The Availability Heuristic, Intuitive Cost-Benefit Analysis, and Climate Change

Because risks are on all sides of social situations, it is not possible to be “precautionary” in general. The availability heuristic ensures that some risks stand out as particularly salient, whatever their actual magnitude. Taken together with intuitive cost-benefit balancing, the availability heuristic helps to explain differences across groups, cultures, and even nations in the assessment of precautions to reduce the risks associated with climate change. There are complex links among availability, social processes for the spreading of information, and predispositions. If the United States is to take a stronger stand against climate change, it is likely to be a result of available incidents that seem to show that climate change produces serious and tangible harm

Resolution Preference and Project Choice

A manager who is concerned with outsider’s perceptions of himself or his firm will be sensitive to the timing of resolution of uncertainty about the firm’s projects. While a high ability manger tries to advance resolution of a likely-favorable outcome, a low manager may defer resolution, hoping to be mistaken for a high ability manager forced into late resolution by external circumstances. This suggests that managers who demand protection from takeovers to focus on long-term goals are frequently incompetent.In contrast with previous models, we show that resolution preference can cause a bias toward late cash flows (“hyperopia”) as well as early cash flows (“myopia”). A high ability manager may accelerate resolution through R&D, even if this reduces net present value. Nevertheless, since early resolution is preferred by high quality mangers or firms, higher R&D can be good news for investors. Thus, reputational concerns will sometimes cause excessive innovative expenditures. Resolution-advancing decisions are more favored when they are visible to outsiders. The model provides some new empirical predictions, and offers an explanation for some evidence that is inconsistent with previous models of managerial time horizons. It also suggests that in general there may be a bias toward direct product development over basic research activity. Perhaps more importantly, there is a perverse sorting of high ability managers to conventiona

Resolution Preference and Project Choice

A manager who is concerned with outsider’s perceptions of himself or his firm will be sensitive to the timing of resolution of uncertainty about the firm’s projects. While a high ability manger tries to advance resolution of a likely-favorable outcome, a low manager may defer resolution, hoping to be mistaken for a high ability manager forced into late resolution by external circumstances. This suggests that managers who demand protection from takeovers to focus on long-term goals are frequently incompetent.In contrast with previous models, we show that resolution preference can cause a bias toward late cash flows (“hyperopia”) as well as early cash flows (“myopia”). A high ability manager may accelerate resolution through R&D, even if this reduces net present value. Nevertheless, since early resolution is preferred by high quality mangers or firms, higher R&D can be good news for investors. Thus, reputational concerns will sometimes cause excessive innovative expenditures. Resolution-advancing decisions are more favored when they are visible to outsiders. The model provides some new empirical predictions, and offers an explanation for some evidence that is inconsistent with previous models of managerial time horizons. It also suggests that in general there may be a bias toward direct product development over basic research activity. Perhaps more importantly, there is a perverse sorting of high ability managers to conventiona

Investigating Risky Choices Over Losses Using Experimental Data

We conduct a battery of experiments in which agents make choices from several pairs of all-loss-lotteries. Using these choices, we estimate a representation of individual preferences over lotteries. We find statistically and economically significant departures from expected utility maximization for many subjects. We also estimate a preference representation based on summary statistics for behavior in the population of subjects, and again find departures from expected utility maximization. Our results suggest that public policies based on an expected utility approach could significantly underestimate preferences and willingness to pay for risk reduction. Copyright Springer Science + Business Media, Inc. 2005risky decision-making, loss domain, experiments,