How is your decision-making affected by rare events? – Chapter 30

Try remembering a time in which terrorist attacks in public transport were relatively common. The attacks were fairly rare in absolute numbers and the risks for travellers very small, but that is not how they felt about it. People tried to avoid public transport or were very cautious. Kahneman also disliked being near buses, even though he knew the risk of a terrorist attack happening was negligible. People assigned an absurdly high decision weight to a very small probability due to the experience of the moment: being near a bus made them have unpleasant thoughts, so they avoided buses. Terrorism is effective because it evokes an availability cascade. Very vivid images of victims, constantly mentioned by media and the topic of many conversations, become highly accessible, especially if it related to a specific situation (seeing a bus). This emotional response is automatic, uncontrolled, associative and it generates an impulse for protective behavior. System 2 knows about the low probability, but System 1 cannot be switched off.

The same goes for big lotteries. The exciting possibility of winning the jackpot is shared by the community and reinforced by interactions with others. Buying a ticket instantly results into appealing fantasies, just like avoiding public transport was an immediate response to fear. Merely the possibility matters, not the actual probability. According to the prospect theory, highly unlikely events get overweighted or ignored. Kahneman’s current view of weighting decisions has been shaped by research on the role of vividness in decision making and of emotions. Vividness and emotion influence judgments of probability, availability and fluency and therefore explain disproportionate responses to rare events.

Consider the following questions:

1. What is your judgment of the probability that the national football team of Saudi Arabia wins the next world cup?

2. How much will you pay for a bet in which you receive € 500 if the next world cup winner is Saudi Arabia, and no money otherwise?

The first question regards the assessment of the probability of an unlikely event. The second question requires assigning a decision weight to the same event. People tend to overestimate the probability of an unlikely event and overweight the unlikely event. Overweighting and overestimation are different notions, but the psychological mechanism behind them are the same: cognitive ease, confirmation bias and focused attention. The associative machinery of System 1 is triggered by specific descriptions. When thinking about the unlikely win of Saudi Arabia, your associative machinery starts selectively retrieving evidence, images and instances that would make the statement true. The judgment of probability was determined by the cognitive ease with which a credible scenario come to mind. The probability of a rare event will be overestimated in case of a not fully specified alternative.

Research demonstrates that the valuation is a gamble is much less sensitive to probability when the outcomes are emotional (kissing, getting electric shocks) than when the outcomes are losses or gains of money. The fear of receiving a shock does not correlate with the probability of receiving it. The probability alone triggered the feeling of fear, which overrules the response to probability. This conclusion was later challenged by other researchers. They considered that the low sensitivity to probability for emotional outcomes is normal (gambles on money excluded): insensitivity to probability is not caused by the intensity of emotion.

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WorldSupporter Resources
Summary per chapter with the 1st edition of Thinking, Fast and Slow by Kahneman

Summary per chapter with the 1st edition of Thinking, Fast and Slow by Kahneman

Summary per chapter with the 1st edition of Thinking, Fast and Slow by Kahneman

  • What is the book about?
  • Part 1: How do fast thinking and slow thinking work? Chapters 1-9
  • Part 2: How do heuristics and biases work? Chapters 10-18
  • Part 3: In what ways can you get overconfident? Chapters 19-24
  • Part 4: How do you make choices and decisions? Chapters 25-34
  • Part 5: What is the effect of fast and slow thinking on your experiences, choices and well-being? Chapters 35-38
  • Related summaries and study notes with the 1st edition of Thinking,
...Read more