Shared losses reduce sensitivity to risk: A laboratory study of moral hazard

Moral hazards are said to occur when one party makes decisions that have potential negative consequences that will either be fully or partially experienced by another party. The present experiment sought to explore moral hazard in a laboratory setting. Participants made choices between certain and risky rewards. On some trials, participants bore the full brunt of a loss if the risky reward was chosen and lost. On other trials, participants believed losses would be shared with another party creating the opportunity for moral hazard. Our design allowed us to measure whether the presence of a moral hazard influenced participants’ choice behavior and to quantify the magnitude of this influence. Results suggested that participants were more tolerant of risk when they believed losses would be shared with another party compared to choices when all of the loss would be experienced personally. More importantly, concern for the third party losses appeared to exert no influence on choices whatsoever. These results were found when the third party was anonymous (Experiment 1) but also when they met the third party face-to-face (Experiment 2). The relationship between the current results and real-life moral hazards, as well as possible future research directions, is discussed.     

Impulsiveness moderates the effects of exogenous attention on the sensitivity to gains and losses in risky lotteries

Does attention have a causal impact on risky decisions? We address this question in a preregistered experiment in which participants accept or reject a series of mixed gambles while exogenously varying how information can be sampled. Specifically, in each trial participants observe the outcomes of a mixed-gamble with gains and losses presented sequentially. To isolate the causal role of attention on the decision process, we manipulate for how long a specific attribute is presented before showing the next one (e.g., 600 ms/800 ms vs 400 ms). Our results partially confirm our preregistered hypotheses that longer exposure to an attribute increases its weight on the decision. While we find no effects on choice frequency, we observe specific effects on the decision weights of our Random Utility Model. Presenting losses longer (for 600 ms, but not 800 ms) than gains (400 ms) leads to increased sensitivity for losses. When gains are presented for longer (600 ms and 800 ms) than losses (400 ms), the participants show increased sensitivity to both gain and loss values in their decision. Loss aversion reflects this trend across attention treatments, but differences remain non-significant. Further exploratory analyses show that specifically participants with higher impulsiveness become more sensitive to attribute values when gains are presented for longer. Jointly, these results support the notion that attention has a causal impact on the sensitivity to specific attributes during risky choice. Moreover, our results underline the moderating role of impulsiveness on the relationship between attention and choice.     

Responsibility and limited liability in decision making for others – An experimental consideration

Agency in financial markets has been claimed to foster excessive risk taking, ultimately leading to bubble formation. The main driving factor appears to be the skewed bonus system for agents who invest other people’s money. The resulting excessive risk taking on behalf of others would imply that such bonus systems crowds out responsible decision making for others in order to serve egoistic self-interest. To test this implication, we conduct laboratory experiments comparing decision making for others with and without such a bonus system. First, we show that, in the absence of bonus systems, decision makers invested significantly less for others than for themselves. Second, we show that limited liable decision makers—participating only in gains but not in losses—invested substantially more for others than for themselves. Hence, our results suggest that indeed limited liability outweighs responsibility.     

Time-based versus money-based decision making under risk: An experimental investigation

This paper investigates whether individuals make similar decisions under risk when the outcomes are expressed in time versus monetary units. We address this issue in two studies measuring individual risk preferences and prospect theory parameters (i.e., utility curvature, probability weighting, and loss aversion) for both time and money. In the first (resp., second) study we consider relatively small (resp., large) time and monetary outcomes. We find that individuals hold similar risk preferences for time and money; we also find evidence that “time is money” with regard to the utility curvature for gains, loss aversion, and decision weighting. However, individuals have different valuations of losing time and money. The utility function for small losses of money is more concave and variable than the utility function for small losses of time (Study 1), but the utility function for large losses of time is more concave and variable than that for large losses of money (Study 2). We argue that these results reflect a difference in the perceived slack of the respective resource.     

Losses disguised as wins in multiline slots: using an educational animation to reduce erroneous win overestimates

Slot machines are available in several countries, with multiline games growing in popularity. Interestingly, many audiovisually reinforced small ‘wins’ in multiline games are in fact monetary losses – outcomes referred to as losses disguised as wins (LDWs). Research suggests that LDWs cause players to overestimate how many times they remember actually winning during a playing session. The study sought to replicate this finding and see if a short educational animation about LDWs could significantly reduce this LDW-triggered win overestimation effect. It employed a mixed design, with animation viewed (LDW, control) as the between-subjects factor, and game played (200 spins on a few LDW or many LDW game; game order counterbalanced) as the within-subjects factor. Fifty-four novice participants estimated how many times they won more than they wagered in each game. In the control animation group, the study replicated the LDW-triggered win overestimation effect for participants playing the many LDW game. Crucially, win overestimates were significantly reduced in this many LDW game for players exposed to the LDW animation. The study concludes that LDWs can lead novice gamblers to remember winning more often than they actually do during a playing session, but educating participants about LDWs can reduce these erroneous win overestimates.     

Misestimating Betting Behavior: The Role of Negative Asymmetries in Emotional Self Prediction

This paper addresses the role of negative asymmetries in emotional self-prediction by looking at the extent to which individuals misestimate their own betting behavior in sequential gambles. In a series of three experimental studies, we demonstrate that losses lead to higher than planned bets whereas bets are on average carried over after gains. Such asymmetric deviations from the plan emerge (1) when monetary and non-monetary incentives are used, and (2) when participants face fair and unfair gambles. The asymmetry is based on people’s inability to predict how much the negative emotions generated by a bad experience (e.g. the loss) will influence them to put more effort (e.g. bet more) than planned in an attempt to re-establish a homeostatic state in the prospect of a good experience (e.g. winning).     

Tracing risky decisions for oneself and others: The role of intuition and deliberation

This study contributes to the understanding of how individuals make choices for themselves and on behalf of others in a risky environment. In a laboratory eye-tracking experiment, we investigate whether risk preferences, decision error, and information processing differ between decisions made for oneself and on behalf of others. While we find no differences in risk preferences when deciding for oneself or for someone else, individuals have a greater decision error when deciding for others. Process data partly explains these differences. Individuals spend less time, have less fixations, and inspect less information when deciding for others. We detect similar processing patterns when comparing intuitive and deliberative decision making. We argue that the processing of decisions for oneself is more effortful and involves more extensive deliberation which, in turn, is related to less decision errors.     

A reverse sunk cost effect in risky decision making: Sometimes we have too much invested to gamble

The sunk cost effect refers to the empirical finding that people tend to let their decisions be influenced by costs made at an earlier time in such a way that they are more risk seeking than they would be had they not made these costs. This finding seems to be in conflict with economic theory which implies that only incremental costs and benefits should affect decisions. The effect is often explained in terms of prospect theory of (Kahneman, D., Tversky, A., 1979. Prospect theory: An analysis of decision under risk. Econometrica 47, 263–291), suggesting that sunk costs may induce a ‘loss frame,’ consequently causing risk seeking behavior. We argue that sunk costs may also result in risk aversion. In the present study we investigated the effect of time and effort investments (Behavioral Sunk Costs) on risky decision making in gain and loss situations. The results show that, in agreement with prospect theory, participants were more risk averse in gain situations than in loss situations. Moreover, incurring Behavioral Sunk Costs appeared to increase risk aversive choices, i.e., a reverse sunk cost effect. Furthermore, the results suggest that, in loss situations, Behavioral Sunk Costs mainly lead to risk aversive behavior if opting for the ‘safe’ alternative is not accompanied by an increased possibility to regret the decision.     

Demand for decision autonomy and the desire to avoid responsibility in risky environments: Experimental evidence

This paper experimentally studies individuals’ willingness to pay for the authority to make risky decisions for themselves, and the willingness to take responsibility for others, as primary determinants of leadership willingness. We consider a setup involving a pair of individuals, where one individual is designated to make both parties’ decisions by default. Depending on treatment, either party can express a willingness to pay to change this situation. If one’s willingness to pay to make her own decision herself is positive (negative), we interpret it as a demand for autonomy (a desire to delegate). On the flip side, if one’s willingness to pay to avoid making a decision on behalf of another person is positive (negative), we interpret it as a desire to avoid responsibility (a demand for authority). We find that on average, individuals are willing to pay positive amounts of money to make their decisions themselves, and incur positive but smaller opportunity costs for the right to make decisions for others. Certain individual and contextual characteristics emerge as important predictors. Notably, (1) men are more likely to demand both autonomy and authority at the same time, (2) individuals with other regarding preferences are more likely to pay to avoid taking responsibility for others’ decisions when the probability of loss is high. Exploring differences between individuals’ own decisions and the decisions they make on behalf of others, we find that subjects with other-regarding preferences tend to “cautious-shift” when making decisions on behalf of others. Also, we find that individuals who would like to avoid responsibility also tend to “shift” their decisions when put in a decision-making role. The results have implications for the allocation of decision-making authority in pairs and leadership.     

Increased Urge to Gamble Following Near-Miss Outcomes May Drive Purchasing Behaviour in Scratch Card Gambling

Previous research into scratch card gambling has highlighted the effects of these games on players’ arousal and affective states. Specifically, near-miss outcomes in scratch cards (uncovering 2 of 3 needed jackpot symbols) have been associated with high levels of physiological and subjective arousal and negative emotional evaluations, including increased frustration. We sought to extend this research by examining whether near-misses prompted increases in gambling urge, and the subsequent purchasing of additional scratch cards. Participants played two scratch cards with varying outcomes with half of the sample experiencing a near-miss for the jackpot prize, and the other half experiencing a regular loss. Players rated their urge to continue gambling after each game outcome, and following the initial playing phase, were then able to use their winnings to purchase additional cards. Our results indicated that near-misses increased the urge to gamble significantly more than regular losses, and urge to gamble in the near-miss group was significantly correlated with purchasing at least one additional card. Although some players in the loss group purchased another card, there was no correlation between urge to gamble and purchasing in this group. Additionally, participants in the near-miss group who purchased additional cards reported higher levels of urge than those who did not purchase more cards. This was not true for the loss group: participants who experienced solely losing outcomes reported similar levels of urge regardless of whether or not they purchased more scratch cards. Despite near-misses’ objective status as monetary losses, the increased urge that follows near-miss outcomes may translate into further scratch card gambling for a subset of individuals .     

Regret aversion and the reluctance to exchange lottery tickets

The current research finds that people are willing to forego a direct material gain, if that protects them from future regrets. In two experiments participants endowed with a lottery ticket were offered to exchange their ticket for another ticket from the same lottery. Even though they could receive a bonus for exchanging, many participants chose not to do so. Experiment 1 finds that a manipulation that prevented the anticipation of regret by offering the ticket in a sealed envelope made more participants exchange their ticket. Experiment 2 finds that an increased potential of regret over not-exchanging made more participants exchange as well. In both experiments the effect of the manipulation on choices is mediated by anticipated regret. The experiments show that people are willing to forego a material gain to prevent future regrets and that the reluctance to exchange lottery tickets is (partly) caused by regret aversion.     

AGGREGATE DEMAND CONTRACTIONS WITH NOMINAL DEBT COMMITMENTS: IS WAGE FLEXIBILITY STABILIZING?

When nominal debt payments commitments exist, output losses following an aggregate demand contraction will be larger and more persistent. Paradoxically, output can be less stable if wages are more flexible. This occurs because falling wages and prices cause debtors' cash flow to deteriorate relative to their debt commitments. To reduce the chance of incurring bankruptcy costs, debtors cut expenditure. Creditor's wealth increases from an unexpected deflation but their gain does not offset debtors' loss because of the increased threat of bankruptcy and associated costs. Net wealth and aggregate demand fall, magnifying the effect of the initial contraction.     

Risky choices and emotion-based learning

The paper offers a comprehensive analysis of causes and consequences of the accumulation of emotional experience, measured via skin conductance response, when taking risky choices. A large experimental data set was obtained from a psycho-physiological task conducted with 645 bank customers and financial professionals. With respect to causes, we found that the individual emotional response to gains/losses is trend-dependent and influenced by habituation, as well as by anchoring/framing due to the external layout of risky alternatives. With respect to consequences, we found evidence that the somatic reinforcement experience is able to guide asset picking, but within a long-term strategy. Consequently, selection behaviors were observed in a portfolio mean–variance framework, revealing that somatic markers lead individuals to pursue a long-term ‘psycho-economic’ efficiency that integrates factual information (monetary outcomes) with the implicit subjective experience.     

The Desire to Gamble: The Influence of Outcomes on the Priming Effects of a Gambling Episode

The influence of gambling outcomes on the efficacy of a short gambling episode to prime motivation to continue gambling was determined in two experiments in which desire to gamble was evaluated while participants played a slot machine located in a virtual reality casino. In experiment 1, 38 high-risk [>3 Problem Gambling Severity Index (PGSI)] [Ferris and Wynne (The Canadian problem gambling index: final report, 2001)] and 36 non-problem gamblers (0 PGSI) either won or lost a modest amount. Among high-risk gamblers, winning resulted in a greater increase in the desire to continue gambling than did losing. In experiment 2, 39 high-risk, 33 low-risk (0 < PGSI < 3), and 31 non-problem gamblers experienced either a single large win or a series of small wins (equivalent monetary gain). Participants were permitted to continue playing as long as they wanted (all subsequent spins being losses) thus permitting evaluation of persistence (resistance to extinction). Throughout, desire to gamble was assessed using a single item measure. High-risk gamblers who experienced a large win reported significantly greater desire to gamble upon voluntary cessation than those who experienced a series of small wins. It seems that the priming effects of a short gambling episode are contingent on the pattern of outcomes experienced by the gambler. The data were related to motivational factors associated with gambling, gambling persistence, and chasing losses.     

Separating thoughts from the self by selling them to others: the moderating role of self-esteem / Separar los pensamientos del yo al venderlos a otros: el rol moderador de la autoestima

Abstract

This research introduces a new approach for separating people from their thoughts by anticipating selling them to others. Participants were asked to write down either positive or negative thoughts about fast food on different pieces of paper. Then, participants were randomly assigned to role-play the part of either potential buyers or sellers for an advertising campaign. Finally, all participants indicated their self-esteem (as an additional predictor) and their attitudes towards fast food (as the dependent measure). For high self-esteem participants, anticipating selling thoughts to others reduced the impact of thoughts on attitudes, suggesting that distancing thoughts from a location with high validity (the self) reduced the perceived value of their thoughts. In contrast, for low self-esteem participants, anticipating selling thoughts increased their usage, suggesting that separating thoughts from a location with low validity (the self) increased the perceived value of those thoughts. These findings suggest that thoughts can be associated with high or low validity depending on individual differences in self-esteem.     

Portraits of loneliness: emerging themes among community-dwelling older adults

With aging comes a multitude of possible losses, including loss of health, spouse, friends, or independence. These losses can place older adults at risk for isolation and loneliness. Loneliness is of significant concern in older adults, as it can negatively affect their quality of life. An interpretive phenomenological study was conducted to explore the meaning of loneliness in 12 older adults living in the community. Selected excerpts from the participants reveal several themes, as well as the importance of maintaining meaningful connections and relationships with others to alleviate feelings of loneliness. Nurses can become more attuned to the problem of loneliness in older adults and the importance of helping their older clients maintain meaningful connections with others to reduce loneliness.     

How do changes in income,employment and health insurance affect family mental health spending?

Using eight two-year panels from the Medical Expenditure Panel Survey data for the period 2004 to 2012, we examine the effect of economic shocks on mental health spending by families with children. Estimating two-part expenditure models within the correlated random effects framework, we find that employment shocks have a greater impact on mental health spending than do income or health insurance shocks. Our estimates reveal that employment gains are associated with a lower likelihood of family mental health services utilization. By contrast employment losses are positively related to an increase in total family mental health. We do not detect a link between economic shocks and mental health spending on behalf of fathers.

     

Risky choice in interpersonal context: Do people dare because they care?

This paper presents an experimental study investigating the interplay of individuals’ other-regarding preferences and individuals’ risk attitude. Participants (N = 120) had to make choices between a certain and risky payoff only for themselves (individual context) and choices in which the participants were paired with another randomly assigned participant who functioned as a passive recipient (interpersonal context). In the interpersonal context the risky option was beneficial for the other person while the certain option was not. Thus, the interpersonal choice context was an abstract representation of the incentive structure in helping situations, which yield risk only for the helper. Risky options in the interpersonal context yielded different payoff distributions, which allowed us to identify how considerations of fairness affect interpersonal risky choices. To assess other-regarding preferences, a dictator game was played. First we found that participants were generally less risk averse in the interpersonal choices; however, the degree of risk aversion was affected by the distribution of payoffs between decider and recipient. Furthermore, we found that changes of risk aversion in an interpersonal context could be predicted with the proposed splits in the dictator game.     

Gambling versus investment: Lay theory and loss aversion

Gambling and investment are two domains that involve financial decisions. The present research investigates people’s lay theories about gambling and investment, and how these lay theories affect loss aversion in these domains. Lay people’s understanding of gambling and investment is often largely based on information that is immediately available to them. Moreover, information about losing money by gambling and earning money through investments are more predominant than information about earning money by gambling and losing money through investments. Hence, we hypothesized and found that people tend to hold lay theories that gambling is more likely to cause losses and less likely to bring gains compared to investment (Study 1); and we observed a stronger loss aversion when the same monetary decision was framed as gambling rather than as an investment (Studies 2 to 6). This domain-framing effect held in both hypothetical and incentivized settings.