Using tools gleaned from behavioral economics to help people make better decisions is all the rage these days. This work is built on the theory that behavioral biases – like the sunk cost fallacy, status quo bias, or the tendency to give outsize attention to very unlikely events – are cognitive mistakes that are holding us back. If we can somehow suppress these biases, people will make better choices about saving for retirement, purchasing insurance, and avoiding self-destructive behaviors like smoking or drugs.
But how confident are we that these behavioral biases are a bad thing? Eons of natural selection have failed to weed them out of the human gene pool, so they might serve some sort of purpose after all. A new paper appearing in the American Economic Review argues that at least one apparent behavioral “mistake” could make a surprising amount of evolutionary sense.
In Perceiving Prospects Properly (PDF), authors Jakub Steiner and Colin Stewart focus on the tendency of people to overweight small probabilities in their mind, making long-odds gambles more appealing and making small risks of catastrophic loss seem more scary. A famous early study of behavioral biases by Daniel Kahneman and Amos Tversky showed that test subjects did this when asked about various hypothetical lotteries. Subsequent evidence from various studies in different settings around the world show that people routinely inflate small probabilities when answering these types of questions.
More here – American Economics Association
