By Jason Hreha

Glossary

Certainty Effect

Reviewed by Jason Hreha

Published 1 min read

What is the Certainty Effect?

The certainty effect is a disproportionate response to the difference between a certain outcome and a merely probable one. The crucial difference is between “will happen” and “might happen,” not simply between better and worse odds. It is one of the findings discussed in prospect theory.

An Example of the Certainty Effect

  • In Kahneman and Tversky’s 1979 study, most respondents preferred a sure gain of 3,000 to an 80% chance of 4,000.
  • When both winning probabilities were divided by four, most preferred a 20% chance of 4,000 to a 25% chance of 3,000.

That paired pattern illustrates the special influence of certainty.

Why the Paired Choices Matter

Preferring a sure gain in one choice is not sufficient evidence of this effect: ordinary risk aversion may explain that choice. The change in preference when certainty disappears is what makes the paired choices informative.

Limits

Certainty means probability one. A lottery with slightly better odds is still uncertain.