Myopic risk-seeking: The impact of narrow decision bracketing on lottery play

In two experiments conducted with low-income participants, we find that individuals are more likely to buy state lottery tickets when they make several purchase decisions one-at-a-time, i.e. myopically, than when they make one decision about how many tickets to purchase. These results extend earlier findings showing that “broad bracketing” of decisions encourages behavior consistent with expected value maximization. Additionally, the results suggest that the combination of myopic decision making and the “peanuts effect”—greater risk seeking for low stakes than high stakes gambles—can help explain the popularity of state lotteries.

Environmental disasters as risk regulation catalysts? The role of Bhopal,Chernobyl, Exxon Valdez,Love Canal,and Three Mile Island in shaping U.S. environmental law

Unexpected events such as environmental catastrophes capture wide public attention. Soon after five major shocks—Three Mile Island, Love Canal, Bhopal, Chernobyl, and the Exxon Valdez oil spill—Congress voted on new risk regulation. This paper conducts an event study to test whether individual congressional representatives were “shocked” by these environmental disasters into increasing their probability of voting in favor of risk legislation. On average, representatives were less likely to vote in favor of bills tied to these five events. Significant heterogeneity in representatives’ responses to these shocks is documented. Liberal Northeast representatives were most likely to increase their pro-environment voting in the aftermath of these shocks.

Self-protection and insurance with interdependencies

We study optimal investment in self-protection of insured individuals when they face interdependencies in the form of potential contamination from others. If individuals cannot coordinate their actions, then the positive externality of investing in self-protection implies that, in equilibrium, individuals underinvest in self-protection. Limiting insurance coverage through deductibles or selling “at-fault” insurance can partially internalize this externality and thereby improve individual and social welfare.

The ostrich effect: Selective attention to information

We develop and test a model which links information acquisition decisions to the hedonic utility of information. Acquiring and attending to information increases the psychological impact of information (an impact effect), increases the speed of adjustment for a utility reference-point (a reference-point updating effect), and affects the degree of risk aversion towards randomness in news (a risk aversion effect). Given plausible parameter values, the model predicts asymmetric preferences for the timing of resolution of uncertainty: Individuals should monitor and attend to information more actively given preliminary good news but “put their heads in the sand” by avoiding additional information given adverse prior news. We test for such an “ostrich effect” in a finance context, examining the account monitoring behavior of Scandinavian and American investors in two datasets. In both datasets, investors monitor their portfolios more frequently in rising markets than when markets are flat or falling.

An experimental investigation of violations of transitivity in choice under uncertainty

Several models of decision-making imply systematic violations of transitivity of preference. Our experiments explored whether people show patterns of intransitivity predicted by regret theory and majority rule. To distinguish “true” violations from those produced by “error,” a model was fit in which each choice can have a different error rate and each person can have a different pattern of true preferences that need not be transitive. Error rate for a choice is estimated from preference reversals between repeated presentations of that same choice. Our results showed that very few people repeated intransitive patterns. We can retain the hypothesis that transitivity best describes the data of the vast majority of participants.

Valuing lives equally: Defensible premise or unwarranted compromise?

This article examines the nature of the restrictions on the underlying social welfare function that would appear to be required in order to justify the application of a “common” Value of Statistical Life (VSL) for any particular hazard within a given society and considers the way in which the magnitude of this common VSL might relate to the values actually employed in practice. The article also considers the question of whether, by contrast, discounts or premia might legitimately be applied to the VSL in order to take account of factors such as age or current exposure to risk and explores the form that such discounts or premia might reasonably take.

Prospect theory for continuous distributions

We extend the original form of prospect theory by Kahneman and Tversky from finite lotteries to arbitrary probability distributions, using an approximation method based on weak-⋆ convergence. The resulting formula is computationally easier than the corresponding formula for cumulative prospect theory and makes it possible to use prospect theory in future applications in economics and finance. Moreover, we suggest a method how to incorporate a crucial step of the “editing phase” into prospect theory and to remove in this way the discontinuity of the original model.

Cancer premiums and latency effects: A risk tradeoff approach for valuing reductions in fatal cancer risks

Many studies estimate individuals’ values for avoiding fatality risks; however, most value-of-statistical-life studies focus on accident-related deaths. Consequently, little is known about preferences for avoiding other fatal risks, such as cancer. Cancer may engender strong feelings of dread, leading to a “cancer premium,” but cancer latency periods may have the opposite effect. Using a national survey, we elicit relative preferences for avoiding fatal cancer and auto-accident risks. We find strong preferences for avoiding cancer risks. With a 5-year latency, they are valued roughly three times greater than immediate accident risks, declining to 50% greater for a 25-year latency.

Paying for permanence: Public preferences for contaminated site cleanup

We use conjoint choice questions to investigate the preferences of people in four cities in Italy for income and future/permanent mortality risk reductions delivered by contaminated site remediation policies. The VSL is €5.6 million for an immediate risk reduction. If the risk reduction takes place 20 years from now, the implied VSL is €1.26 million. Respondents’ implicit discount rate is 7%. The VSL depends on respondent characteristics, familiarity with contaminated sites, concern about the health effects of exposure to toxicants, having a family member with cancer, perceived usefulness of public programs and beliefs about the goals of government remediation programs.

The value of mortality risk reductions in Delhi,India

We interviewed commuters in Delhi, India, to estimate their willingness to pay (WTP) to reduce their risk of dying in road traffic accidents in three scenarios that mirror the circumstances under which traffic fatalities occur in Delhi. The WTP responses are internally valid: WTP increases with the size of the risk reduction, income, and exposure to road traffic risks, as measured by length of commute and whether the respondent drives a motorcycle. As a result, the value of a statistical life (VSL) varies across groups of beneficiaries. For the most highly-exposed individuals the VSL is about 150,000 Purchasing Power Parity (PPP) dollars.

Gender,risk and stereotypes

This paper reports results from an economic experiment where respondents are asked to make choices between risky outcomes for themselves and others. We investigate whether subjects’ own risk preferences and gender stereotypes are reflected in the predictions they make for the risk preferences of others and the way this occurs. When predicting other people’s risk preferences, the respondents tend to use a combination of their own risk preferences and stereotypes. Moreover, when making risky choices for others, the respondents generally use a combination of their own risk preferences and their average predicted risk preference of the targeted group.

Measuring revisions to subjective expectations

This paper develops a new metric to measure revisions to subjective expectations and proposes a survey design strategy that enables the estimation of the metric. As an application, I analyze how women update their ex pectations about the effectiveness of contraception methods. The women interviewed exhibit substantial heterogeneity in the way they revise their expectations with receipt of the same information. When relating the heterogeneity in the updating process to observable characteristics, I find that schooling, having a regular sexual partner and knowledge and use of birth control methods have a large impact on the revision process about the effectiveness of contraceptives.

Can ranking techniques elicit robust values?

This paper reports two experiments which examine the use of ranking methods to elicit ‘certainty equivalent’ values. It investigates whether such methods are able to eliminate the disparities between choice and value which constitute the ‘preference reversal phenomenon’ and which thereby pose serious problems for both theory and policy application. The results show that ranking methods are vulnerable to distorting effects of their own, but that when such effects are controlled for, the preference reversal phenomenon, previously so strong and striking, is very considerably attenuated.

The relationship between individual expectations and behaviors: Mortality expectations and smoking decisions

Using data from the Health and Retirement Study, we assess the accuracy of subjective beliefs about mortality and objectively estimated probabilities for individuals in the same sample. Overall, subjective beliefs and objective probabilities are very close. However, there are differences conditional on behaviors, with current smokers being relatively optimistic and never smokers relatively pessimistic in their assessments. In the aggregate, individuals accurately predict longevity, but at the individual level, subjective beliefs provide information in addition to the estimated objective probabilities in predicting actual events, which may arise from the effect of past or anticipated decisions on these beliefs.

Individual decision-making experiments with risk and intertemporal choice

Many decisions require tradeoffs over time and in the presence of risk. To examine interactions between risk and intertemporal effects we developed a laboratory experiment. In the experiment, subjects choose between payoffs that take place at different points in time. We find that very few subjects are consistently risk averse or risk loving. Instead, we find that subjects are less patient in the presence of risk. We also find that increased risk decreases subjects’ patience levels. However, we do not find evidence that the effect of risk on the intertemporal decision depends on the length of the temporal delay.

Risk aversion and expected-utility theory: A calibration exercise

Rabin (Econometrica 68(5):1281–1292, 2000) argues that, under expected-utility, observed risk aversion over modest stakes implies extremely high risk aversion over large stakes. Cox and Sadiraj (Games Econom. Behav. 56(1):45–60, 2006) have replied that this is a problem of expected-utility of wealth, but that expected-utility of income does not share that problem. We combine experimental data on moderate-scale risky choices with survey data on income to estimate coefficients of relative risk aversion using expected-utility of consumption. Assuming individuals cannot save implies an average coefficient of relative risk aversion of 1.92. Assuming they can decide between consuming today and saving for the future, a realistic assumption, implies quadruple-digit coefficients. This gives empirical evidence for narrow bracketing.

The sensitivity of subjective probability to time and elicitation method

The paper reports the results of a survey designed to elicit probability judgements for different types of events: ‘pure chance’ events, for which objective probabilities can be calculated; ‘public’ events, about which there may be some discussion in social groups and the media; and ‘personal’ events, such as those relating to crime or accidental injury. Even among respondents deemed to be ‘well-calibrated’ in the domain of pure chance events we find limited sensitivity to the ‘temporal scope’ of public and personal events—this being especially marked for personal events. We discuss possible reasons and some implications for policy-related survey work.

Perception of own death risk

Individuals’ perception of their own road-traffic and overall mortality risks are examined in this paper. Perceived risk is compared with the objective risk of the respondents’ peers, i.e. their own gender and age group, and the results suggest that individuals’ risk perception of their own risk is biased. For road-traffic risk we obtain similar results to what have been found previously in the literature, overassessment and underassessment among low- and high-risk groups, respectively. For overall risk we find that all risk groups underestimate their risk. The results also indicate that men's risk bias is larger than women’s.

Individual and group decision making under risk: An experimental study of Bayesian updating and violations of first-order stochastic dominance

This paper reports the results of experiments designed to test whether individuals and groups abide by monotonicity with respect to first-order stochastic dominance and Bayesian updating when making decisions under risk. The results indicate a significant number of violations of both principles. The violation rate when groups make decisions is substantially lower, and decreasing with group size, suggesting that social interaction improves the decision-making process. Greater transparency of the decision task reduces the violation rate, suggesting that these violations are due to judgment errors rather than the preference structure. In one treatment, however, less complex decisions result in a higher error rates.