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Normally a reduction in the probability of winning a reward (e.g., a reduction from 80% to 20% in the chance of winning a reward) creates a psychological effect such as displeasure to individuals, which leads to the perception of loss from the original probability thus favoring a risk-averse decision.
In most real-life situations, the probabilities associated with each outcome are not specified by the situation, but have to be subjectively estimated by the decision-maker. [5] The subjective value of a gamble is again a weighted average, but now it is the subjective value of each outcome that is weighted by its probability. [1]
In probability theory, an outcome is a possible result of an experiment or trial. [1] Each possible outcome of a particular experiment is unique, and different outcomes are mutually exclusive (only one outcome will occur on each trial of the experiment). All of the possible outcomes of an experiment form the elements of a sample space. [2]
The theory continues with a second concept, based on the observation that people attribute excessive weight to events with low probabilities and insufficient weight to events with high probability. For example, individuals may unconsciously treat an outcome with a probability of 99% as if its probability were 95%, and an outcome with ...
For example, if we see a person who is dressed in eccentric clothes and reading a poetry book, we might be more likely to think that they are a poet than an accountant. This is because the person's appearance and behavior are more representative of the stereotype of a poet than an accountant.
In another example of near-total neglect of probability, Rottenstreich and Hsee (2001) found that the typical subject was willing to pay $10 to avoid a 99% chance of a painful electric shock, and $7 to avoid a 1% chance of the same shock. They suggest that probability is more likely to be neglected when the outcomes are emotion-arousing.
Classical definition: Initially the probability of an event to occur was defined as the number of cases favorable for the event, over the number of total outcomes possible in an equiprobable sample space: see Classical definition of probability. For example, if the event is "occurrence of an even number when a dice is rolled", the probability ...
The gambler's fallacy, also known as the Monte Carlo fallacy or the fallacy of the maturity of chances, is the belief that, if an event (whose occurrences are independent and identically distributed) has occurred less frequently than expected, it is more likely to happen again in the future (or vice versa).