'Decisions from Experience' = Sampling Error Prospect Theory: Reconsidering Hertwig, Barron, Weber & Erev (2004)

Judgment and Decision Making, 1(2), 159-161, 2006

Posted: 27 Oct 2015

See all articles by Craig R. Fox

Craig R. Fox

University of California, Los Angeles (UCLA) - Anderson School of Management

Liat Hadar

Reichman University - Interdisciplinary Center (IDC) Herzliyah - Adelson School of Entrepreneuship

Date Written: November 2006

Abstract

According to prospect theory, people overweight low probability events and underweight high probability events. Several recent papers (notably, Hertwig, Barron, Weber & Erev, 2004) have argued that although this pattern holds for “description-based” decisions, in which people are explicitly provided with probability distributions over potential outcomes, it is actually reversed in “experience-based” decisions, in which people must learn these distributions through sampling. We reanalyze the data of Hertwig et al. (2004) and present a replication to determine the extent to which their phenomenon can be attributed to sampling error (a statistical rather than psychological phenomenon) versus underestimation of rare events (i.e., judgmental bias) versus actual underweighting of judged probabilities. We find that the apparent reversal of prospect theory in decisions from experience can be attributed almost entirely to sampling error, and are consistent with prospect theory and the two-stage model of decision under uncertainty (Fox & Tversky, 1998).

Keywords: decisions from experience, uncertainty, Prospect Theory, two-stage model, probability learning, decision weights

JEL Classification: D01

Suggested Citation

Fox, Craig R. and Hadar, Liat, 'Decisions from Experience' = Sampling Error Prospect Theory: Reconsidering Hertwig, Barron, Weber & Erev (2004) (November 2006). Judgment and Decision Making, 1(2), 159-161, 2006, Available at SSRN: https://ssrn.com/abstract=2680083

Craig R. Fox (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Liat Hadar

Reichman University - Interdisciplinary Center (IDC) Herzliyah - Adelson School of Entrepreneuship ( email )

P.O. Box 167
Herzliya, 46150
Israel

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