People may overlook unlikely events in financial forecasts
When making predictions about financial and economic outcomes, people tend to neglect low-probability events, according to research in the Journal of Experimental Psychology: Applied. Findings indicate that people create simplified financial forecasts, treating the most probable events as near certain while underestimating the potential impact of less probable events. In four online experiments, participants read scenarios about a foreign government that was considering increasing its public spending. The scenarios included information about how changes in public spending might affect economic outcomes like stock market values. For example, in one scenario, participants learned that a 70% chance of increased public spending was unlikely to lead to higher stock value, while a less likely 30% chance of decreased public spending was likely to raise stock value. When asked to predict future stock values, participants, including financial experts, essentially ignored the less probable event—even though it was the one likely to move the market. According to the researchers, additional studies can help us understand this cognitive bias and ways to overcome it, supporting more informed financial and economic decision-making.
DOI: 10.1037/xap0000576


