Overweighting of Small Probabilities

Abstract

AbstractThe psychological impact of a low probability or rare event is typically large relative to that of the event's actuarial likelihood. Thisoverweightingfollows a two‐stage process. First, rare events tend to be overestimated because of the availability heuristic, anchoring on the “ignorance prior,” and coarse chance categories. Second, when making decisions, low probability events are overweighted because of the “possibility effect”—decision makers are more sensitive to probability changes close to 0 than to probability changes away from 0.