Remembering the best and worst of times: Memories for extreme outcomes bias risky decisions
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When making decisions on the basis of past experiences, people must rely on their memories. Human memory has many well-known biases, including the tendency to better remember highly salient events. We propose an extreme-outcome rule, whereby this memory bias leads people to overweight the largest gains and largest losses, leading to more risk seeking for relative gains than for relative losses. To test this rule, in two experiments, people repeatedly chose between fixed and risky options, where the risky option led equiprobably to more or less than did the fixed option. As was predicted, people were more risk seeking for relative gains than for relative losses. In subsequent memory tests, people tended to recall the extreme outcome first and also judged the extreme outcome as having occurred more frequently. Across individuals, risk preferences in the risky-choice task correlated with these memory biases. This extreme-outcome rule presents a novel mechanism through which memory influences decision making.
KeywordsRisky choice Memory biases Decisions from experience Decision making Behavioral economics
Research was funded by grants from the Alberta Gambling Research Institute (AGRI) and the National Science and Engineering Research Council (NSERC) of Canada held by M.L.S. C.R.M. was supported by scholarships from AGRI and NSERC. E.A.L. was supported by NIH Grant #P30 AG024361. We thank the Explore-Exploit Group at Princeton for insightful discussions and Ashley Rodgers for research help. Door images were extracted from “Irish Doors” on fineartamerica.com, with permission from Joe Bonita.
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