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.
Bibliographical noteFunding Information:
This research was supported by the I-CORE program of the Planning and Budgeting Committee and the Israel Science Foundation (grant 1821/12 for Ido Erev, and grant 1739/14 for Eyal Ert). We thank Alvin E. Roth, Asen Kochov, Eric Schulz, and Michael Sobolev for their useful comments. We also thank members of 25 teams for participation in the competition, and Shier Cohen-Amin, Shani Haviv, Liron Honen, and Yaara Nussinovitch for their help in data collection.
© 2017 American Psychological Association.
- Experience-description gap
- Out-of-sample predictions
- Prospect theory
- Random forest
- St. Petersburg paradox