Analyses of human reaction to economic incentives reveal contradictory deviations from maximization. For example, underinvestment in the stock market suggests risk aversion, but insufficient diversification of financial assets suggests risk-seeking. The leading explanations for these...

Experimental and field studies of repeated decisions document high sensitivity to the probability of regret; experience leads people to underweight rare risks and select the actions that provide the best outcomes in most cases. We clarify the implications of this pattern to policies designed to...