The Psychology of Tail Events: Progress and Challenges

Over the past decade, there has been a surge of interest among academic researchers, policymakers, and the broader public in “tail events”—rare, high-impact events. There are many possible reasons for this: the occurrence of particularly salient tail events such as the 9/11 terrorist attacks and the US financial crisis; the rise of the Internet and social media, which have made news and information about tail events much more accessible than before; and the popularization, by Taleb (2007), of the notion of “black swans,” to name just a few. In this article, I start by summarizing some recent progress in our understanding of the psychology of tail events. I suggest that much of this progress has centered on the concept of “probability weighting” and, in particular, on applications of this concept in various fields of economics. I then describe some major open questions in this area. We can think about the psychology of tail events using a two-step framework (Fox and Tversky 2004). In the first step, an individual assesses the probability of a tail event. In the second step, with this probability judgment in hand, he makes a decision. The first step is about beliefs; the second, about preferences. What do we know about how people tackle the task they face at each step? On the beliefs side, a tentative summary of the available evidence—a summary that papers over many subtleties—is that, when asked to estimate AdvAnces in BehAviorAl economics ‡