Why are people attracted to 50:50 probabilities?

BARACK OBAMA’S intelligence officers told him, variously, that there was a probability of between 30% and 95% that Osama bin Laden was in the Abbottabad compound in Pakistan in April 2011. The president was having none of it. “This is 50:50,” he said. “Look guys, this is a flip of the coin.” That bin Laden was found and killed does not reveal whose estimate of the odds was best. But new research argues that Mr Obama’s instinct—to treat probabilities as evenly split when they are uncertain—is widespread.

In a working paper Benjamin Enke and Thomas Graeber, both of Harvard University, argue that the bias towards 50:50 has shown up in many contexts. One is decision-making under (known) risks, such as gambling at a (fair) slot machine. Economists have long realised that people are more sensitive to changes in probabilities, the nearer they are to the boundaries of 0% and 100%. For example, the chance of a big win of, say, $1m rising from 0% to 1% seems much more significant than the chance of the same win rising from 20% to 21%. At the extremes, there is a tendency to compress odds towards evens.

Mr Obama did not face known odds, but ambiguous ones. Other researchers have found that such uncertainty has a similar compression effect: it can make people act as if they are facing known odds that are closer to 50:50 than might...

via The Economist: Finance and economics Business Feeds

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