Are Black Swans Really Ignored?

This paper investigates the often-discussed over – and under – weighting of rare and extreme events – so called “black swans” – in decisions from experience (DFE).
We first resolve the problem of lack of control over experienced probabilities by adjusting the common sampling paradigm of DFE. Our experimental design also controls for utility and uncertainty of experienced probabilities (ambiguity). This enables us to exactly identify the deviations from Expected Utility due to over – or under – weighting of probabilities under risk.
Our results confirm the well-known gap between DFE and traditional decisions from description (DFD) but do not provide evidence for underweighting of small probabilities in DFE. We found that experience leads to less pronounced overweighting of small probabilities, and less pronounced underweighting of large probabilities. Thus, our findings suggest a clear de-biasing effect of sampling experience: it attenuates – rather than reverses – the commonly found inverse S-shaped probability weighting in DFD.