Decision and behavioural research from Peter Wakker
I attended a very interesting seminar this evening about how people evaluate (and reveal their estimates of) probabilities under conditions of ambiguity. This idea of ambiguity (or Knightian uncertainty) is very present in the economics conversation in recent months - the idea that we can't evaluate the probability of an event if we don't have reliable models, or any data to measure its past frequency. In some cases people thought their models were reliable, but they turned out not to be. In others, the key decisions were made by people without any models, relying on intuitive estimates based on the recent past. Some of the intriguing results that Peter Wakker presented today show that people respond in somewhat predictable ways to this situation. First, people tend to act as if the probability of an event is a bit closer to 50% than its real value. So, if the real probability is 75% (and even if we know that it is 75%) we will behave as if it is 69%, or 61%. The amount of bia...