What impacts the impact of rare events

Abstract

Kahneman and Tversky (Econometrica 47:263–291, 1979) argued that " unlikely events are either neglected or overweighted, " but left the task of identifying factors that determine which of these contradicting biases occur to future research. We present four studies designed to tackle this issue in the context of decisions from incomplete descriptions. Our findings suggest that the impact of unlikely events increases when they become more similar to their comparison stimuli, and when they are explicitly presented. Using these factors we reversed the findings in variants of classic gambles in the history of decision research, the Allais and the St. Petersburg gambles. In their analysis of decision making under risk Kahneman and Tversky (1979) asserted: " Because people are limited in their ability to comprehend and evaluate extreme probabilities, highly unlikely events are either neglected or overweighted, and the difference between high probability and certainty is either neglected or exaggerated. " (p. 283). In Tversky and Kahneman (1992), they reiterated the view that the probability weighting function " is not well-behaved near the endpoints, and