several insights are discussed. First, while the major source of under-weighting of rare events may be sampling error, it is argued that a robust experience-description gap remains when these factors are not at play. Second, the residual experience-description gap is not only about experience per se, but also about the way in which information concerning the probability distribution over possible outcomes is learned.Additional econometric and empirical work might be required to fully flech out these tentative conclusions. However, there was a consensus that an initially polemical literature turns out to be constructive in drawing researcher towards greater rapprochements.

Keywords: Black swans; risk; ambiguity; four-fold pattern; (non)-expected utility; probabilistic choices; experience-based decision making; description-based decision making. (search for similar items in EconPapers)
Date: 2014-12-08
New Economics Papers: this item is included in nep-hpe
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