Certainty effect

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Main article: Prospect theory

Certainty effect refers to the psychological effect resulted from the reduction of probability from certainty to probable (Tversky & Kahneman 1986). 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[edit]

Tversky & Kahneman (1986) illustrated the certainty 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 demonstrates the typical risk-aversion phenomenon in prospect theory and framing effect because the expected value of option B ($45x0.8=$36) exceeds that of A by 20%.

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.

As before, the expected value of the first option ($30x0.25=$7.50) was 20% lower than that of option B ($45x.0.2=9) however, when neither option was certain, risk-taking increased.

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