NEUROSCIENCE
Envisioning the Improbable: Judgment and Strategy in Heavy-Tailed Contexts
ABSTRACT
This multi-method research seeks to increase understanding of the judgment, behavior, and performance of individuals and organizations in heavy-tailed contexts (e.g., networked markets that are constructed socially, through mechanisms like preferential attachment, including branded product sales or financial crises). Several studies demonstrate that individuals overwhelmingly fail to distinguish between heavy-tailed and thin–tailed contexts in the absence of experience, biasing their judgments towards thin-tailed distributional assumptions. As a consequence, individuals may underestimate the magnitude and frequency of possible rare events, and thus may undervalue investment opportunities or fail to insure against catastrophic loss. Intermediate statistical knowledge does not appear to attenuate the bias; however, the bias is moderated by contextual knowledge and attenuated through priming. The paper introduces and validates an incentive compatible method of elicitation of perceptions of the magnitude and frequency of possible errors surrounding expectations.