From anomalies to forecasts: Toward a descriptive model of decisions under risk, under ambiguity, and from experience

Ido Erev*, Eyal Ert, Ori Plonsky, Doron Cohen, Oded Cohen

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

138 Scopus citations

Abstract

Experimental studies of choice behavior document distinct, and sometimes contradictory, deviations from maximization. For example, people tend to overweight rare events in 1-shot decisions under risk, and to exhibit the opposite bias when they rely on past experience. The common explanations of these results assume that the contradicting anomalies reflect situation-specific processes that involve the weighting of subjective values and the use of simple heuristics. The current article analyzes 14 choice anomalies that have been described by different models, including the Allais, St. Petersburg, and Ellsberg paradoxes, and the reflection effect. Next, it uses a choice prediction competition methodology to clarify the interaction between the different anomalies. It focuses on decisions under risk (known payoff distributions) and under ambiguity (unknown probabilities), with and without feedback concerning the outcomes of past choices. The results demonstrate that it is not necessary to assume situation-specific processes. The distinct anomalies can be captured by assuming high sensitivity to the expected return and 4 additional tendencies: pessimism, bias toward equal weighting, sensitivity to payoff sign, and an effort to minimize the probability of immediate regret. Importantly, feedback increases sensitivity to probability of regret. Simple abstractions of these assumptions, variants of the model Best Estimate and Sampling Tools (BEAST), allow surprisingly accurate ex ante predictions of behavior. Unlike the popular models, BEAST does not assume subjective weighting functions or cognitive shortcuts. Rather, it assumes the use of sampling tools and reliance on small samples, in addition to the estimation of the expected values.

Original languageAmerican English
Pages (from-to)369-409
Number of pages41
JournalPsychological Review
Volume124
Issue number4
DOIs
StatePublished - Jul 2017

Bibliographical note

Publisher Copyright:
© 2017 American Psychological Association.

Keywords

  • Experience-description gap
  • Out-of-sample predictions
  • Prospect theory
  • Random forest
  • St. Petersburg paradox

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