We have Prof. Dr. Helga Fehr-Duda, Professor of Decision Theory and Experimental Decision Research, University of Zurich, visiting this week and giving a talk in the Social, Economic, and Decision Psychology colloquium (title and abstract follow).

 A Tale of Two Tails: The Impact of Interactions of Time and Risk on the Valuation of Tail Events

The majority of economic decisions involve consequences that are both risky and delayed. While the bulk of previous research has focused on measuring atemporal risk preferences, a robust body of evidence has emerged showing that risk tolerance is delay dependent, usually increasing with the delay to the resolution of uncertainty. I will argue that the driving force of this effect is the inherent uncertainty of future events, which generates an additional layer of uncertainty not accounted for by the objectively given probabilities. This future uncertainty conjointly with people’s proneness to nonlinear probability weighting provides an explanation for the co-existence of underweighting and overweighting of tail events, manifest, for example, in the low take up of disaster insurance and the high willingness to purchase extended warranties, respectively.