| Summary: | Risk and reward
are negatively correlated in a wide variety of environments, and in many cases
this trade off approximates a fair bet. Pleskac and Hertwig (2014) recently
proposed that people have internalized this relationship and use it as the
basis for probability estimation and subsequent choice under conditions of
uncertainty. Specifically, they showed that risky options with high-value
outcomes are inferred to have lower probability than options offering a less
valuable reward. We report two experiments that test a simple corollary of this
idea. In both studies, participants estimated the magnitude of prizes offered
by lotteries with known win-probabilities. The relationship between estimates
and probabilities followed the power relationship predicted by the risk-reward
heuristic, albeit with a tendency to overestimate outcome magnitude. In
addition, people’s estimates predicted their willingness to take the gamble.
Our results provide further evidence that people have internalized the
ecological relationship between risk and reward in financial lotteries, and we
suggest that this relationship exerts a wide-ranging influence on
decision-making.
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