Beware of black swans: Taking stock of the description– experience gap in decision under uncertainty

Uncertainty pervades most aspects of life. From selecting a new technology to choosing a career, decision makers rarely know in advance the exact outcomes of their decisions. Whereas the consequences of decisions in standard decision theory are explicitly described (the decision from description (DFD) paradigm), the consequences of decisions in the recent decision from experience (DFE) paradigm are learned from Mark Lett (2014) 25:269–280 DOI 10.1007/s11002-014-9316-z A. de Palma (*) Economics and Management Department, Ecole Normale Supérieure de Cachan, 61 Av. du Président Wilson, 94235 Cachan Cedex, France e-mail: [email protected] M. Abdellaoui GREGHEC, HEC-Paris, 1 rue de la Libération, 78351 Jouy-en-Josas, France G. Attanasi BETA, Université de Strasbourg, 61 Av. de la Forêt Noire, 67085 Strasbourg Cedex, France M. Ben-Akiva Department of Civil and Environmental Engineering, Massachusetts Institute of Technology, 77 Massachusetts Av., Cambridge, MA 02139, USA I. Erev William Davidson Faculty of Industrial Engineering and Management, Technion, Israel Institute of Technology, Technion City, Haifa 32000, Israel H. Fehr-Duda Chair of Economics, Swiss Federal Institute of Technology Zurich, ClausiusStrasse 37, 8092 Zurich, Switzerland D. Fok : P. P. Wakker Erasmus School of Economics, Erasmus University Rotterdam, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands C. R. Fox Department of Psychology, UCLA Anderson School of Management, 110 Westwood Plaza #D511, Los Angeles, CA, USA experience. In DFD, decision makers typically overrespond to rare events. That is, rare events have more impact on decisions than their objective probabilities warrant (overweighting). In DFE, decision makers typically exhibit the opposite pattern, underresponding to rare events. That is, rare events may have less impact on decisions than their objective probabilities warrant (underweighting). In extreme cases, rare events are completely neglected, a pattern known as the “Black Swan effect.” This contrast between DFD and DFE is known as a description–experience gap. In this paper, we discuss several tentative interpretations arising from our interdisciplinary examination of this gap. First, while a source of underweighting of rare events in DFE may be sampling error, we observe that a robust description–experience gap remains when these factors are not at play. Second, the residual description–experience gap is not only about experience per se but also about the way in which information concerning the probability distribution over the outcomes is learned in DFE. Econometric error theories may reveal that different assumed error structures in DFD and DFE also contribute to the gap.