Skip to main content
About HEC About HEC Faculty & Research Faculty & Research Master’s programs Master’s programs MBA Programs MBA Programs PhD Program PhD Program Executive Education Executive Education Summer School Summer School HEC Online HEC Online About HEC Overview Overview Who
We Are Who
We Are
Egalité des chances Egalité des chances Career
Center Career
International International Campus
Life Campus
Sustainability Sustainability Diversity
& Inclusion Diversity
& Inclusion
Stories Stories The HEC
Foundation The HEC
Coronavirus Coronavirus
Faculty & Research Overview Overview Faculty Directory Faculty Directory Departments Departments Centers Centers Chairs Chairs Knowledge Knowledge Master’s programs Master in
Management Master in
MSc International
Finance MSc International
Masters Specialized
programs X-HEC
programs Dual-Degree
students Visiting
Certificates Certificates Student
Life Student
Stories Student
MBA Programs MBA MBA Executive MBA Executive MBA TRIUM EMBA TRIUM EMBA PhD Program Overview Overview HEC Difference HEC Difference Program details Program details Research areas Research areas HEC Community HEC Community Placement Placement Job Market Job Market Admissions Admissions Financing Financing Executive Education Executive Masters Executive Masters Executive Certificates Executive Certificates Executive short programs Executive short programs Online Online Train your teams Train your teams Executive MBA Executive MBA Summer School Youth Programs Youth Programs Summer programs Summer programs HEC Online Overview Overview Degree Program Degree Program Executive certificates Executive certificates MOOCs MOOCs


Decision Making: Why Do We Underestimate Rare Events?

Decision Sciences
Published on:
Updated on:
April 14th, 2020

Uncertainty accompanies most individual and collective decisions. Given the unknown probabilities of available options, people make choices based on experience. But this way of functioning is biased: it leads to underestimating or ignoring rare events. This could explain, for example, why in 2005 only half of the colossal damage caused by the North Atlantic hurricanes in the U.S. was covered by insurance. Mohammed Abdellaoui and his co-authors set out to understand this surprising phenomenon.

The black swan theory was developed by the scholar Nassim Nicholas Taleb to describe unforeseeable, low probability events with significant consequences.

Subjective perception of "described" uncertainty

In the study, when decision makers chose based on descriptions of probability distributions, they tended to feel an increase in the probability of a somewhat likely loss (50% chance of losing €1000) less strongly than the same increase in the probability of a very unlikely loss (5% risk of losing €1000 euros) or an almost certain loss (95% risk of losing €1000). This behavior is also observed for gains. In the language of prospect theory, this means that decision makers facing uncertainty overestimate small probabilities and underestimate moderate and high probabilities. The study of Abdellaoui and his co-authors confirms this result.


How the information is communicated influences people’s perceptions.

Small samples and short memory

On the one hand, in an uncertain context, policy makers tend to trust conclusions based on very small samples: they need few examples to form an opinion. In addition, decision makers tend to draw lessons from more recent situations. For example, after a natural disaster, the inhabitants of the devastated region are often inclined to get insurance. But a significant portion of those who sign up in the immediate aftermath of the disaster will terminate their contract a few years later.

Presentation of the information

Finally, how the information is communicated influences people’s perceptions. A dull description using figures presented in terms of probabilities does not have the same impact on behavior as information gained through experience. Road safety campaigns focused on communicating accident rates have little success, whereas signs indicating that fatalities have occurred at that particular location have greater impact. Besides the fact that statistics have little capacity to provoke uncertainty, they are sometimes misunderstood and misused, even by the most sophisticated decision makers. In an uncertain context, these factors contribute to incoherent decisions that may have costly negative, economic consequences.


Focus - Application pour les marques
In the two contexts of uncertainty studied by Abdellaoui and his co-authors, individual behavior diverges from the predictions of the standard model of rationality, or the expected utility model. When individuals make decisions based on experience (rather than known options), their behavior also differs from predictions of prospect theory, causing them to underestimate or ignore rare events. Awareness of these phenomena and understanding their causes can help improve and modernize practices in risk management. In particular, it would be possible to take into account the fact that even well-trained decision makers are not immune to statistical or behavioral bias.


Abdellaoui and his co-authors compared the choices observed in laboratory experiments with those predicted by the prospect theory of Tversky and Kahneman (1992) in two contexts. In the first, individuals chose between alternatives described in the form of probability distributions (“described” risk). In the second, the decision maker discovered each alternative through a sampling process of unknown probability distribution (“experienced” risk).
Based on an interview with Mohammed Abdellaoui and the article “Experienced vs. Described Uncertainty: Do We Need Two Prospect Theory Specifications?” by Mohammed Abdellaoui, Olivier L’Haridon, and Corina Paraschiv published in Management Science in June 2011.

Related content on Decision Sciences

viral videos - AdobeStock_Editorial_Use_Only
Information Systems

When Videos Become Viral: Why, How and What Consequences?

By Haris Krijestorac

donald trump and doctors - vignette - PICRYL
Decision Sciences

How Believing in Unsubstantiated Claims Leads to Polarization

By Anne-Sophie Chaxel

black swan on a lake - vignette - Tatiana-AdobeStock

A New Theory in Economics Helps Predict Future Events

By Itzhak Gilboa

Fan Wang Profile
Fan Wang
Ph.D. Student
Itzhak Gilboa
Decision Sciences

Uncertainty Across Disciplines

By Brian Hill