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PEOPLE DON’T CARE
ABOUT PROBABILITY
WHEN THEY CHOOSE
PARADOXES IN DECISION MAKING
B
y the 1960s mainstream
economics had settled on
a set of principles for
understanding people’s decision
making. Human beings are rational,
calculating individuals. When
confronted with different options
and an uncertain future, they
assign a probability to each
possible future outcome and make
their choice accordingly. They seek
to boost their “expected utility”
(the amount of satisfaction theyexpect) based on their beliefs about
the probability of different future
outcomes, opting for the choice
with the highest expected utility.
But this set of ideas was
challenged by results suggesting
that, even under experimental
conditions, humans do not behave
according to the theory. One of the
most important of these challenges
was posed in the Ellsberg paradox,
popularized by US economist
Daniel Ellsberg in 1961, butIN CONTEXT
FOCUS
Decision makingKEY THINKER
Daniel Ellsberg (1931– )BEFORE
1921 US economist
Frank Knight explains that
“risk” can be quantified and
“uncertainty” cannot.1954 In The Foundations of
Statistics, US mathematician
L. J. Savage tries to show how
probabilities can be assigned
to unknown future events.AFTER
From 1970s Behavioral
economics uses experiments
to study behavior under
conditions of uncertainty.1989 Michael Smithson
proposes a “taxonomy” of risk.2007 Nassim Nicholas
Taleb’s The Black Swan
discusses the problem of rare,
unforeseen events.Economists
often assume
that people are
rational decision
makers... People
don’t care
about
probability
when they
choose.People shy
away from these
ambiguities and
make decisions
by different
rules.But some
possible futures
have a completely
unknown
probability.... and that
when they face
uncertainty, people
will decide on
the probabilities
of each likely
outcome.