Rare and extreme outcomes in risky choice

Area of Science:

• Decision-making research
• Behavioral economics
• Risk perception

Background:

• Real-world decisions frequently involve rare events with extreme outcomes.
• Previous research studied rarity and extremity in isolation, not their combined effect.
• People tend to underestimate rare event probabilities and overestimate extreme event probabilities.

Purpose of the Study:

• To investigate the combined impact of rarity and extremity on decisions from experience.
• To analyze how risk preferences change when outcomes are both rare and extreme.

Main Methods:

• A between-groups behavioral experiment was conducted.
• Participants made decisions involving rare extreme outcomes and rare non-extreme outcomes.
• Results were simulated using a decision-making model incorporating rarity and extremity biases.

Main Results:

• Risk preferences for rare extreme outcomes deviate from typical patterns for rare events.
• A reduced underweighting of probability was observed for events that were both rare and extreme.
• The study identified separable influences of rarity and extremity on risk-taking behavior.

Conclusions:

• Understanding real-world risk for rare events requires considering outcome extremity alongside rarity.
• Combined biases of rarity and extremity significantly alter decision-making under uncertainty.
• Future research should account for the interplay of these factors in risk assessment.