Good Choice, Bad Judgment: How Choice Under Uncertainty Generates Overoptimism

The One That Got Away: Overestimation of Forgone Alternatives as a Hidden Source of Regret

Past research has established that observing the outcomes of forgone alternatives is an important driver of regret. In this research, we predicted and empirically corroborated a seemingly opposite result: Participants in our studies were more likely to experience regret when they did not observe a forgone outcome than when it was revealed. Our prediction drew on two theoretical observations. First, feelings of regret frequently stem from comparing a chosen option with one’s belief about what the forgone alternative would have been. Second, when there are many alternatives to choose from under uncertainty, the perceived attractiveness of the almost-chosen alternative tends to exceed its reality. In four preregistered studies ( Ns = 800, 599, 150, and 197 adults), we found that participants predictably overestimated the forgone path, and this overestimation caused undue regret. We discuss the psychological implications of this hidden source of regret and reconcile the ostensible contradiction with past research.

Does Choice Cause an Illusion of Control?

Previous research suggests that choice causes an illusion of control—that it makes people feel more likely to achieve preferable outcomes, even when they are selecting among options that are functionally identical (e.g., lottery tickets with an identical chance of winning). This research has been widely accepted as evidence that choice can have significant welfare effects, even when it confers no actual control. In this article, we report the results of 17 experiments that examined whether choice truly causes an illusion of control ( N = 10,825 online and laboratory participants). We found that choice rarely makes people feel more likely to achieve preferable outcomes—unless it makes the preferable outcomes actually more likely—and when it does, it is not because choice causes an illusion but because choice reflects some participants’ preexisting (illusory) beliefs that the functionally identical options are not identical. Overall, choice does not seem to cause an illusion of control.

Stage-Gate Escalation

In this article, we review resource allocation at former handset maker Sony Ericsson. Three observations reveal how innovation projects can escalate through a stage-gate process that is meant to minimize initial commitment. First, uncertainty makes business cases hard to disconfirm in the early stages of project development. Second, as information that can be used to disconfirm business cases becomes more readily attainable in later stages of development, an increasing focus on project completion discourages the updating of business cases. Third, if business cases are revised negatively, the heightened organizational attention appears to make discontinuations less likely. We contextualize these three findings, replicate them with data from a second company, and discuss their potential implications for organizing innovation under uncertainty.

The Valuator’s Curse: Decision Analysis of Overvaluation and Disappointment in Acquisition

Initial valuations of entrepreneurial ventures offering uncertain payoffs can often be overvalued by investors; namely, the expected payoff postacquisition is smaller than the expected payoff prior to acquisition when the investor harbors uncertainties about various components of the business. Common explanations involve irrationality such as psychological preference for potential over realized payoffs. We provide a different, rational explanation, which we term the valuator’s curse. It is similar in nature to the winner’s curse in auctions and the optimizer’s curse in decision analysis, but the source of the curse is neither from the competitive effects of an auction-type mechanism nor from the optimization effects in a choice among alternatives. Rather the effect is generated from the nonlinear evaluation of the payoffs, even though the inputs to the evaluation are unbiased. We formalize the valuator’s curse and discuss its implications to entrepreneur’s learning. The valuator’s curse proves a boon to the entrepreneur as it leads to larger capitalizations.