Decisions from experience: why small samples?

Abstract

In many decisions we cannot consult explicit statistics telling us about the risks involved in our actions. In lieu of such data, we can arrive at an understanding of our dicey options by sampling from them. The size of the samples that we take determines, ceteris paribus, how good our choices will be. Studies of decisions from experience have observed that people tend to rely on relatively small samples from payoff distributions, and small samples are at times rendered even smaller because of recency. We suggest one contributing and previously unnoticed reason for reliance on frugal search: Small samples amplify the difference between the expected earnings associated with the payoff distributions, thus making the options more distinct and choice easier. We describe the magnitude of this amplification effect, and the potential costs that it exacts, and we empirically test four of its implications.