730 publications from this institution
Axiomatic theories of choice introduce preference as a primitive relation, which is interpreted through specific empirical procedures such as choice or pricing. Models of rational choice assume a principle of procedure invariance, which requires strategically equivalent methods of elicitation to yield the same preference order. Thus, if the decision maker prefers A to B, then the cash equivalent, or minimum selling price, of A should exceed that of B. However, there is a substantial body of evidence showing that the price ordering of risky prospects is systematically different from the choice ordering, contrary to standard theories of choice.
Financial advisors are continually faced with the challenge of evaluating the quality of financial investments. Previous research has indicated that even among researchers of financial markets, diverse views exist about the meaning of risk and its relationship to returns. A survey study of 265 financial advisors and planners was undertaken to develop a deeper understanding of how financial judgment is related to other characteristics of asset classes, particularly perceptions of their risks, returns and return/risk relationships. Risk-related dimensions included volatility, investment time horizon, performance predictability, knowledge level and overall perceived risk. Return-related dimensions included overall perceived return, return/risk ratio and one & ten year rate of return. The results indicated a strong correlation between perceived risk and return, consistent with finance theory. However, a more complex, curvilinear picture emerged with respect to the relationship between perceived risk and perceived return/risk. The findings suggest that among financial advisors, risk can take on a variety of meanings when the concept is applied to evaluating different asset classes.
Fault trees represent problem situations by organizing "things that could go wrong" into functional categories. Such trees are essential devices for analyzing and evaluating the fallibility of complex systems. They follow many different formats, sometimes by design, other times inadvertently. The present study examined the effects of varying three aspects of fault tree structure on the evaluation of a fault tree for the event "a car fails to start." The fault trees studied had four to eight branches, including "battery charge insufficient," "fuel system defective," and "all other problems." Major results were as follows: (a) People were quite insensitive to what had been left out of a fault tree, (b) increasing the amount of detail for the tree as a whole or just for some of its branches produced small effects on perceptions, and (c) the perceived importance of a particular branch was increased by presenting it in pieces (i.e., as two separate component branches). Insensitivity to omissions was found with both college student subjects and experienced garage mechanics. Aside from their relevance for the study of problem solving, such results may have important implications for (a) how best to inform the public about technological risks and to involve it in policy decisions and (b) how experts should perform fault tree analyses of the risks from technological systems.
We employed simple gambles to investigate information processing in relation to the compatibility effect. Subjects should be more likely to engage in a deliberative thinking strategy when completing a pricing task rather than a rating task. We used eye-tracking methodology to measure information acquisition and processing in order to test the above hypothesis as well as to show that losses and alternatives with uncertain outcomes are more likely than gains and alternatives with sure outcomes to be processed through a deliberative thinking process. Results showed that pupil dilations, fixation duration and number of fixations increased when subjects evaluated the gambles with a pricing task. Additionally, the number of fixations increased as the gamble outcome became increasingly negative and when the outcome was uncertain (vs. sure). Fixations were also predictive of subjects’ final evaluations of the gambles. We discuss our results in light of the cognitive processes underlying different response modes in economic preferences.
Risk management has become increasingly politicized and contentious. Polarized views, controversy, and overt conflict have become pervasive. Risk‐perception research has recently begun to provide a new perspective on this problem. Distrust in risk analysis and risk management plays a central role in this perspective. According to this view, the conflicts and controversies surrounding risk management are not due to public ignorance or irrationality but, instead, are seen as a side effect of our remarkable form of participatory democracy, amplified by powerful technological and social changes that systematically destroy trust. Recognizing the importance of trust and understanding the “dynamics of the system” that destroys trust has vast implications for how we approach risk management in the future.
No abstract is provided for this article.
Risk management has become increasingly politicized and contentious. Polarized views, controversy, and conflict have become pervasive. Research has begun to provide a new perspective on this problem by demonstrating the complexity of the concept "risk" and the inadequacies of the traditional view of risk assessment as a purely scientific enterprise. This paper argues that danger is real, but risk is socially constructed. Risk assessment is inherently subjective and represents a blending of science and judgment with important psychological, social, cultural, and political factors. In addition, our social and democratic institutions, remarkable as they are in many respects, breed distrust in the risk arena. Whoever controls the definition of risk controls the rational solution to the problem at hand. If risk is defined one way, then one option will rise to the top as the most cost-effective or the safest or the best. If it is defined another way, perhaps incorporating qualitative characteristics and other contextual factors, one will likely get a different ordering of action solutions. Defining risk is thus an exercise in power. Scientific literacy and public education are important, but they are not central to risk controversies. The public is not irrational. Their judgments about risk are influenced by emotion and affect in a way that is both simple and sophisticated. The same holds true for scientists. Public views are also influenced by worldviews, ideologies, and values; so are scientists' views, particularly when they are working at the limits of their expertise. The limitations of risk science, the importance and difficulty of maintaining trust, and the complex, sociopolitical nature of risk point to the need for a new approach--one that focuses upon introducing more public participation into both risk assessment and risk decision making in order to make the decision process more democratic, improve the relevance and quality of technical analysis, and increase the legitimacy and public acceptance of the resulting decisions.
Cognitive and social psychologists have uncovered a number of features of ordinary thinking about risk. Giving particular attention to the work of Paul Slovic, this review-essay explores how an understanding of human cognition bears on law and public policy. The basic conclusion is that people make many mistakes in thinking about risk and that sensible policies, and sensible law, will follow statistical evidence, not ordinary people. The discussion explores the use of heuristics, the effects of cascades, the role of emotions, demographic differences, the role of trust, and the possibility that ordinary people have a special “rationality” distinct from that of experts. Because people are prone to error, what matters, most of the time, is actual risk, not perceived risk. In the late 1980s, the Environmental Protection Agency embarked on an ambitious project, designed to compare the views of “the public” and “EPA experts” on the seriousness of environmental problems.1 The project revealed some striking anomalies, for the two groups sharply diverged on some crucial issues. With respect to health risks, the public’s top five concerns included radioactive waste, radiation from nuclear accidents, industrial pollution of waterways, and hazardous waste sites.2 But in the view of EPA experts, not one of these problems deserved a “high” level of concern. Two of the public’s top concerns (nuclear accident radiation and radioactive waste) were not even * Karl N. Llewellyn Distinguished Service Professor, Law School and Department of Political Science, University of Chicago. I am grateful to Daniel Kahneman, Martha Nussbaum, and Richard A. Posner for very helpful comments on a previous draft. 1 Counting on Science At EPA, 249 Science 616 (1990).
The present report describes an expanded replication of the previous experiments in a nonlaboratory real-play setting unique to the experimental literature on decision processes - a casino in downtown Las Vegas.
This paper describes a psychological phenomenon called psychic numbing that devalues lives when many are at stake and thus enables political leaders to neglect mass suffering, in violation of our professed humanitarian values. The authors argue for the need to use tools such as decision analysis to overcome this moral insensitivity and provide a more thoughtful and consistent framework within which to assess the difficult trade-offs posed by decisions involving mass atrocities.
Perhaps the earliest studies of risk perception with regard to natural hazards were conducted by geographer Gilbert White (1945, 1964) and his students (e.g. Burton and Kates 1964). Later, in 1974, this author joined with White and economist Howard Kunreuther to review this early work in the context of new research in cognitive psychology (Kahneman and Tversky 1972; Tversky and Kahneman 1971, 1973) describing the idiosyncratic ways human minds think about probability, uncertainty and risk (Slovic et al. 1974). This research illustrated the workings of Herbert Simon’s theory of “bounded rationality” (1959), which asserts that human cognitive limitations force decision makers to construct a simplified model of the world in order to deal with it.
No abstract is provided for this article.
Abstract : Previous studies have concluded that when making inferences, people tend to ignore various kinds of normatively important information (e.g., samples sizes, base rates). The basis for such conclusions has typically been the similarity of responses across groups presented with widely discrepant values of that information. The experiments reported here convert earlier, between- subject designs to within-subject formats. Each subject made several judgments as one kind of information varied across a range of possible values. When information regarding base rates and predictive validity was varied, roughly two-thirds of the subjects changed their judgments in directions dictated by normative considerations. There were no appreciable shifts in response to changes in sample size. Apparently, people know (or can figure out) sonewhat more than what they have been given credit for in the past. (Author)
