![]() (Contains 9 tables, 6 figures and 1 footnote. Our findings highlight a need to investigate how variation in decision content produces variation in preferences for risk. This suggests that people's experiences of events leak into decisions even when risk information is explicitly provided. We found evidence that exaggerated risk is caused by the accessibility of events in memory: The weighting function varies as a function of the accessibility of events. This effect is not anticipated by prospect theory or experience-based decision research (Hertwig, Barron, Weber, & Erev, 2004). For precautionary decisions, people overweighted small, medium-sized, and moderately large probabilities-they exaggerated risks. This result indicates a failure of the descriptive invariance axiom of expected utility theory. where, A is the Associated Risk Event and B is the Condition Present. When we assess the probability a risk may occur, we are technically assessing a conditional probability that is, 0 < Prob (AB) < 1. In judging risks, we tend to focus on one of the two elements, and more or less neglect the other one. The associated risk event represents a future event that may occur. Looking at the definition of risk, this is not so strange: Risk Probability Effect Most of us will have some understanding of both elements ‘Probability’ and ‘Effect’, but the combination of the two is rather abstract. Fitting these data to Tversky and Kahneman's (1992) prospect theory, we found that the weighting function required to model precautionary decisions differed from that required for monetary gambles. Other Risk Management Probability Definitions. ![]() We compared the risks taken for precautionary decisions with those taken for equivalent monetary gambles. In 5 experiments, we studied precautionary decisions in which participants decided whether or not to buy insurance with specified cost against an undesirable event with specified probability and cost. ![]()
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