rational risky choice

in my implosive post a few days back, i mentioned the quandary of how accurately people are able to judge the outcomes of their decisions and that it should be the subject of it’s own post. well, i just finished an article in the journal psychological science that speaks to this and so today is the day.
the researchers compare two different resources we use to gather information for decision making, experience and written guides (brochures, books, etc.). subjects using written guides tend to make cautious decisions, oftentimes overweighing the probability of rare outcomes.
when using only experience, as we are often required to do, subjects made riskier decisions, underweighting the likelihood of rare events. rare events are, well, rare, and therefore less likely to be at the forefront of our minds unless the event just occurred, which is unlikely. therefore, we tend to make decisions from experience underweighting the probability of those rare events because they are literally the furthest thing from our mind, a phenomenon called the recency effect.
in life unpleasant outcomes are often rare. it isn’t every day we’re hit by a car when carelessly walking across the street. it makes sense then for us to underestimate negative outcomes if going just off of experience. are then our decisions less rational because we are not taking into account in the proper proportions the likelihood of certain events? it seems to me that this phenomenon, although unconscious, is rational. we should undervalue those rare events and free ourselves to receive the benefits of doing things we otherwise would not do.

i have recent experience with this phenomenon: i undervalued the probability that a car would be driving behind me as i was backing out of my parking space, prompting me to be careless, gun it, and smash in the side of a lawyer’s lexus. where usually the recency effect allows me to do things i wouldn't otherwise do, this time it just raised my insurance.

reference: hertwig, barron, weber, erev. decisions from experience and the effect of rare events in risky choice. psychological science, vol 15 no 8. aug. 2004

Labels: decision making