Certainty effect

Certainty effect refers to the psychological effect resulted from the reduction of probability from certainty to probable (Kahneman & Tversky, 1986)^[1]. It is an idea introduced in prospect theory.

Normally a reduction in probability of winning a reward (e.g. reduce from 80% to 20% of chance of winning a reward) creates psychological effect such as displeasure to individuals, which leads to the perception of loss from the original probability thus favoring a risk-aversion decision. However, the same reduction results in larger psychological effect when it is done from certainty than from uncertainty.

Example

Kahneman and Tversky (1986) illustrated the pseudocertainty effect by the following examples.

First, consider this example:

Which of the following options do you prefer?

• A. a sure gain of $30
• B. 80% chance to win $45 and 20% chance to win nothing

In this case, 78% of participants chose option A while only 22% chose option B. This is the typical risk-aversion phenomenon in prospect theory and framing effect.

Now, consider this problem:

Which of the following options do you prefer?

• C. 25% chance to win $30 and 75% chance to win nothing
• D. 20% chance to win $45 and 80% chance to win nothing

In this case, 42% of participants chose option C while 58% chose option D.

Compare to the first problem, both options winning probabilities were quarter of the original (A->C:100%/4=25%, B->D:80%/4=20%) . However, individuals show a greater preference in the second option in the second problem while expected utility remained the same.

See also

• Pseudocertainty effect
• Framing effect
• Prospect theory

External links

• Kahneman, Daniel and Tversky, Amos. The Framing of Decisions and the Psychology of Choice Science 211 (1981), pp. 4538, copyright 1981 by the American Association for the Advancement of Science. [2]

Reference

1. ^ [1], Tversky, A., & Kahneman, D. (1986). Rational Choice and the Framing of Decisions. The Journal of Business, 59, S251-S278.