Pseudocertainty effect
Encyclopedia
The pseudocertainty effect is a concept from prospect theory
. It refers to people's tendency to perceive an outcome as certain while in fact it is uncertain (Kahneman & Tversky, 1986). It is observed in multi-stage decisions, in which evaluation of outcomes in previous decision stage is discarded when making an option in subsequent stages.
First, consider this problem:
Which of the following options do you prefer?
In this case, 42% of participants chose option C while 58% chose option D.
Now, consider this problem:
Consider the following two stage game. In the
first stage, there is a 75% chance to end the game without winning
anything, and a 25% chance to move into the second stage. If you
reach the second stage you have a choice between:
Your choice must be made before the outcome of the first stage is
known.
This time,74% of participants chose option E while only 26% chose option F.
In fact, the actual probability of winning money in option E (25% x 100% = 25%) and option F (25% x 80% = 20%) is the same as the probability of winning money in option C (25%) and option D (20%) respectively. In the second problem, since individuals have no choice on options in the first stage, individuals tend to discard the first option when evaluating the overall probability of winning money, but just to consider the options in the second stage that individuals have a choice on. This is also known as cancellation, meaning that possible options are yielding to the same outcome thus ignoring decision process in that stage.
Prospect theory
Prospect theory is a theory that describes decisions between alternatives that involve risk i.e. where the probabilities of outcomes are known. The model is descriptive: it tries to model real-life choices, rather than optimal decisions.-Model:...
. It refers to people's tendency to perceive an outcome as certain while in fact it is uncertain (Kahneman & Tversky, 1986). It is observed in multi-stage decisions, in which evaluation of outcomes in previous decision stage is discarded when making an option in subsequent stages.
Example
Kahneman and Tversky (1986) illustrated the pseudocertainty effect by the following examples.First, consider this problem:
Which of the following options do you prefer?
- C. 25% chance to win $30 and 75% chance to win nothing
- D. 20% chance to win $45 and 80% chance to win nothing
In this case, 42% of participants chose option C while 58% chose option D.
Now, consider this problem:
Consider the following two stage game. In the
first stage, there is a 75% chance to end the game without winning
anything, and a 25% chance to move into the second stage. If you
reach the second stage you have a choice between:
- E. a sure win of $30
- F. 80% chance to win $45 and 20% chance to win nothing
Your choice must be made before the outcome of the first stage is
known.
This time,74% of participants chose option E while only 26% chose option F.
In fact, the actual probability of winning money in option E (25% x 100% = 25%) and option F (25% x 80% = 20%) is the same as the probability of winning money in option C (25%) and option D (20%) respectively. In the second problem, since individuals have no choice on options in the first stage, individuals tend to discard the first option when evaluating the overall probability of winning money, but just to consider the options in the second stage that individuals have a choice on. This is also known as cancellation, meaning that possible options are yielding to the same outcome thus ignoring decision process in that stage.
External links
- Kahneman, DanielDaniel KahnemanDaniel Kahneman is an Israeli-American psychologist and Nobel laureate. He is notable for his work on the psychology of judgment and decision-making, behavioral economics and hedonic psychology....
and Tversky, AmosAmos TverskyAmos Nathan Tversky, was a cognitive and mathematical psychologist, a pioneer of cognitive science, a longtime collaborator of Daniel Kahneman, and a key figure in the discovery of systematic human cognitive bias and handling of risk. Much of his early work concerned the foundations of measurement...
. The Framing of Decisions and the Psychology of Choice Science 211 (1981), pp. 4538, copyright 1981 by the American Association for the Advancement of Science. http://www.cs.umu.se/kurser/TDBC12/HT99/Tversky.html