Many people will be far too quick to perceive causal regularity in random sequences of events. The tendency to attribute causal significance to chance fluctuations also leads investors to overreact to any information to which their attention is drawn. The same psychological quirk causes investors to perceive trends where none exist, and to take action on these erroneous impressions. Now we present some evidence about the way in which people use probability information in evaluating risky prospects, assign values to outcomes, and combine values and probabilities into preferences. The theory of rational choice tells us that uncertain prospects should be evaluated by a weighted average of the utilities of possible outcomes, each weighted by its probability.
People deviate from the principle of weighting by probability in highly systematic ways.
This rule explains much of what we know about decision-making under risk and uncertainty. In general, the non-proportional weighting of probabilities makes people like both lottery tickets and insurance policies. People Value Changes, not States What matters to a perfectly rational decision-maker is where he or she gets to in the end, not the gains or losses along the way. There are several important morals to be drawn from this story. We admit, however, narrow framing is easier, more natural, and much more common.