Moderating effects of consumer knowledge on the perception of small probabilities of risk

Abstract

Perceived probabilities do not perfectly correspond to the stated probabilities. Prospect theory suggests that small probabilities are often overestimated, and such overestimation of negative prospects reflects a tendency toward risk aversion. We examine how two types of consumer knowledge, objective and subjective knowledge, influence the perception of a small probability of risk. Subjective knowledge appears to reinforce objective judgment (i.e., being less biased by small probabilities) once consumers are knowledgeable. On the other hand, subjective knowledge could facilitate the tendency to risk aversion (i.e., overestimation of small probabilities of risk), when the regulating force of objective knowledge is low.