Previous research documents two pairs of inconsistent reactions to rare events: 1) Studies of probability judgment reveal conservatism which implies overestimation of rare events, and overconfidence which implies underestimation of rare events. 2) Studies of choice behavior reveal overweighting...

This paper revisits a recent study by Posen and Levinthal (2012) on the exploration/exploitation tradeoff for a multi-armed bandit problem, where the reward probabilities undergo random shocks. We show that their analysis suffers two shortcomings: it assumes that learning is based on stale...

Previous research suggests that human reaction to risky opportunities reflects two contradicting biases: Òloss aversion", and Òlimited level of reasoning" that leads to overconfidence. Rejection of attractive gambles is explained by loss aversion, while counterproductive risk seeking is...