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.

An experimental investigation of transitivity in set ranking

A decision under ‘complete uncertainty’ is one where the decision maker knows the set of possible outcomes for each decision, but cannot assign probabilities to those outcomes. This way, the problem of ranking decisions is reduced to a problem of ranking sets of outcomes. All rankings that have emerged in the literature in this domain imply transitivity. In the current study, transitivity is subjected to an empirical evaluation in two experiments, where subjects are asked to choose between sets of monetary consequences. After analysis with a Bayes Factor, very few violations of transitivity were found. It can be concluded that transitivity seems a plausible condition for the ranking of sets of monetary consequences.     

One-reason decision-making: Modeling violations of expected utility theory

People violate expected utility theory and this has been traditionally modeled by augmenting its weight-and-add framework by nonlinear transformations of values and probabilities. Yet individuals often use one-reason decision-making when making court decisions or choosing cellular phones, and institutions do the same when creating rules for traffic safety or fair play in sports. We analyze a model of one-reason decision-making, the priority heuristic, and show that it simultaneously implies common consequence effects, common ratio effects, reflection effects, and the fourfold pattern of risk attitude. The preferences represented by the priority heuristic satisfy some standard axioms. This work may provide the basis for a new look at bounded rationality.

Using Online Reviews in Social Care

The emphasis placed on choice of social care provider means that there is an increasing need to furnish service users with reliable and up‐to‐date information on provider quality. In England, encouraging users to leave online feedback on providers is seen as one of the ways of improving the supply of information. However, using these channels for social care raises a number of issues, for example, the challenge of generating enough content to be of value, and the need to protect the anonymity of potentially vulnerable users. This article aims to summarize these issues, by drawing upon the experience of an established ratings site (TripAdvisor), and of heath service rating systems, as well as literature on decision‐making and behaviour across social care and related sectors. The article concludes that online ratings can assist users to choose providers, however, they will need to be supported by carefully designed processes to maximize their usefulness.     

Intertemporal choice under timing risk: An experimental approach

This paper investigates how individuals evaluate delayed outcomes with risky realization times. Under the discounted expected utility (DEU) model, such evaluations depend only on intertemporal preferences. We obtain several testable hypotheses using the DEU model as a benchmark and test these hypotheses in three experiments. In general, our results show that the DEU model is a poor predictor of intertemporal choice behavior under timing risk. We found that individuals are averse to timing risk and that they evaluate timing lotteries in a rank-dependent fashion. The main driver of timing risk aversion is nothing but probabilistic risk aversion that stems from the nonlinear treatment of probabilities.     

The effect of context variables on cognitive effort in multiattribute binary choice

This article reports an empirical investigation of the cognitive effort required to decide in multiattribute binary choice using a variation of the Additive Difference strategy. In contrast with other studies, this paper focuses on the effect of various context variables (rather than task variables) on cognitive effort. In order to select the context variables to be manipulated, we used the model proposed by Shugan (1980; J. Consumer Res. 75 (1980) 99). Our results indicate that there is a positive relationship between the cognitive effort required to decide and the mean of the differences between the dimensions of the choice alternatives. We have also found an inverse relationship between cognitive effort and the variance of the differences between the dimensions of the choice alternatives. Finally, we have found that in negative correlation contexts the effort needed to decide is greater than in positive and null correlation contexts.     

Production under uncertainty and choice under uncertainty in the emergence of generalized expected utility theory

Theory and Decision - Interest in the foundations of the theory of choice under uncertainty was stimulated by applications of expected utility theory such as the Sandmo model of production under...     

Implications of behavioral consistency in dynamic choice under uncertainty

This paper considers two fundamental aspects of the analysis of dynamic choices under risk: the issue of the dynamic consistency of the strategies of a non EU maximizer, and the issue that an individual whose preferences are nonlinear in probabilities may choose a strategy which is in some appropriate sense dominated by other strategies. A proposed way of dealing with these problems, due to Karni and Safra and called behavioral consistency, is described. The implications of this notion of behavioral consistency are explored, and it is shown that while the Karni and Safra approach obtains dynamically consistent behavior under nonlinear preferences, it may imply the choice of dominated strategies even in very simple decision trees.     

An experimental test of prospect theory for predicting choice under ambiguity

Prospect theory is the most popular theory for predicting decisions under risk. This paper investigates its predictive power for decisions under ambiguity, using its specification through the source method. We find that it outperforms its most popular alternatives, including subjective expected utility, Choquet expected utility, and three multiple priors theories: maxmin expected utility, maxmax expected utility, and a-maxmin expected utility.     

Testing between alternative models of choice under uncertainty—Comment

Battaglio, Kagel, and Jiranyakul use experimental tests to compare rank-dependent expected utility (RDEU), regret theory, prospect theory, and Machina's generalized smooth preferences model. They conclude that none of these models consistently organizes the data. The purpose of this note is to point out that RDEU theory was tested in combination with a hypothesis on the choice of functional form that has been explicitly rejected by the original author of the model (Quiggin, 1982, 1987). When the original form of RDEU theory is tested, it performs quite well.     

Probability and juxtaposition effects: An experimental investigation of the common ratio effect

Several theories explain the common ratio effect as a probability effect resulting from properties of individuals' preference orderings over probability distributions of consequences. In contrast, regret theory explains it as the result of changes in the juxtaposition of consequences in the action/state matrix. This article reports an experiment that allowed probability effects and juxtaposition effects to be separately identified for some common ratio problems, some of which involved real gains and others, real losses. The main finding is that changes in the juxtaposition of consequences have systematic effects on choices in the direction predicted by regret theory.University of East Anglia     

Testing between alternative models of choice under uncertainty: Some initial results

Experiments have identified a number of well-known violations of expected utility theory, giving rise to alternative models of choice under uncertainty, all of which are able to explain these violations. In this article, predictions of several prominent rival formulations are examined. No single alternative consistently organizes choices. Among the more important inconsistencies, we identify conditions generating systematic fanning in of indifference curves in the unit probability triangle, and find risk-loving over a number of gambles with all positive payoffs, in cases where prospect theory predicts risk aversion.     

Context dependence and consistency in dynamic choice under uncertainty: the case of anticipated regret

We examine if and to what extent choice dispositions can allow dependence on contexts and maintain consistency over time, in a dynamic environment under uncertainty. We focus on one of the context dependence properties, opportunity dependence because of being affected by anticipated regret, where the consequentialist choice framework is maintained. There are two sources of potential inconsistency: one is arrival of information, and the other is changing opportunities. First, we go over the general method of resolution of potential inconsistency, by taking any kinds of inconsistency as given constraints. Second, we characterize a class of choice dispositions that are consistent to information arrival, but may be inconsistent to changing opportunities. Finally, we consider the overall requirement of dynamic consistency and show that it necessarily implies each of consistency to information arrival and independence of choice opportunities. The last result states that the two kinds of potential inconsistency cannot “compensate” each other to recover dynamic consistency overall.     

Examination of the Child Protective Services Decision-Making Context with Implications for Decision Support System Design

Abstract

The general perception of Child Protective Services (CPS) decision making is that it is inconsistent and prone to error. As a result, risk assessment instruments were developed to enable investigators to make better decisions. The present study uses a qualitative approach with an explicit theoretical framework pertinent to management information systems and decision support system design to examine the context in which investigators operate and make decisions. The resulting information can be used to determine design requirements that would improve the experience of using a risk assessment instrument that serves as a decision support system (DSS) for CPS investigators.     

Different frames for the independence axiom: An experimental investigation in individual decision making under risk

This article classifies three classes of generalized expected utility preferences according to the justifications for the independence axiom and for the reduction principle that they subscribe to or reject. The results of an experiment designed to test the three classes show that some substantial proportions of responses are consistent with each class. In view of this finding, it is suggested that the different theories belonging to the three classes should be considered complementary, rather than alternative, in order to explain individual behavior under risk.     

Focal points in pure coordination games: An experimental investigation

This paper reports an experimental investigation of the hypothesis that in coordination games, players draw on shared concepts of salience to identify focal points on which they can coordinate. The experiment involves games in which equilibria can be distinguished from one another only in terms of the way strategies are labelled. The games are designed to test a number of specific hypotheses about the determinants of salience. These hypotheses are generally confirmed by the results of the experiment.     

A note on decisions under uncertainty: the impact of the choice of the welfare measure

The paper addresses the question, how policy decisions under uncertainty depend on the underlying welfare concept. We study three different welfare measures: The first is directly based on the ex ante (expected) utility of a representative consumer whereas the second relies on an ex ante and the third on an ex post valuation of policy changes compared to the status quo. We show that decisions based on these measures coincide if and only if risk-neutral expected utility maximization is applied. Differences between the decisions are analyzed for both, risk-averse expected utility maximization and the MaxiMin criterion. For risk-averse decision makers, differences between the first and the second concept arise if the absolute risk-aversion of the decision maker is not constant in income. For risk-aversion and the MaxiMin criterion, the effort levels to provide a public good based on an optimization of ex post utility changes exceed those based on the first or second concept. Implications for environmental policy decisions based on the concepts of abatement costs and benefits from abatement are discussed.     

Production under Uncertainty and Choice under Uncertainty in the Emergence of Generalized Expected Utility Theory

This paper presents a personal view of the interaction between the analysis of choice under uncertainty and the analysis of production under uncertainty. Interest in the foundations of the theory of choice under uncertainty was stimulated by applications of expected utility theory such as the Sandmo model of production under uncertainty. This interest led to the development of generalized models including rank-dependent expected utility theory. In turn, the development of generalized expected utility models raised the question of whether such models could be used in the analysis of applied problems such as those involving production under uncertainty. Finally, the revival of the state-contingent approach led to the recognition of a fundamental duality between choice problems and production problems. This revised version was published online in June 2006 with corrections to the Cover Date.     

Choices at various levels of uncertainty: An experimental test of the restated diversification theorem

Our “Restated diversification theorem” (Skogh and Wu, 2005) says that risk-averse agents may pool risks efficiently without assignment of subjective probabilities to outcomes, also at genuine uncertainty. It suffices that the agents presume that they face equal risks. Here, the theorem is tested in an experiment where the probability of loss, and the information about this probability, varies. The result supports our theorem. Moreover, it tentatively supports an evolutionary theory of the insurance industry—starting with mutual pooling at uncertainty, turning into insurance priced ex ante when actuarial information is available.