Simultaneous Underweighting and Overestimation of Rare Events: Unpacking a Paradox

We investigated previous findings suggesting a paradoxical inconsistency of people’s beliefs and choices: When making decisions under uncertainty, people seem to both overestimate the probability of rare events in their judgments and underweight the probability of the same rare events in their choices. In our reexamination, we found that people’s beliefs are consistent with their decisions, but they do not necessarily correspond with the environment. Both overestimation and underweighting of the rare event seemed to result from (most, but not all) participants’ mistaken belief that they can infer and exploit sequential patterns in a static environment. In addition, we found that such inaccurate representations can be improved through incentives. Finally, detailed analysis suggested a mixture of individual-level response patterns, which can give rise to an erroneous interpretation of group-level patterns. Our results offer an explanation for why beliefs and decisions can appear contradictory and present challenges to some current models of decisions under uncertainty.