Prof. Ido Erev's Lecture

Analyses of choice behavior highlight contradictory deviations from the basic rational model. For example, the observation that investors prefer bonds over riskier stocks suggests risk aversion, and the observation that investors prefer individual stocks over safer index funds suggests risk-seeking. The leading explanations for these deviations assume that different choice environments trigger distinct psychological processes and biases. The current talk explores the value of an alternative explanation. It considers the hypothesis that people tend to select the options that led to the best outcomes in the most similar past experiences. While similarity-based decisions are highly adaptive in many settings, they trigger deviations from maximization in certain settings. I propose that simple abstractions of this “similarity-based decisions” explanation, can help clarify the existence of contradictory deviations from rational choice and predict choice behavior.