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Cognitive Overload and the Evaluation of Risky Alternatives: The Effects of Sample Size, Information Format and Attitude To Risk

When the amount of information to be dealt with exceeds people’s short-term memory capacity, they must resort to the sampling of information. In the present study we show that, under conditions of cognitive overload (which could result from decision-making under stress, time constraints or information abundance), individuals exhibit systematic differences in estimating variance. Moreover, these differences critically depend on the format of the evidence presented: Variance is downward attenuated when information is presented analogically, but amplified when it is presented numerically. These distortions in the perception of variance affect individuals’ pricing of risky alternatives. We suggest that these results may help to explain economic anomalies, such as excess trading in financial markets. We also point out possibilities for manipulating the perception of variability and normative implications concerning the presentation of information on the variance of phenomena.