Consumer Choices Under Small Probabilities: Overweighting or Underweighting?

Abstract

This article provides a theoretical account and identifies boundary conditions for the common beliefs about the “overweighting of small probabilities”. Based on four studies, our results suggest that the weighting of probabilities is context-dependent. When the contrast in value is reduced or not presented in a decision problem, small probabilities are less likely to be overweighted. In addition, as the associated payoffs increase, the weights on small probabilities tend to diminish or even to be “underweighted”. However, there is an “interpersonal difference” in the weighting of probabilities which reflects the particular circumstances of individuals, including their wealth status. Some implications of small probabilities for marketing practices are also investigated and discussed.