Certainty effect
Encyclopedia
Certainty effect refers to the psychological effect resulted from the reduction of probability from certainty to probable (Kahneman & Tversky, 1986). It is an idea introduced in prospect theory
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:...

.

Normally a reduction in probability of winning a reward (e.g. reduce from 80% to 20% of chance of winning a reward) creates psychological effect such as displeasure to individuals, which leads to the perception of loss from the original probability thus favoring a risk-aversion decision. However, the same reduction results in larger psychological effect when it is done from certainty than from uncertainty.

Example

Kahneman and Tversky (1986) illustrated the pseudocertainty effect by the following examples.

First, consider this example:

Which of the following options do you prefer?
  • A. a sure gain of $30
  • B. 80% chance to win $45 and 20% chance to win nothing


In this case, 78% of participants chose option A while only 22% chose option B. This is the typical risk-aversion phenomenon in prospect theory
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:...

 and framing effect.

Now, 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.

Compare to the first problem, both options winning probabilities were quarter of the original (A->C:100%/4=25%, B->D:80%/4=20%) . However, individuals show a greater preference in the second option in the second problem while expected utility remained the same.

External links

  • Kahneman, Daniel
    Daniel Kahneman
    Daniel 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, Amos
    Amos Tversky
    Amos 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
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