{{Short description|Psychological effect}} {{one source|date=December 2010}} {{main|Prospect theory}} The '''certainty effect''' is the psychological effect resulting from the reduction of probability from certain to probable {{harv|Tversky|Kahneman|1986}}. It is an idea introduced in prospect theory.
Normally a reduction in the probability of winning a reward (e.g., a reduction from 80% to 20% in the chance of winning a reward) creates a psychological effect such as displeasure to individuals, which leads to the perception of loss from the original probability thus favoring a risk-averse decision. However, the same reduction results in a larger psychological effect when it is done from certainty than from uncertainty.
==Example== {{harvtxt|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 D ($45x0.2=9) however, when neither option was certain, risk-taking increased.
==See also== * Pseudocertainty effect * Framing effect * Prospect theory * Allais paradox
==Bibliography== {{Reflist}}
===Papers=== *{{Cite journal | doi = 10.1126/science.7455683 |author-link1= Amos Tversky |author-link2=Daniel Kahneman |last1 = Tversky | first1 = Amos | last2 = Kahneman | first2 = Daniel | year = 1981 | title = The Framing of decisions and the psychology of choice | journal = Science | volume = 211 | issue = 4481| pages = 453–458 | pmid = 7455683|url=http://psych.hanover.edu/classes/cognition/papers/tversky81.pdf | bibcode= 1981Sci...211..453T |s2cid= 5643902 }} *{{cite journal|last1=Tversky|first1=Amos|last2=Kahneman|first2=Daniel|title=Rational Choice and the Framing of Decisions|journal=The Journal of Business|volume=59|issue=S4|year=1986|pages=S251|doi=10.1086/296365|url=https://www.cog.brown.edu/courses/cg195/pdf_files/fall07/Kahneman%26Tversky1986.pdf|access-date=2010-11-20|archive-date=2019-11-26|archive-url=https://web.archive.org/web/20191126173606/http://www.cog.brown.edu/courses/cg195/pdf_files/fall07/Kahneman%26Tversky1986.pdf|url-status=dead}}
===General references=== * {{cite book|last=Baron|first=Jonathan|title=Thinking and Deciding|chapter-url=https://books.google.com/books?id=Fc5fQgAACAAJ|edition=4th|year=2006|publisher=Cambridge University Press|isbn=978-0-521-68043-1|chapter=Chapter 11: Prospect theory|page=262}}
{{Decision theory}} {{DEFAULTSORT:Certainty Effect}} Category:Risk Category:Cognitive biases Category:Prospect theory