TY - JOUR
T1 - From anomalies to forecasts
T2 - Toward a descriptive model of decisions under risk, under ambiguity, and from experience
AU - Erev, Ido
AU - Ert, Eyal
AU - Plonsky, Ori
AU - Cohen, Doron
AU - Cohen, Oded
N1 - Publisher Copyright:
© 2017 American Psychological Association.
PY - 2017/7
Y1 - 2017/7
N2 - 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.
AB - 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.
KW - Experience-description gap
KW - Out-of-sample predictions
KW - Prospect theory
KW - Random forest
KW - St. Petersburg paradox
UR - http://www.scopus.com/inward/record.url?scp=85014731136&partnerID=8YFLogxK
U2 - 10.1037/rev0000062
DO - 10.1037/rev0000062
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C2 - 28277716
AN - SCOPUS:85014731136
SN - 0033-295X
VL - 124
SP - 369
EP - 409
JO - Psychological Review
JF - Psychological Review
IS - 4
ER -