Description-experience gap

Last updated

The description-experience gap is a phenomenon in experimental behavioral studies of decision making. The gap refers to the observed differences in people's behavior depending on whether their decisions are made towards clearly outlined and described outcomes and probabilities or whether they simply experience the alternatives without having any prior knowledge of the consequences of their choices. [1]

Contents

In both described and experienced choice tasks, the experimental task usually involves selecting between one of two possible choices that lead to certain outcomes. [1] The outcome could be a gain or a loss and the probabilities of these outcomes vary. Of the two choices, one is probabilistically safer than the other. The other choice, then, offers a comparably improbable outcome. The specific payoffs or outcomes of the choices, in terms of the magnitude of their potential gains and losses, varies from study to study. [2]

Description

Description-based alternatives or prospects are those where much of the information regarding each choice is clearly stated. [3] That is, the participant is shown the potential outcomes for both choices as well as the probabilities of all the outcomes within each choice. Typically, feedback is not given after a choice is selected. That is, the participant is not shown what consequences their selections led to. Prospect theory guides much of what is currently known regarding described choices.

According to prospect theory, the decision weight of described prospects are considered differently depending on whether the prospects have a high or low probability and the nature of the outcomes. [4] Specifically, people's decisions differ depending on whether the described prospects are framed as gains or losses, and whether the outcomes are sure or probable.

Prospects are termed as gains when the two possible choices both offer a chance to receive a certain reward. Losses are those where the two possible choices both result in a reduction of a certain resource. An outcome is said to be sure when its probability is absolutely certain, or very close to 1. A probable outcome is one that is comparably more unlikely than the sure outcome. For described prospects, people tend to assign a higher value to sure or more probable outcomes when the choices involve gains; this is known as the certainty effect. When the choices involve losses, people tend to assign a higher value to the more improbable outcome; this is called the reflection effect because it leads to the opposite result of the certainty effect. [4]

Experience

Previous studies focusing on description-based prospects suffered from one drawback: the lack of external validity. In the natural environment, people's decisions must be made without a clear description of the probabilities of the alternatives. [5] Instead, decisions must be made by drawing upon past experiences. In experience-based studies, then, the outcomes and probabilities of the two possible choices are not initially presented to the participants. [3] Instead, participants must sample from these choices, and they can only learn the outcomes from feedback after making their choices. Participants can only estimate the probabilities of the outcomes based on experiencing the outcomes.

Contrary to the results obtained by prospect theory, people tended to underweight the probabilities of rare outcomes when they made decisions from experience. [6] That is, they in general tended to choose the more probable outcome much more often than the rare outcomes; they behaved as if the rare outcomes were more unlikely than they really were. The effect has been observed in studies involving repeated and small samples of choices. [5] [6] However, people tended to choose the riskier choice when deciding from experience for tasks that are framed in terms of gains, and this, too, is in contrast with decisions made from description. [3] [6]

As demonstrated above, decisions appear to be made very differently depending on whether choices are made from experience or description; that is, a description-experience gap has been demonstrated in decision making studies. The example of the reverse reflection effect aptly demonstrates the nature of the gap. Recall that description-based prospects lead to the reflection effect: people are risk averse for gains and risk seeking for losses. [3] However, experience-based prospects results in a reversal of the reflection effect such that people become risk seeking for gains and risk averse for losses. More specifically, the level of risk-taking behavior towards gains for participants in the experience task is virtually identical to the level of risk-taking towards losses for participants in the description task. The same effect is observed for gains versus losses in experience and description tasks. There are a few explanations and factors that contribute to the gap; some of which will be discussed below.

One factor that may contribute to the gap is the nature of the sampling task. In a sampling paradigm, people are allowed to respond to a number of prospects. [1] Presumably, they form their own estimations for the probabilities of the outcomes through sampling. However, some studies rely on people making decisions for a small sample of prospects. Due to the small samples, people may not even experience the low probability event, and this might influence peoples’ underweighting of the rare events. However, description-based studies involve making the exact probabilities known to the participant. Since the participants here are immediately made aware of the rareness of an event, they are unlikely to undersample rare events.

The results from experience-based studies may be the result of a recency effect. [5] The recency effect shows that greater weight or value is assigned to more recent events. [7] Given that rare events are uncommon, the more common events are more likely to take recency and therefore be weighted more than rare events. The recency effect, then, may be responsible for the underweighting of rare events in decisions made from experience. [5] Given that description-based studies usually involving responding to a limited number of trials or only one trial, [4] recency effects likely do not have as much of an influence on decision making in these studies or may even be entirely irrelevant.

Another variable which may be driving the results for the experience-based decisions paradigm is a basic tendency to avoid delayed outcomes: alternatives with positive rare events are on average advantageous only in the long term; while alternatives with negative rare events are on average disadvantageous in the long term. Hence, focusing on short term outcomes produces underweighting of rare events. Consistent with this notion, it has been found the increasing the short term temptation (e.g., by showing outcomes from all options; or foregone payoffs) increases the underweighting of rare events in decisions from experience [8]

Since experience-based studies include multiple trials, participants must learn about the outcomes of the available choices. The participants must base their decisions on previous outcomes, so they must therefore rely on memory when learning the outcomes and their probabilities. Biases for more salient memories, then, may be the reason for greater risk seeking in gains choices in experience-based studies. [9] The assumption here is that a more improbable but greater reward may produce a more salient memory.

To reiterate, prospect theory offers sound explanations for how people behave towards description-based prospects. However, the results from experience-based prospects tend to show opposite forms of responding. In described prospects, people tend to overweight the extreme outcomes such that they expect these probabilities to be more likely than they really are. Whereas in experienced prospects, people tend to underweight the probability of the extreme outcomes and therefore judge them as being even less likely to occur.

A highly relevant example of the description-experience gap has been illustrated: the difference in opinions on vaccination between doctors and patients. [5] Patients who learn about vaccination are usually exposed to only information regarding the probabilities of the side effects of the vaccines so they are likely to overweight the likelihood of these side effects. Although doctors learn about the same probabilities and descriptions of the side effects, their perspective is also shaped by experience: doctors have the direct experience of vaccinating patients and they are more likely to recognize the unlikelihood of the side effects. Due to the different ways in which doctors and patients learn about the side effects, there is potential disagreement on the necessity and safety of vaccination. [5]

Typically in natural settings, however, peoples’ awareness of the probabilities of certain outcomes and their prior experience cannot be separated when they make decisions that involve risk. In gambling settings, for instance, players can participate in a game with some level of understanding of the probabilities of the possible outcomes and what specifically the outcomes lead to. For example, players know that there are six sides to a die, and that each side has a one in six chance of being rolled. However, a player's decisions in the game must also be influenced by his or her past experiences of playing the game.

See also

Related Research Articles

The gambler's fallacy, also known as the Monte Carlo fallacy or the fallacy of the maturity of chances, is the erroneous belief that if a particular event occurs more frequently than normal during the past it is less likely to happen in the future, when it has otherwise been established that the probability of such events does not depend on what has happened in the past. Such events, having the quality of historical independence, are referred to as statistically independent. The fallacy is commonly associated with gambling, where it may be believed, for example, that the next dice roll is more than usually likely to be six because there have recently been less than the usual number of sixes.

Risk aversion

In economics and finance, risk aversion is the behavior of humans, who, when exposed to uncertainty, attempt to lower that uncertainty. It is the hesitation of a person to agree to a situation with an unknown payoff rather than another situation with a more predictable payoff but possibly lower expected payoff. For example, a risk-averse investor might choose to put their money into a bank account with a low but guaranteed interest rate, rather than into a stock that may have high expected returns, but also involves a chance of losing value.

Prospect theory

Prospect theory is a theory of behavioral economics and behavioral finance that was developed by Daniel Kahneman and Amos Tversky in 1979. The theory was cited in the decision to award Kahneman the 2002 Nobel Memorial Prize in Economics.

Decision theory is the study of an agent's choices. Decision theory can be broken into two branches: normative decision theory, which analyzes the outcomes of decisions or determines the optimal decisions given constraints and assumptions, and descriptive decision theory, which analyzes how agents actually make the decisions they do.

In social psychology, group polarization refers to the tendency for a group to make decisions that are more extreme than the initial inclination of its members. These more extreme decisions are towards greater risk if individuals' initial tendencies are to be risky and towards greater caution if individuals' initial tendencies are to be cautious. The phenomenon also holds that a group's attitude toward a situation may change in the sense that the individuals' initial attitudes have strengthened and intensified after group discussion, a phenomenon known as attitude polarization.

Loss aversion

Loss aversion is the tendency to prefer avoiding losses to acquiring equivalent gains. The principle is prominent in the domain of economics. What distinguishes loss aversion from risk aversion is that the utility of a monetary payoff depends on what was previously experienced or was expected to happen. Some studies have suggested that losses are twice as powerful, psychologically, as gains. Loss aversion was first identified by Amos Tversky and Daniel Kahneman.

The expected utility hypothesis model is a popular concept in economics, game theory and decision theory that serves as a reference guide for judging decisions and behaviors that are influenced by economic and psychological factors. The theory recommends which option a rational individual should choose in a complex situation, based on his tolerance for risk and personal preferences. Within the utility function, individual preferences about risk and the perceived value of attributes are captured to allow people to choose the most rational decision in an unclear scenario. The introduction of St. Petersburg Paradox by Daniel Bernoulli in 1738 is considered the beginning of the hypothesis and has explained why some choices seems to contradict the expected value criterion of payouts and probability of occurrence.

In psychology and behavioral economics, the endowment effect is the finding that people are more likely to retain an object they own than acquire that same object when they do not own it. The endowment theory can be defined as "an application of prospect theory positing that loss aversion associated with ownership explains observed exchange asymmetries."

The disposition effect is an anomaly discovered in behavioral finance. It relates to the tendency of investors to sell assets that have increased in value, while keeping assets that have dropped in value.

In accounting, finance, and economics, a risk-seeker or risk-lover is a person who has a preference for risk. While most investors are considered risk averse, one could view casino-goers as risk-seeking. A common example to explain risk-seeking behaviour is; If offered two choices; either $50 as a sure thing, or a 50% chance each of either $100 or nothing, a risk-seeking person would prefer the gamble. Even though the gamble and the "sure thing" have the same expected value, the preference for risk makes the gamble's expected utility for the individual much higher.

Cumulative prospect theory

Cumulative prospect theory (CPT) is a model for descriptive decisions under risk and uncertainty which was introduced by Amos Tversky and Daniel Kahneman in 1992. It is a further development and variant of prospect theory. The difference between this version and the original version of prospect theory is that weighting is applied to the cumulative probability distribution function, as in rank-dependent expected utility theory but not applied to the probabilities of individual outcomes. In 2002, Daniel Kahneman received the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel for his contributions to behavioral economics, in particular the development of Cumulative Prospect Theory (CPT).

Decision field theory (DFT) is a dynamic-cognitive approach to human decision making. It is a cognitive model that describes how people actually make decisions rather than a rational or normative theory that prescribes what people should or ought to do. It is also a dynamic model of decision making rather than a static model, because it describes how a person's preferences evolve across time until a decision is reached rather than assuming a fixed state of preference. The preference evolution process is mathematically represented as a stochastic process called a diffusion process. It is used to predict how humans make decisions under uncertainty, how decisions change under time pressure, and how choice context changes preferences. This model can be used to predict not only the choices that are made but also decision or response times.

One way of thinking holds that the mental process of decision-making is rational: a formal process based on optimizing utility. Rational thinking and decision-making does not leave much room for emotions. In fact, emotions are often considered irrational occurrences that may distort reasoning.

Taleb distribution probability distribution with a positive mean and a left fat tail; with expected small positive payoff and a small chance of serious losses

In economics and finance, a Taleb distribution is the statistical profile of an investment which normally provides a payoff of small positive returns, while carrying a small but significant risk of catastrophic losses. The term was coined by journalist Martin Wolf and economist John Kay to describe investments with a "high probability of a modest gain and a low probability of huge losses in any period."

Framing effect (psychology) Drawing different conclusions from the same information, depending on how that information is presented

The framing effect is a cognitive bias where people decide on options based on whether the options are presented with positive or negative connotations; e.g. as a loss or as a gain.

In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value, often focusing on negative, undesirable consequences. Many different definitions have been proposed. The international standard definition of risk for common understanding in different applications is “effect of uncertainty on objectives”.

'Outcome primacy' is a psychological phenomenon that describes lasting effects on a subject's behavior based on the outcome of first experiences with a given task or decision. It was found that this outcome primacy can account for much of the underweighting of rare events in experience based decisions, where participants apparently underestimate small probabilities.

Risk aversion is a preference for a sure outcome over a gamble with higher or equal expected value. Conversely, the rejection of a sure thing in favor of a gamble of lower or equal expected value is known as risk-seeking behavior.

Behavioral game theory analyzes interactive strategic decisions and behavior using the methods of game theory, experimental economics, and experimental psychology. Experiments include testing deviations from typical simplifications of economic theory such as the independence axiom and neglect of altruism, fairness, and framing effects. As a research program, the subject is a development of the last three decades.

The priority heuristic is a simple, lexicographic decision strategy that correctly predicts classic violations of expected utility theory such as the Allais paradox, the four-fold pattern, the certainty effect, the possibility effect, or intransitivities.

References

  1. 1 2 3 Hertwig, R; Erev, I (2009). "The description-experience gap in risky choice" (PDF). Trends in Cognitive Sciences. 13 (12): 517–23. doi:10.1016/j.tics.2009.09.004. hdl:11858/00-001M-0000-002E-57C8-C. PMID   19836292. S2CID   2190783.
  2. ↑ Eysenck, Michael W.; Keane, Mark T. (2020-03-09). Cognitive Psychology: A Student's Handbook. Psychology Press. ISBN   978-1-351-05850-6.
  3. 1 2 3 4 Ludvig EA, Spetch ML (2011). "Of black swans and tossed coins:Is the description-experience gap in risky choice limited to rare events". PLOS ONE. 6 (6): e20262. Bibcode:2011PLoSO...620262L. doi:10.1371/journal.pone.0020262. PMC   3105996 . PMID   21673807.
  4. 1 2 3 Kahneman D, Tversky A (1979). "Prospect theory: An analysis of decision under risk" (PDF). Econometrica. 47 (2): 263–92. CiteSeerX   10.1.1.407.1910 . doi:10.2307/1914185. JSTOR   1914185.
  5. 1 2 3 4 5 6 Hertwig R, Barron G, Weber EU, Erev I (2004). "Decisions from experience and the effect of rare events in risky choice" (PDF). Psychological Science. 15 (8): 534–39. doi:10.1111/j.0956-7976.2004.00715.x. hdl:11858/00-001M-0000-002E-57CE-F. PMID   15270998. S2CID   12977034.
  6. 1 2 3 Barron G, Erev I (2003). "Small feedback-based decisions and their limited correspondence to description-based decisions". Journal of Behavioral Decision Making. 16 (3): 215–23. CiteSeerX   10.1.1.320.4812 . doi:10.1002/bdm.443.
  7. ↑ Hogarth RM, Einhorn HJ (1992). "Order effects in belief updating: The belief-adjustment model". Cognitive Psychology. 24: 1–55. doi:10.1016/0010-0285(92)90002-J. S2CID   54272129.
  8. ↑ Yechiam, E; Busemeyer, J (2006). "The effect of foregone payoffs on underweighting small probability events". Journal of Behavioral Decision Making. 19: 1–16. doi:10.1002/bdm.509.
  9. ↑ Ludvig EA, Madan CR, Spetch ML (2014). "Extreme outcomes sway risky decisions from experience". Journal of Behavioral Decision Making. 27 (2): 146–156. CiteSeerX   10.1.1.718.7150 . doi:10.1002/bdm.1792.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.