The IdeaPeople take more risks when they judge from experience rather than from other sources of information.
Ralph Hertwig, Greg Barron, Elke Weber and Ido Erev studied how people make decisions of two kinds: when they do or don’t have information that describes the risks involved. When they do have such information, it’s a decision from “description.” When they don’t, it’s a decision from “experience.”
The study asked 100 students at a technical university to make six decisions. Half got a description of the risks, and the other half did not. For each decision, before making your final choice you could try out different answers to see what result each gave. Then you moved on to the next decision. So both groups were able to learn from experience, but only one had description too.
The results showed that the pure experience group made dramatically riskier choices than the description group and the description group made more accurate choices; the experience group underweighted the risks. Also, the experience group did not do more sampling beforehand to compensate for the lack of description; sampling came out about the same for both groups.
Professionals of all kinds
This research reveals a key insight for decision making of all kinds. It’s basic human nature to discount risks when you decide from experience; in fact, animal studies show the same tendency. There is a cost in time to searching out more information before making a decision, but there is a risk factor too you will tend to make a less risky decision.
Managers and team leaders
The results of this research shed new light on how your team makes decisions. Different people will have different tendencies to seek more information or to decide from experience. It’s important to recognize that these different tendencies carry different risk factors. You don’t want to suppress risky decisions; you just want to make sure you know their source.
Professor Weber works at the intersection of psychology and economics. She is an expert on behavioral models of judgment and decision making under risk and uncertainty. Recently she has been investigating psychologically appropriate ways to measure and model individual and cultural differences in risk taking, specifically in risky financial situations and environmental decision making and policy. Weber is past president of the Society for...
Read the Research
Ralph Hertwig, Greg Barron, Elke Weber, Ido Erev
"Decisions from Experience and the Effect of Rare Events in Risky Choice"