Marketing Letters

, Volume 25, Issue 3, pp 269–280

Beware of black swans: Taking stock of the description–experience gap in decision under uncertainty

  • André de Palma
  • Mohammed Abdellaoui
  • Giuseppe Attanasi
  • Moshe Ben-Akiva
  • Ido Erev
  • Helga Fehr-Duda
  • Dennis Fok
  • Craig R. Fox
  • Ralph Hertwig
  • Nathalie Picard
  • Peter P. Wakker
  • Joan L. Walker
  • Martin Weber
Article
  • 678 Downloads

Abstract

Uncertainty pervades most aspects of life. From selecting a new technology to choosing a career, decision makers rarely know in advance the exact outcomes of their decisions. Whereas the consequences of decisions in standard decision theory are explicitly described (the decision from description (DFD) paradigm), the consequences of decisions in the recent decision from experience (DFE) paradigm are learned from experience. In DFD, decision makers typically overrespond to rare events. That is, rare events have more impact on decisions than their objective probabilities warrant (overweighting). In DFE, decision makers typically exhibit the opposite pattern, underresponding to rare events. That is, rare events may have less impact on decisions than their objective probabilities warrant (underweighting). In extreme cases, rare events are completely neglected, a pattern known as the “Black Swan effect.” This contrast between DFD and DFE is known as a description–experience gap. In this paper, we discuss several tentative interpretations arising from our interdisciplinary examination of this gap. First, while a source of underweighting of rare events in DFE may be sampling error, we observe that a robust description–experience gap remains when these factors are not at play. Second, the residual description–experience gap is not only about experience per se but also about the way in which information concerning the probability distribution over the outcomes is learned in DFE. Econometric error theories may reveal that different assumed error structures in DFD and DFE also contribute to the gap.

Keywords

Black swans Risk Ambiguity Fourfold pattern (Non)-expected utility Probabilistic choices Experience-based decision making Description-based decision making 

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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  • André de Palma
    • 1
  • Mohammed Abdellaoui
    • 2
  • Giuseppe Attanasi
    • 3
  • Moshe Ben-Akiva
    • 4
  • Ido Erev
    • 5
  • Helga Fehr-Duda
    • 6
  • Dennis Fok
    • 7
  • Craig R. Fox
    • 8
  • Ralph Hertwig
    • 9
  • Nathalie Picard
    • 10
  • Peter P. Wakker
    • 7
  • Joan L. Walker
    • 11
  • Martin Weber
    • 12
  1. 1.Economics and Management DepartmentEcole Normale Supérieure de CachanCachan CedexFrance
  2. 2.GREGHEC, HEC-ParisJouy-en-JosasFrance
  3. 3.BETA, Université de StrasbourgStrasbourg CedexFrance
  4. 4.Department of Civil and Environmental EngineeringMassachusetts Institute of TechnologyCambridgeUSA
  5. 5.William Davidson Faculty of Industrial Engineering and Management, TechnionIsrael Institute of TechnologyTechnion CityIsrael
  6. 6.Chair of Economics, Swiss Federal Institute of Technology ZurichZurichSwitzerland
  7. 7.Erasmus School of EconomicsErasmus University RotterdamRotterdamThe Netherlands
  8. 8.Department of PsychologyUCLA Anderson School of ManagementLos AngelesUSA
  9. 9.Center for Adaptive Rationality, Max Planck Institute of Human DevelopmentBerlinGermany
  10. 10.THEMA, University of Cergy-PontoiseCergy-Pontoise CedexFrance
  11. 11.Department of Civil and Environmental EngineeringUniversity of California BerkeleyBerkeleyUSA
  12. 12.School of BusinessUniversity of MannheimMannheimGermany

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