Competence effects for choices involving gains and losses

We investigate how choices for uncertain gain and loss prospects are affected by the decision maker’s perceived level of knowledge about the underlying domain of uncertainty. Specifically, we test whether Heath and Tversky’s (J Risk Uncertain 4:5–28, 1991) competence hypothesis extends from gains to losses. We predict that the commonly-observed preference for high knowledge over low knowledge prospects for gains reverses for losses. We employ an empirical setup in which participants make hypothetical choices between gain or loss prospects in which the outcome depends on whether a high or low knowledge event occurs. We infer decision weighting functions for high and low knowledge events from choices using a representative agent preference model. For gains, we replicate the results of Kilka and Weber (Manage Sci 47:1712–1726, 2001), finding that decision makers are more attracted to choices that they feel more knowledgeable about. However, for losses, we find limited support for our extension of the competence effect.     

The Cognitive Basis of Future-oriented Prosocial Behavior

Two experiments examined the development of future-oriented prosocial behavior in relation to developing theory of mind and executive functioning. Children from 3;0 to 4;6 were given a series of trials in which they had to make a choice between immediate and delayed sticker rewards, where these rewards accrued either to self, to a play partner, or were shared. They also were presented with standard theory of mind tasks (in Experiment 1) assessing the understanding of belief and desire and an executive function task (in Experiment 2) in which the children had to inhibit pointing to a baited box in order to win the cookie within. Results showed that for 4-year-olds, the tendency to opt for delayed rewards in order to share with the partner was correlated with theory of mind. For younger 3-year-olds, the children's ability to inhibit pointing to the baited box was significantly correlated with the tendency to choose delayed over immediate sticker rewards. These results indicate that children's ability to show future-oriented prosocial or sharing behavior is linked developmentally both to the ability to imagine conflicting noncurrent mental states and the ability to inhibit responding to perceptually salient events.     

Social comparison and risk taking behavior

This paper studies the effects of social comparison on risk taking behavior. In our theoretical framework, decision makers evaluate the consequences of their choices relative to both their own and their peers’ conditions. We test experimentally whether the position in the social ranking affects risk attitudes. Subjects interact in a simulated workplace environment where they perform a work task, receive possibly different wages, and then undertake a risky decision that may produce an extra gain. We find that social comparison matters for risk attitudes. Subjects are more risk averse in the presence of small social gain than social loss. In addition, risk aversion is decreasing in the size of the social gain.     

Self-protection against repeated low probability risks

This paper reports the results of experiments designed to test the effect of experience on preferences for self-protection against low and high probability losses. Subjects gained experience by repeatedly making choices about whether or not to invest in a protective activity and then observing the result of their choice. Half of the subjects faced a low probability risk while the other half faced a higher probability risk with the severity of loss scaled down to hold expected value constant. Protection was more common against the high probability risk. Despite receiving full information about the risks in advance, most subjects made choices in response to prior outcomes. This led to a great deal of experimentation when losses were common (the high probability risk) but very little experimentation when losses were infrequent (the low probability risk).     

Loss Averse Behavior

A behavioral condition of loss aversion is proposed and tested. Forty-nine students participated in experiments on binary choices among lotteries involving small scale real gains and losses. At the aggregate level, a significant proportion of the choices are in the direction predicted by loss aversion. Individuals can be classified as loss averse (28 participants), gain seeking (12), and unclassified (9). A comparison with risk behavior for binary choices on lotteries involving only gains shows that risk attitudes vary across these domains of lotteries. A gender effect is also observed: proportionally more women are loss averse. In contrast to the predictions of comonotonic independence, the size of common outcomes has systematic influence on choice behavior. JEL Classification: D81, C91     

Accommodating stake effects under prospect theory

This paper investigates how letting people predict others’ choices under risk affects subsequent own choices. We find an improvement of strong rationality (risk neutrality) for losses in own choices, but no such improvement for gains. There is no improvement of weak rationality (avoiding preference reversals). Overall, risk aversion in own choices increases. Conversely, for the effects of own choices on predicting for others, the risk aversion predicted in others’ choices is reduced if preceded by own choices, for both gains and losses. Remarkably, we find a new probability matching paradox at the group level. Relative to preceding studies on the effects of predicting others’ choices, we added real incentives, pure framing effects, and simplicity of stimuli. Our stimuli were maximally targeted towards our research questions.     

Failing to learn from experience about catastrophes: The case of hurricane preparedness

This paper explores the question of whether there are inherent limits to our ability to learn from experience about the value of protection against low-probability, high-consequence, events. Findings are reported from two controlled experiments in which participants have a monetary incentive to learn from experience making investments to protect against hurricane risks. A central finding is that investments display a short-term forgetting effect consistent with the use of reinforcement learning rules, where a significant driver of investments in a given period is whether storm losses were incurred in the precious period. Given the relative rarity of such losses, this reinforcement process produces a mean investment level below that which would be optimal for most storm threats. Investments are also found to be insensitive to the censoring effect of protection itself, implying that the size of experienced losses??rather than losses that are avoided??is the primary driver of investment decisions.     

My life in care: experiences of non-participation in decision-making processes

The extent to which young people are involved in legal decision‐making depends on assumptions and perceptions about their ability to participate in decision‐making in general. This paper draws on research with four young people, looking at their experiences of involvement in a variety of decision‐making processes whilst in the care of the local authority. Through narratives, games and other activities, the thoughts and emotions of the four young people are explored, identifying the development of feelings of helplessness, low self‐esteem and poor confidence that have followed the lack of opportunities made available to them to make decisions about their own lives. The efficacy and tension of corporate parenting is also explored with suggestions from the participants on how the care system could be constructed differently to facilitate their voice and that of much younger children than themselves. Thus, the debate becomes one of adult ability and preparedness to involve young people in decisions about their own lives, rather than whether they are able to participate effectively.     

The Elements of Rationality and Chance in the Choice of Human Action

The focus in this paper is on deliberate human action. The central questions addressed are: whether purely rational choice is possible; whether choices may be induced by chance alone; or whether there is always a mixture of rationality and chance, as well as other factors such as habit, emotion, imitation and irrationality. The approach is a factualist one, upholding the view that, although human action can be explained by its antecedents, this is not incompatible with the notion of "free choice". It is the actual choosing process that determines the final choice of action. Whatever the sources of the elements involved in the choosing process, the choice of action is a specific outcome created by the acting agent. It is in this choosing process and decision making that both rationality and chance enter. The conclusion is that rationality is the element which links intentionality with goal seeking and attainment, but that the actual choice is determined by a complex interactive process in which both logic and chance play a part.     

Preference reversals: Time and again

This paper sheds new light on the preference reversal phenomenon by analyzing decision times in the choice task. In a first experiment, we replicated the standard reversal pattern and found that choices associated with reversals take significantly longer than non-reversals, and non-reversal choices take longer whenever long-shot lotteries are selected. These results can be explained by a combination of noisy lottery evaluations (imprecise preferences) and an overpricing phenomenon associated with the compatibility hypothesis. The first cause explains the existence of reversals, while the second explains the predominance of a particular type thereof. A second experiment showed that the overpricing phenomenon can be shut down, greatly reducing reversals, by using ranking-based, ordinally-framed evaluation tasks. This experiment also disentangled the two determinants of reversals, because imprecise evaluations still deliver testable predictions on decision times even in the absence of the overpricing phenomenon. Strikingly, when unframed ranking tasks were used, decision times in the choice phase were greatly reduced, even though this phase was identical across treatments. This observation is consistent with psychological insights on conflicting decision processes.     

Behavioral patterns and reduction of sub-optimality: an experimental choice analysis

This paper attempts to identify behavioral patterns and compare their average success considering several criteria of bounded rationality. Experimentally observed choice behavior in various decision tasks is used to assess heterogeneity in how individual participants respond to 15 randomly ordered portfolio choices, each of which is experienced twice. Treatments differ in (not) granting probability information and in (not) eliciting aspirations. Since in our setting neither other regarding concerns nor risk attitude matter and probability of the binary chance move is (optimal) choice irrelevant, categorizing decision types relies on parameter dependence and choice adaptations. We find that most participants reduce systematically sub-optimality when following the identified criteria.     

Effects of Outcome and Probabilistic Ambiguity on Managerial Choices

Information ambiguity is prevalent in organizations and likely influences management decisions. This study examines, given imprecise probabilities and outcomes, how managers make choices when they are provided with single-figure benchmarks. Seventy-nine MBA students completed two experiments. We found that, in a decision framed as a decision under certainty involving an ambiguous outcome, the majority of the subjects were ambiguity prone in the loss condition and switched to ambiguity aversion in the gain condition. However, in the presence of probabilistic ambiguity in a decision under risk, this expected switching pattern was shown only when the difference in riskiness between the two choice options (in the loss condition) was perceived to be relatively small. In a companion study, we used a written protocol approach to identify factors that affect decision makers' investment choices when faced with ambiguous outcomes. Protocols frequently mentioned that the ambiguous outcome option was risky, even in the case which was framed as a decision under certainty in the problem statement. In a decision under risk with ambiguous outcomes, the combination of probabilistic risk and outcome ambiguity was seen as even more risky.     

Temporal discounting of gains and losses of time: An experimental investigation

This paper investigates “asymmetries” between non-monetary gains and losses in intertemporal choice. We considered gains and losses of spare/working time with respect to a reference duration defined in a working contract. Specifically, we elicited a behavioral model of intertemporal choice that accounts for a gain/loss-dependent discounting function and a reference-dependent utility. Additionally, we did not impose preference for the present (positive discounting) and allowed for both decreasing and increasing impatience. While our results are standard regarding the discount of money (our baseline treatment), our subjects heavily discounted gains of time. More patience was observed for losses of time and a sizable portion of subjects even exhibited negative discounting, i.e. they preferred to expedite losses of time. Our econometric estimations also reveal a much larger heterogeneity of behavior in terms of both utility and discounting for gains and losses of spare time as compared to money.     

Construal Processes in Preference Assessment

Interpreting people's preferences requires understanding how they have construed their tasks, interpreting the proposed alternatives in the context where the evaluation is being made. With stylized experimental or survey choices, researchers' challenge is typically identifying the features that people add in order to make their task real enough to answer (i.e., how they read between the lines). With rich “real world” choices, researchers' challenge is typically identifying the features that people neglect, as they reduce their task to manageable complexity (i.e., which lines they choose to read). In either case, if people misunderstand or mistrust the stated transaction, they may evaluate a different offer than the one that was proposed. Such misconstruals are a nuisance for investigators, insofar as dealing with them delays the measurements that motivated the research. However, they can also provide an opportunity, by focusing attention on how people give meaning to choice situations. This article describes procedures for studying construal processes, strategies for getting people to answer the questions that interest researchers, and options for interpreting responses when people construe questions differently than was intended.     

The disgust-promotes-disposal effect

Individuals tend toward status quo bias: preferring existing options over new ones. There is a countervailing phenomenon: Humans naturally dispose of objects that disgust them, such as foul-smelling food. But what if the source of disgust is independent of the object? We induced disgust via a film clip to see if participants would trade away an item (a box of unidentified office supplies) for a new item (alternative unidentified box). Such “incidental disgust” strongly countered status quo bias. Disgusted people exchanged their present possession 51% of the time compared to 32% for people in a neutral state. Thus, disgust promotes disposal. A second experiment tested whether a warning about this tendency would diminish it. It did not. These results indicate a robust disgust-promotes-disposal effect. Because these studies presented real choices with tangible rewards, their findings have implications for everyday choices and raise caution about the effectiveness of warnings about biases.     

Economic performance under different monetary policy frameworks

We examine the economic performance (inflation and growth) associated with different monetary policy frameworks, presenting unconditional and conditional analyses, and using predictions of countries’ monetary policy framework choices to address the issue of endogeneity. We find some differences in performance associated with the different monetary policy frameworks, together with a general improvement over time which is explained in part by the trends towards inflation targeting and more precise monetary control, that is from changes in the choice of framework, but in part, and perhaps more strongly, reflects a more general trend towards better economic performance related to changes in decision-making within the frameworks. Our results suggest that the choice of MPF is an important, but by no means the only, determinant of economic performance, and therefore not the only consideration for policymakers looking to improve economic performance.     

Estimating individual and group preference functionals using experimental data

In this paper, the empirical performance of several preference functionals is assessed using individual and group experimental data. We investigate if there is a risky choice theory that fits group decisions better than alternative theories, and if there are significant differences between individual and group choices. Experimental findings reported in this paper provide answers to both of those questions showing that expected utility gains a “winning” position over higher-level functionals (we considered disappoint aversion and two variants of rank-dependent utility) when risky choices are undertaken by individuals as well as by small groups. However, in the group experiment, alternatives (and, most notably, disappoint aversion) improve their relative performance, a fact that hints at the existence of differences between individual and group choices. We interpreted this result as evidence that feelings-like disappointment aversion become stronger in group decision.     

Different carrots and different sticks: do we reward and punish differently than we approve and disapprove?

This paper reports lab data from four games in order to analyze and compare the motivations behind monetary punishment and reward and their non-monetary counterparts, disapproval and approval, an important question given that both types of punishment/rewards affect cooperation and norm compliance. The results in our games support the hypothesis that a motivation akin to reciprocity plays the key role for approval and disapproval whereas payoff comparisons play the key role for monetary rewards and punishment.     

Reference Wealth Effects in Sequential Choice

It is argued that in order to accommodate experimentally-observed choice patterns, it is not enough to model the utility function as being dependent on changes from a reference wealth point. Instead, individuals should be modeled as treating decisions as part of an identifiable sequence of decisions, and utility should be a function of reference wealth, income so far from the sequence, and payoffs from the current decision. The three-argument utility function allows for risk aversion over gains and risk seeking over losses for the first choice in the sequence, and for the house money and break-even effects in later decisions.     

Dynamic awareness and zero probability beliefs

We study behavioral patterns of insurance demand for low-probability large-loss events (catastrophic losses). Individual patterns of belief formation and risk attitude that were suggested in the behavioral decisions literature emerge robustly in the current set of insurance choices. However, social comparison effects are less robust. We do not find any evidence for peer effects (through social-loss aversion or imitation) on insurance take-up. In contrast, we find support for the prediction that people underweight others’ relevant information in their own decision making.