Probability Weighting

Probability weighting is a concept from behavioral economics that describes how people perceive chances differently from actual probabilities. Instead of treating all probabilities proportionally, individuals tend to overweigh small chances (like winning a lottery) and underweigh large chances (like a car accident). This means they may overvalue unlikely events and undervalue very likely ones, affecting their decisions. It helps explain behaviors like gambling or buying insurance, where perceptions of risk don’t align perfectly with true probabilities. Essentially, probability weighting shows that our minds often interpret risks in a subjective way that influences our choices.