Probability dominance

Enrico Diecidue*, Haim Levy*, Moshe Levy*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

The most commonly employed paradigms for decision making under risk are expected utility, prospect theory, and regret theory. We ex-amine the simple heuristic of maximizing the probability of being ahead, which in some natural economic situations may be in contradiction to all three of the above fundamental paradigms. We test whether this heuristic, which we call probability dominance (PD), affects decisions under risk. We set up head-to-head situations where all preferences of a given class (expected utility, original or cumulative prospect theory, or regret theory) favor one alternative yet PD favors the other. Our experiments reveal that 49% of subjects’ choices are aligned with PD in contradiction to any form of expected utility or prospect theory maximization; 73% are aligned with PD as opposed to preferences under risk aversion and under original and cumulative prospect theory preferences; and 68% to 76% are aligned with PD contradicting preferences under regret theory. We conclude that probability dominance substantially affects choices and should therefore be incorporated into decision-making models. We show that PD has significant economic consequences. The PD heuristic may have evolved through situations of winner-take-all competition.

Original languageAmerican English
Pages (from-to)1006-1020
Number of pages15
JournalReview of Economics and Statistics
Volume102
Issue number5
DOIs
StatePublished - Dec 2020

Bibliographical note

Publisher Copyright:
© 2019 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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