Priority heuristic

The priority heuristic is a simple, lexicographic decision strategy that correctly predicts classic violations of expected utility theory such as the Allais paradox, the four-fold pattern, the certainty effect, the possibility effect, or intransitivities. The heuristic maps onto Rubinstein’s three-step model, according to which people first check dominance and stop if it is present, otherwise they check for dissimilarity. To highlight Rubinstein’s model consider the following choice problem: I: 50% chance to win 2,000 50% chance to win nothing II: 52% chance to win 1,000 48% chance to win nothing Dominance is absent, and while chances are similar monetary outcomes are not. Rubinstein’s model predicts that people check for dissimilarity and consequently choose Gamble I. Unfortunately, dissimilarity checks are often not decisive, and Rubinstein suggested that people proceed to a third step that he left unspecified. The priority heuristic elaborates on Rubinstein’s framework by specifying this Step 3. For illustrative purposes consider a choice between two simple gambles of the type “a chance c of winning monetary amount x; a chance (100 - c) of winning amount y.” A choice between two such gambles contain four reasons for choosing: the maximum gain, the minimum gain, and their respective chances; because chances are complementary, three reasons remain: the minimum gain, the chance of the minimum gain, and the maximum gain. For choices between gambles in which all outcomes are positive or 0, the priority heuristic consists of the following three steps (for all other choices see Brandstätter et al. 2006): Priority rule: Go through reasons in the order of minimum gain, the chance of minimum gain, and maximum gain. Stopping rule: Stop examination if the minimum gains differ by 1/10 (or more) of the maximum gain; otherwise, stop examination if chances differ by 10% (or more). Decision rule: Choose the gamble with the more attractive gain (chance). The term “attractive” refers to the gamble with the higher (minimum or maximum) gain and to the lower chance of the minimum gain.