Question
What are your intuitions about these cases? Is the difference between a 0% and 5% risk larger than the difference between 5% and 10%? Is
What are your intuitions about these cases? Is the difference between a 0% and 5% risk larger than the difference between 5% and 10%? Is the difference between 90% and 93% smaller than the difference between 97% and 100%? Find a scenario similar to those described (ie taking a test, wearing a mask, taking an online course as a few examples...).Demonstration 12.9 Probabilities Versus Decision Weights Does utility theory describe how ordinary people make decisionsin the marketplace or in their lives? According to the theory, people should be influenced by probabilities. It's easy to show, however, that people don't respect the laws of probability in their decision making. Among other points, people overinterpret the difference between a 0% probability and, say, a 5% probability because they perceive a huge difference between "can't happen" and "might happen." Kahneman and Tversky refer to this as the "possibility effect." (In other words, people are keenly sensitive to whether something is a possibility or not.) Likewise, people overinterpret the difference between 100% and, say, 95%because here they perceive a huge difference between "will happen" and "might happen." This is the certainty effect. These effects show up in many settings. People are willing to pay for lottery tickets because they're impressed by the notion that they might win (the possibility effect). People will likewise pay a lot to increase their chances of a gain from 99% to 100%because of the high value they put on certainty. To see these effects in action, consider the following pair of questions: A friend of yours is going in for surgery. You've heard that the surgery has risks attached to it, so you do a bit of research on the Internet and discover that for people with your friend's profile, the risk is actually 0%. But then you find a more recent bit of news, and you realize that the risk is actually 5%. How much would this increase your level of anxiety? A different friend of yours is going in for surgery. You've heard that the surgery has risks attached to it, so you do a bit of research on the Internet and discover that for people with your friend's profile, the risk is actually 5%. But then you find a more recent bit of news, and you realize that the risk is actually 10%. How much would this increase your level of anxiety? Alternatively, imagine two scenarios: You're the director of a small company, and you've heard that an illness is likely to affect the city in which your company is located. You decide to vaccinate all of your employees to protect them against the illness. You do a bit of research and discover that you can buy enough doses of Vaccine A for $30,000. But Vaccine A is only 90% effective; Vaccine B is 93% effective. How much more would you be willing to pay for Vaccine B? Again, you're the director of a small company, and (as before) you've heard that an illness is likely to affect your city. You decide to vaccinate all of your employees to protect them against the illness. You do a bit of research and discover that you can buy enough doses of Vaccine X for $30,000. But Vaccine X is only 97% effective; Vaccine Y is 100% effective. How much more would you be willing to pay for Vaccine Y? What are your intuitions about these cases? Is the difference between a 0% and 5% risk larger than the difference between 5% and 10%? Is the difference between 90% and 93% smaller than the difference between 97% and 100%? For more on this topic, see Kahneman, D. (2011). Thinking, fast and slow. New York, NY: Farrar, Straus and Giroux
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