Exaggerated Risk: Prospect Theory and Probability Weighting in Risky Choice

Journal article

Kusev, P., van Schaik, P., Ayton, P., Dent, J. and Chater, N. (2009). Exaggerated Risk: Prospect Theory and Probability Weighting in Risky Choice. Journal of Experimental Psychology: Learning Memory and Cognition. 35 (6), pp. 1487-1505. https://doi.org/10.1037/a0017039
AuthorsKusev, P., van Schaik, P., Ayton, P., Dent, J. and Chater, N.
Abstract

In 5 experiments, we studied precautionary decisions in which participants decided whether or not to buy insurance with specified cost against an undesirable event with specified probability and cost. We compared the risks taken for precautionary decisions with those taken for equivalent monetary gambles. Fitting these data to Tversky and Kahneman’s (1992) prospect theory, we found that the weighting function required to model precautionary decisions differed from that required for monetary gambles. This result indicates a failure of the descriptive invariance axiom of expected utility theory. For precautionary decisions, people overweighted small, medium-sized, and moderately large probabilities—they exaggerated risks. This effect is not anticipated by prospect theory or experience-based decision research (Hertwig, Barron, Weber, & Erev, 2004). We found evidence that exaggerated risk is caused by the accessibility of events in memory: The weighting function varies as a function of the accessibility of events. This suggests that people’s experiences of events leak into decisions even when risk information is explicitly provided. Our findings highlight a need to investigate how variation in decision content produces variation in preferences for risk.

Year2009
JournalJournal of Experimental Psychology: Learning Memory and Cognition
Journal citation35 (6), pp. 1487-1505
PublisherAmerican Psychological Association
ISSN1939-1285
Digital Object Identifier (DOI)https://doi.org/10.1037/a0017039
Web address (URL)http://www.scopus.com/inward/record.url?eid=2-s2.0-71649111215&partnerID=MN8TOARS
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Online01 Jan 2009
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Deposited31 Aug 2022
Accepted author manuscript
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Open
ISBN02787393
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