If money's less valuable in the two-bullet case of the Russian Roulette problem, then ought you pay more to remove a bullet when the gun has $\ge 2$ bullets?
The emboldened sentences feel contradictory. On one hand, "they are equal reductions in the probability of death". On the other, "money is less valuable in the two-bullet case since they are 1/6 likely to die anyway". What does this imply for the two-bullet case? Ouoght you pay more to remove a bullet, when the gun has $\ge 2$ bullets?
Two subject areas in behavioral economics, prospect theory and the availability heuristic, help explain the over-updating of virgin risks and the under-updating of experienced risks after an extreme event. A finding of prospect theory is that individuals place excess weight on zero. The Russian Roulette problem illustrates this phenomenon. Most people are willing to pay more to remove one bullet from a six-cylinder gun when it is the only bullet than if there are two (or more) bullets in the gun. That is, a reduction in risk from 1/6 to zero is worth more to them than a reduction from 2/6 to 1/6, even though they are equal reductions in the probability of death, and money is less valuable in the two-bullet case since they are 1/6 likely to die anyway. [Emphasis mine]
Similarly, people perceive an increase in risk from, say, 0 percent to 0.1 percent as large but an equal absolute increase from say 5 percent to 5.1 percent as small. This tendency leads to excessive updating for a previously virgin risk and to barely any updating for an experienced risk. Suppose, for example, an uncontemplated event occurs and fully rational updating would change the risk from 0.01 percent to 1 percent, a 100-fold increase. We conjecture that individuals might instead produce a posterior risk assessment of say 5 percent, a value 5 times too high.
Paul Slovic, The Irrational Economist (2010), pages 104-5.
0 answers
0 comment threads