On safety, protection, and underweighting of rare events

Abstract

The current research clarifies the conditions under which safety enhancing interventions backfire. A laboratory experiment compares three repeated choice conditions. In Condition Baseline, the participants were asked to choose between a safe prospect, and a counterproductive risky prospect that led to a gain, moderate loss, or a large but rare loss. The other conditions simulate safety interventions that modify Condition Baseline by protecting the participants from one of the two losses, while keeping the risky choice equally counterproductive. Results show that protection against the rare loss was effective, but the protection against the moderate loss impaired participants' earnings. The results are captured with a simple model that assumes reliance on small samples of past experiences. Implications are discussed.