Innumeracy and incentives: A ratio bias experiment

Abstract

The Ratio-Bias phenomenon, observed by psychologist Seymour Epstein and colleagues, is a systematic manifestation of irrationality. When offered a choice between two lotteries, individuals consistently choose the lottery with the greater number of potential successes, even when it offers a smaller probability of success. In the current study, we conduct experiments to confirm this phenomenon and test for the existence of Bias as distinct from general irrationality. Moreover, we examine the effect of introducing a monetary incentive of varying size (depending on the treatment) on the extent of irrational choices within this framework. We confirm the existence of the Bias. Moreover, the existence of an incentive significantly reduces the extent of irrationality exhibited, and that this effect is roughly linear in response to changes in the size of the incentive within the magnitudes investigated.

Keywords

• ratio bias
• probability judgment
• incentive
• cognitive bias