The role of information sampling in risky choice

Life is a gamble. True to the cliche, we can rarely be certain of the consequences of our everyday actions. Presumably because of life's lack of certainty, much of the psychological research on decision making under risk is devoted to the study of choices between monetary garnbles or prospects. With few exceptions, the outcomes and outcome probabilities of such garnbles are explicitly described to the decision maker before he or she makes a choice. How often are life's gambles described in this way? When we decide whether to back up our computer's hard drive, cross a busy street, or go out on a date, we often do not know the cornplete range of the possible outcomes, let alone their probabilities. Yet we routinely rnake such decisions, usually without difficulty. We do so by drawing upon our experience with the relevant prospects, for instance, by recalling the outcornes of previous choices. Though effective, sampling from experience brings with it the potential to generate a skewed picture of the risky prospects we face. As we will argue here, this potential is greatest when the outcome probabilities are small and relatively few outcomes have been experienced by the decision maker. Under these circumstances, decisions derived from experience are likely tobe systematically different from those rnade in full knowledge of the outcomes and outcome probabilities. In this chapter, we investigate risky decisions made on the basis of sampled experience. Three findings deserve emphasis. First, when outcome information is sampled, the likelihood of rare events is often underestimated. Second, when the sampling process is sequential, more recent outcomes tend to receive more weight than do earlier outcomes. Third, in decisions from experience, the option that appears best in light of the experienced sample tends to be the one selected. To account for these effects, we propose a learning mechanism that models how people update their estimates of a risky prospect's value in light of newly sampled outcomes.