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Risk and rationality: The effects of mood and decision rules on probability weighting
Abstract
Abstract Empirical research has shown that people tend to overweight small probabilities and underweight large probabilities when valuing risky prospects, but little is known about factors influencing the shape of the probability weighting curve. Based on a laboratory experiment with monetary incentives, we demonstrate that pre-existing good mood is significantly associated with women's probability weights: Women in a better than normal mood tend to weight probabilities relatively more optimistically. Many men, however, seem to be immunized against effects of incidental mood by applying a mechanical decision criterion such as maximization of expected value.
... Risk-taking behavior. Risk-taking behavior is relevant in an organizational context since employees have to make decisions that involve risks (Fehr-Duda et al., 2011). Employee risktaking behavior entails a multi-dimensional construct (i.e. ...
... The literature has revealed several factors influencing risk taking, such as the perception of risks and positive affect (Fehr-Duda et al., 2011). On the one hand, drawing from COR theory, flow may cause a subsequent reduction of cognitive resources to appraise risks (Sch€ uler and Pfenninger, 2011). ...
... More risks are to be taken when individuals are in a positive mood because they are more optimistic about the outcomes. People tend to believe "good" things will happen no matter what they JMP choose (Fehr-Duda et al., 2011). During flow, people become more confident, which may also lead to more risky behaviors (Sch€ uler and Nakamura, 2013). ...
Purpose
Using positive psychology theories, the authors build a model to test whether episodic fluctuations in strengths use coincide with changes in flow experiences and further predict risk-taking behavior and attentional performance.
Design/methodology/approach
A field study covering five working days was conducted among 164 Chinese employees; twice a day, they were asked to complete questionnaires regarding their strengths use and flow experiences during the previous hour ( N = 938 observations). Immediately afterward, their risk-taking behaviors and attentional performance were tested using computerized tasks.
Findings
Multilevel analyses showed that when employees used their strengths more often in the previous hour, they also reported an increase in flow. Episodic fluctuations in flow were positively associated with risk taking and negatively related to attentional performance.
Practical implications
Employees should be encouraged to use their strengths more at work, as this might increase their flow experiences. At the same time, they should pay attention to the downsides of flow (i.e. less attention after flow) at an episodic level.
Originality/value
The authors add to previous studies by using a more objective approach, namely employing computerized tasks on risk-taking behavior and attention to capture the behavioral outcomes of work-related flow.
... This later work has also suggested more nuanced patterns in the carryover effect. These include sensitivity to different types of uncertainty, such as strategic risk and ambiguity (Kugler et al., 2010;Baillon et al., 2016), and gender differences in the effect of emotional primes on risky choice (Fessler et al., 2004;Fehr-Duda et al., 2011;Conte et al., 2018). ...
... In relation to this, one key departure we make from the bulk of related literature is to measure emotional responses twice and then use the within-subject difference of these responses in the analysis. An alternative method would be to only use our second emotions measure (i.e., final emotional state) thereby allowing the model to capture emotional effects beyond those attributable to our treatment manipulations (for example, this might better capture 'dispositional emotions' that may affect risk attitudes, see Fehr-Duda et al., 2011). As a robustness check, we re-estimated the models using the same econometric specifications as before, except for using final emotions, rather than changes in emotions. ...
Existing research has demonstrated carryover effects whereby emotions generated in one context influence decisions
in other, unrelated ones. We examine the carryover effect in relation to valuations of risky and ambiguous lotteries with a novel focus on the comparison of carryovers arising from a targeted stimulus (designed to elicit a specific emotion) with those arising from a naturalistic stimulus (designed to produce a more complex emotional response). We find carryover effects using both types of stimuli, but they are stronger for the naturalistic stimulus
and in the context of ambiguity, providing a proof of concept that carryover effects can be observed when moving away from highly stylised settings. These effects are also gender specific with only males being susceptible. To probe the emotional foundations of the carryover effect, we conduct analysis relating individual self reports of emotions to valuation behaviour. Our results cast doubt on some previously claimed links between specific incidental emotions and risk taking.
... Incidental mood influences the tendency of farmers to weigh potential losses more heavily than equivalent gains. Systematic distortion of the probability weighting has been observed in different mood states [26,27]. Hence, the following hypotheses are tested. ...
... The observed increase in uncertainty-seeking behaviour among farmers in a happy mood contradicts the Mood Maintenance Hypothesis (MMH) but aligns with the principles of the Affect Infusion Model (AIM) [26,27]. According to AIM, farmers use their current affective state as information when making judgments, leading to affect-congruent outcomes. ...
Small farmers in low-and-middle-income countries are disproportionately affected by uncertainties under which they have to make decisions. However, decision-making may not be purely rational as it could be influenced by affective or emotional states. Compared to integral mood, there are few studies investigating whether incidental mood influences farmers’ monetary decisions under uncertainty. This paper applies the Cumulative prospect theory (CPT) model to determine farmers’ attitudes under uncertainty and examines the association with farmers mood, measured by direct elicitation during an experimental session. Participants (farmers) were mostly uncertainty averse in the gain domain. In contrast, farmers were uncertainty-seeking for losses. A one-way ANOVA was conducted to examine the differences between groups in sad, neutral and happy mood states, followed by posthoc tests to determine which groups differed from each other. The results revealed statistically significant differences in uncertainty aversion, loss aversion, and the parameters representing how probabilities are perceived and weighted, i.e., sad, neutral and happy in the gain domain. However, there was an absence of a relationship between incidental mood and several CPT parameters in the loss domain. The paper highlights how understanding the association between mood and attitudes can be harnessed for a better quality of decision-making in various contexts. This finding has important implications for agricultural contexts where farmers often face uncertain outcomes and must make choices that involve potential gains and losses. Since the transfer of incidental moods to decision making is usually done unconsciously, it is crucial to eliminate or reduce the impact of negative moods on decision-making, especially where the outcome is likely to be suboptimal.
... This later work has also suggested more nuanced patterns in the carryover effect. These include gender differences (Fessler et al. 2004;Fehr-Duda et al. 2011;Conte et al. 2018) and sensitivity to different types of uncertainty, such as strategic risk and ambiguity (Kugler et al. 2010;Baillon et al. 2016). ...
... In relation to this, one key departure we make from the bulk of related literature is to measure emotional responses twice and then use the within-subject difference of these responses in the analysis. An alternative method would be to only use our second emotions measure (i.e., final emotional state) thereby allowing the model to capture emotional effects beyond those attributable to our treatment manipulations (for example, this might better capture 'dispositional emotions' that may affect risk attitudes (Fehr-Duda et al. 2011)). As a robustness check, we re-estimated the models using the same econometric specifications as before, except for using final emotions, rather than changes in emotions. ...
Existing research has demonstrated carryover effects whereby emotions generated in one context influence decisions in other, unrelated ones. We examine the carryover effect in relation to valuations of risky and ambiguous lotteries with a novel focus on the comparison of carryovers arising from a targeted stimulus (designed to elicit a specific emotion) with those arising from a naturalistic stimulus (expected to produce a more complex emotional response). We find carryover effects using both types of stimuli, but they are stronger for the naturalistic stimulus and in the context of ambiguity, providing a proof of concept that carryover effects can be observed when moving away from highly stylised settings. These effects are also gender-specific with only males being susceptible. To probe the emotional foundations of the carryover effect, we conduct analysis relating individual self-reports of emotions to valuation behaviour. Our results cast doubt on some previously claimed links between specific incidental emotions and risk taking.
... By multiplying the utilities of rewards by the weighted probabilities with which these rewards are received, decision makers calculate the subjective expected utilities for risky decisions. In humans, utility measured in laboratory experiments is typically concave in the domain of gains, whereas probability weighting is typically inverse S-shaped at aggregate levels (3,6,7) [see previous studies (8)(9)(10)(11) for potential alternate views]. In laboratory monkeys-a close relative to humans-concave or convex utility functions and various shapes of probability weighting functions have been found (12)(13)(14)(15)(16), leading to inconsistent and sometimes controversial results. ...
... In the economic literature, most studies conducted with human participants have found inverse S-shaped probability weighting functions at the aggregate level, with a large amount of heterogeneity at the individual level (7-11, 43, 44). The estimated probability weighting functions were also found to vary with changes in mood (11), age, and sex (9). A handful of recent studies have investigated static distortions in probability weighting of captive macaques, with inconsistent results (13-16, 45, 46). ...
Research in the multidisciplinary field of neuroeconomics has mainly been driven by two influential theories regarding human economic choice: prospect theory, which describes decision-making under risk, and reinforcement learning theory, which describes learning for decision-making. We hypothesized that these two distinct theories guide decision-making in a comprehensive manner. Here, we propose and test a decision-making theory under uncertainty that combines these highly influential theories. Collecting many gambling decisions from laboratory monkeys allowed for reliable testing of our model and revealed a systematic violation of prospect theory's assumption that probability weighting is static. Using the same experimental paradigm in humans, substantial similarities between these species were uncovered by various econometric analyses of our dynamic prospect theory model, which incorporates decision-by-decision learning dynamics of prediction errors into static prospect theory. Our model provides a unified theoretical framework for exploring a neurobiological model of economic choice in human and nonhuman primates.
... † 1 By multiplying the utilities of rewards by the weighted probabilities with which these rewards are received, decision-makers calculate the subjective expected utilities for risky decisions. In humans, utility measured in laboratory experiment is typically concave in the domain of gains, whereas probability weighting is typically inverse-S shaped at aggregate levels 3,6,7 (although previous studies 8,9,10,11 have indicated potentially alternate views). In laboratory monkeys -a close relative to humans -concave or convex utility functions and various shapes of probability weighting functions have been found 12,13,14,15,16 , leading to inconsistent and sometimes controversial results. ...
... As the positive RPE signal in the brain induces learning through the phasic release of dopamine19,20 , the change in subjective internal valuation may drive animals to maximize utility in a broader decision-making context when the environment is less stable.Probability weighting across species. In the economic literature, most studies conducted in humans have found inverse-S shaped probability weighting functions at the aggregate level, with a large amount of heterogeneity at the individual level6, 8, 9, 10, 11, 33, They also varied with the effects of mood11 , age, and sex 9 . A handful of recent studies on captive macaques have investigated static distortions in probability weighting in monkeys, with inconsistent results13,14,15,16,35,36 . ...
Research in the multidisciplinary field of neuroeconomics has been driven by two influential theories regarding human economic choice: prospect theory, which describes decision-making under risk, and reinforcement learning theory, which describes learning for decision-making. We hypothesized that these two distinct theories guide decision-making in a comprehensive manner. Here, we propose and test a new decision-making theory under uncertainty that combines these highly influential theories. Collecting many gambling decisions from laboratory monkeys allowed for reliable testing of our hybrid model and revealed a systematic violation of prospect theory’s assumption that probability weighting is static. Using the same experimental paradigm in humans, substantial similarities between monkey and human behavior were described by our hybrid model, which incorporates decision-by-decision learning dynamics of prediction errors into static prospect theory. Our new model provides a single unified theoretical framework for exploring the neurobiological model of economic choice in human and nonhuman primates.
... However, the results of these studies point in different directions. Not all studies confirm an effect across all incidental emotions (Treffers et al., 2016) or participant groups (Fehr-Duda et al., 2011;Fessler et al., 2004). Furthermore, some discrete emotions appear to increase risk-taking (e.g. ...
... Last, there is a substantial amount of evidence for gender differences in susceptibility to incidental affective influences on decision-making under risk and uncertainty (e.g. Angie et al., 2011;Fehr-Duda et al., 2011;Ferrer et al., 2017). Since more than one-third of the present effect sizes originate from studies with mostly female participants, gender effects might be a driver of the heterogeneity we observed. ...
Emotions influence human decisions under risk and uncertainty, even when they are unrelated to the decisions, i.e. incidental to them. Empirical findings are mixed regarding the directions and sizes of the effects of discrete emotions such as fear, anger, or happiness. According to the Appraisal-Tendency Framework (ATF), appraisals of certainty and control determine why same-valence emotions can differentially alter preferences for risky and uncertain options. Building upon this framework of emotion-specific appraisals, we conducted a systematic review and meta-analysis of 28 experimental studies on the effects of discrete incidental emotions on decision-making under risk and uncertainty. We evaluated potential moderators at the task and study levels. We find emotion-specific, moderately heterogeneous effects partially in line with the expectations of the ATF. The framing and financial consequences of choices, the type of choices, and the presence of other participants during the task do not moderate the effect. Our meta-analytic results support the differential influence of discrete, incidental emotions on decision-making under risk and uncertainty depending on appraisals other than valence. We discuss limited sample sizes and heterogeneity as reasons for the absence of significant moderators and encourage experimental investigations of individual differences in the susceptibility to incidental affective influences.
... Such decisions are significantly influenced by one's emotions. People feeling positive emotions may be relatively optimistic, so that they may fixate on positive rather than negative outcomes, and therefore take on greater risk than they would otherwise (e.g., Grable and Roszkowski, 2008;Fehr-Duda et al., 2011;Kuhnen and Knutson, 2011;Bassi et al., 2013;Halko et al., 2015;Dalton et al., 2020). On the other hand, positive emotions have also been linked to enhanced cognitive ability, productivity, patience, and healthy eating behavior (Erez and Isen, 2002;Isen, 2008;Fedorikhin and Patrick, 2010;Ifcher and Zarghamee, 2011). ...
... Surveys have been the main instrument used to measure emotions. However, surveys differ significantly across studies (Drichoutis and Nayga, 2013;Zhao, 2006;Fehr-Duda et al., 2011;Cahlíková and Cingl, 2017). One approach to studying emotions and risk is to conduct a three-stage experimental design: (1) induce emotions (2) survey respondents about their emotions to ensure stage 1 was successful (3) elicit risk preferences (Fessler et al., 2004;Bruyneel et al., 2009;Kim and Kanfer, 2009;Drichoutis and Nayga, 2013;Treffers et al., 2016;Conte et al., 2018). ...
How do emotions influence one’s willingness to take on risk? We show that answering this question can be particularly challenging because induced emotions are highly sensitive to a respondent’s contemporaneous experiences and can be rapidly diluted while respondents answer subsequent survey questions. We randomly assign respondents to one of three emotion-inducing videos (positive, negative, and neutral), and we also randomize whether subjects complete a self-assessment survey tool measuring emotions prior to completing risk preference elicitation tasks and immediately after watching the emotion-inducing video. We verify changes in emotions for all respondents by using facial expression analysis software. Respondents who watched a positive video and skipped the emotion-measuring survey were less risk averse, particularly in the first of two preference elicitation tasks. Our findings indicate that estimates of how induced emotions affect risk aversion may be attenuated by including any intermediate tasks, including a survey to measure such emotions.
PsychINFO Classification Code: 2360.
... A number of studies have identified that there is a large amount of heterogeneity between individuals in the shape of the probability weighting function Gonzalez & Wu, 1999;Harrison & Rutström, 2009) and that this heterogeneity can be influenced by external factors such as stake size (Fehr-Duda, Bruhin, Epper, & Schubert, 2010), mood (Fehr-Duda, Epper, Bruhin, & Schubert, 2011;Schulreich et al., 2014), timing of payments (Abdellaoui, Diecidue, &Öncüler, 2011) and the source of uncertainty (Johnson, Hershey, Meszaros, & Kunreuther, 1993). However, with a few exceptions e.g. ...
... Probability weighting is measured using a certainty equivalent (CE) elicitation method with sign and rank dependence (Abdellaoui, Diecidue, &Öncüler, 2011;Epper & Fehr-Duda, 2016;Fehr-Duda et al., 2011;Tversky & Kahneman, 1992). The subjects' CE is used to estimate a value function and a probability in Gonzalez and Wu (1999), Baillon, Bleichrodt, Keskin, l'Haridon, and Li (2017) and Andersen, Harrison, Lau, and Rutström (2006) 2 . ...
The ability to make a beneficial financial choice varies greatly among individuals. One of the ways this variability may present itself is through probability weight-ing, where on aggregate small probabilities are overweighted and large probabilities are underweighted. This paper investigates if the combination of risk literacy and the neuro-biological concept of interoception plays a role in mediating the over and under-weighting of a prospects likelihood. I find that high risk literacy increases the perception of changes in probability and as such reduces underweighting/over-weighting while high interoceptive ability reduces overoptimism towards gambles in males but induces pessimism towards gambles for females.
... Previous models, such as prospect theory, have described rational decision-making as a circumstance (i.e., a weighing mechanism) in which a rational decision-maker links their choices to results by overestimating low probabilities and underestimating higher probabilities (Miu & Crişan, 2011;Oliveira, 2007;Seo et al., 2010). Moreover, it is assumed that the ultimate decision is made based on the optimal choices available near a rational decision-maker of the available alternatives (Fehr-Duda et al., 2011;Grinblatt & Han, 2005;Lin, 2011;Oliveira, 2007). Behavioural theorists classify the theories of decision-making into five major perspectives (i.e., economic man, psychodynamic perspectives, behavioural perspectives, cognitive perspectives, and humanistic perspectives) (Bray, 2008). ...
With an avalanche of market manipulations and unethical tactics in the Australian financial industry, the empowerment levels of female Australian consumers when making financial investment decisions are highly questionable. Through the theoretical lens of a utilitarian perspective, financial investment decisions are often built on the pillars of trust, security, and assurance, which allow consumers to make decisions rationally and gain empowerment when making these decisions. However, due to the widespread manipulations prevailing in Australian financial markets, the role of rationality and its influence on consumer empowerment remain understudied. Based on this context, this paper uncovers the association between how each stage of rational decision-making (RDM) (i.e., demand identification, information search, and the evaluation of alternatives) influences the consumer power (i.e., consumer resistance and consumer influence) of female Australian consumers when making financial investment decisions. In doing so, this study employs a quantitative approach, whereby the proposed conceptual framework is tested among 357 female Australian consumers to understand their decision-making power in the presence of heightened situations of market manipulation in the financial industry. The results show that information search has a significant positive relationship with consumer influence and consumer resistance when making financial investment decisions. Additionally, the findings suggest that female Australian consumers should not only rely on individual-based sources of power but also have exposure to network-based sources of power to gain empowerment when making financial investment decisions. Lastly, it is suggested that government bodies, financial institutions, and regulatory authorities should not only implement financial literacy programs but also promote gender diversity across organisations to encourage women’s empowerment (i.e., Goal 5 (SDGs)—Achieve Gender Equality and Empower all Women and Girls).
... Elicitation, in general, comes with several known challenges. These may be related to mood, context, or cognitive ability (Fehr-Duda et al. (2011), Dohmen et al. (2018), Drichoutis and Nayga Jr (2022). Risk and time elicitation from choice lists is sensitive to the presentation of the list. ...
... Drouvelis and Grosskopf (2016), successfully associated subjects' cooperation and sanctioning behavior with their current emotional states and revealed that the average net earnings are lower when subjects are in an angry mood. Fehr-Duda et al. (2011), also in a laboratory experiment, showed that preexisting good mood is significantly associated with decision rules on probability weighting, especially for female participants. In the same direction, Carpa (2004) tested the effect of induced mood on behavior in a one-shot dictator, ultimatum and trust economic game. ...
We explore whether there is a link between mood and hiring decisions. This research examines how positive mood affects the discrimination faced by homosexual and female job candidates compared to heterosexual and male ones. We randomly assign respondents to one of two mood-inducing videos (positive and neutral), and we allow subjects to make a series of hiring choices prior and immediately after watching the mood-inducing video. Our experiment being conducted in the online labor platform Amazon Mechanical Turk, allows us to track the complete hiring process and monitor employers' behavior within and without our treatment context. Constructing pairs of curriculum vitae, distinguished only by the sexual orientation or the gender of the applicants in each case, leads to the observation that women and gay men faced a significantly lower chance of getting hired. We also find that female employers proposed higher levels of discrimination only in the case of female applicants. Our positive mood manipulation leads to a decrease of discrimination levels. Thus, there is substantial experimental evidence to suggest that discrimination based on sexual orientation and gender also exists in online labor markets. An additional experiment with negative mood manipulation, also, gives evidence for the opposite direction of the effects, contributing to a broader picture of the relationship between mood and discrimination behavior. Contributions to the literature on hiring discrimination, mood research and the online economy are discussed.
... On the other hand, the public services equalization in urban and rural areas and the steady increase in social security can increase individuals' life satisfaction (Kotakorpi & Laamanen, 2010). A strong sense of happiness would enhance residents' resistance to risks (Chou et al., 2007;Fehr-Duda et al., 2011), so they would be more willing to accept the lottery industry with ''gambling'' characteristics, and the lottery market share is expected to expand accordingly. Most of the existing studies on lotteries focuses on the relationship between people's lottery purchase behavior and their quality of life and physical and mental health from a micro perspective (Ariyabuddhiphongs, 2011;Feng & Yao, 2016;. ...
Steady progress in urbanization and continuous industrial structure upgrading are important pillars for emerging economies to achieve sustainable development. As an important means of enhancing national economic development, the lottery industry has always been highly valued by all countries. For China, how to promote the sustainability of the lottery industry so as to improve residents’ subjective wellbeing and life satisfaction is particularly critical. The purpose of this study is to explore the impact of urbanization and industrial structure upgrade on lottery consumption. Based on provincial panel data running from 2008 to 2019 in China, it uses two-way fixed effects to make empirical analysis. The results show that the increase in urbanization rate and tertiary industry share has significantly positive effects on lottery consumption; the impact of urbanization and the proportion of the tertiary industry on lottery consumption would vary in categories of lottery tickets; the urbanization and tertiary industry share have a greater role in promoting lottery sales in the eastern region, followed by the central region, and finally the western region. Accordingly, this article proposes policy recommendations to promote the coordinated development of the lottery industry and other related industries in China.
... Similarly, it is important to understand that a serious adverse event may be very rare, but the consequences for the participant, when it occurs, are significant. With this knowledge, a participant's character and disposition-and even their current mood-may impact choice, independent of health numeracy proficiency (Reyna et al., 2009;Fehr-Duda et al., 2011). A strictly scientific approach to any decision is further imperiled by "therapeutic misconception" (Appelbaum et al., 1987;Miller and Brody, 2003), the participant's belief that the investigator, like the clinician, always acts in the best interest of the patient and that, therefore, the research has therapeutic intent. ...
The ability to understand and use numeric information in healthcare and clinical research is a critical component of informed decision-making for patients and study participants. Health numeracy levels in the general population, however, tend to be quite low and as such, the responsibility falls on communicators to ensure that the information being shared is designed to facilitate recipient comprehension and support their autonomy. Here, we introduce health numeracy considerations within the clinical research context and outline specific areas that can benefit from thoughtful communication strategies, including the presentation of visual information to augment the interpretation of, and learning about, research studies. Specifically, we discuss seven categories of numeric concepts that arise throughout the course of research participation and important considerations when presenting such information. Increasing awareness amongst communicators about health numeracy and the need to include supportive visual representations when developing and sharing clinical research-related information will help support the creation of tailored information that meets the needs of the intended audience.
... By pointing towards the potentially mediating role of people's overall life satisfaction for risk-taking and compliance, our findings may help reconcile contradictory evidence on risk-avoidance and compliance, in particular that perceived personal health risks associated with Covid-19 are found to decrease with age 41 yet that regions with less risk-takers and larger older population are found to increase their time staying home during strict lockdowns 42 . Finally, our paper contributes to the literature on the relationship between wellbeing, affect, and behaviour more generally, adding to evidence on how wellbeing and affect are associated with risk-taking (see 43,44 or 45 , for example) and pro-social behaviour (see [46][47][48] or 49 , for example). Table 1. ...
To combat the public health crisis of Covid-19, governments and public health officials have been asking individuals to substantially change their behaviours for prolonged periods of time. Are happier people more willing to comply with such measures? Using independent, large-scale surveys covering about 79,000 adult respondents across 29 countries, including longitudinal data from the UK, we find that life satisfaction predicts compliance with preventive health behaviours during Covid-19 lockdowns, especially the number of weekdays stood at home (β = 0.02, p < 0.01). The association is stronger for higher levels of life satisfaction (e.g. β = 0.19, p < 0.01, 7 on a 0-to-10 scale). Lower life satisfaction, on the contrary, predicts lower compliance (e.g. β = 0.02, p > 0.10, 2 on a 0-to-10 scale). We explore risk-avoidance and pro-social motivations for this relationship, and find suggestive evidence that people who are older or have certain medical preconditions seem to be behave in line with risk-avoidance, whereas motivations of people who are less at risk of Covid-19 seem more mixed. While it is difficult to estimate the relationship between life satisfaction and compliance behaviour due to potential confounders and unobserved heterogeneity, our findings suggest that life satisfaction is important, both for complying with preventive health measures and as a policy end in itself.
... At the same time, an equally rich and growing literature continues to produce evidence suggesting emotional reactions to negative events may systematically influence risk preferences (Lerner and Keltner, 2001;Loewenstein et al., 2001;Kuhnen and Knutson, 2011). Of particular interest are studies finding gender differences in the effects of emotions on risk preferences (e.g., see Lerner et al., 2003, Fessler et al., 2004, and Fehr-Duda et al., 2011. In order to explore this possibility in our sample, we access HILDA information on the emotional well-being of respondents focusing on a question eliciting reported happiness levels. ...
Using both aggregate and individual level data, this thesis analyzes human behavior and preferences in economics across three distinct, but nevertheless related, essays. In particular, the first essay investigates investment behavior in the context of the Australian pension fund industry. The second essay then examines a set of preferences - which have been hypothesized to determine investment behavior, as well as a wide variety of other important decisions that individuals make - following the 2008 Financial Crisis, before turning to explore the preferences of people after the 2009 Black Saturday Fires in Victoria, Australia, in the third and final essay.
... Finally, our paper contributes to the literature on the relationship between wellbeing, affect, and behaviour more generally, adding to evidence on how wellbeing and affect are associated with risk-taking (see [44], [45], or [46], for example) and pro-social behaviour (see [47], [48], [49], or [50], for example). ARE HAPPIER PEOPLE MORE COMPLIANT? ...
To combat the public health crisis of Covid-19, governments and public health officials have been asking individuals to substantially change their behaviours for prolonged periods of time. Are happier people more willing to comply with such measures? Using three independent, large-scale surveys covering about 119,000 adult respondents across 35 countries, including longitudinal data from the UK, we find that past and present life satisfaction predicts compliance with preventive health behaviours during Covid-19 lockdowns. The association is stronger for those with higher levels of life satisfaction. A loss in life satisfaction, on the contrary, predicts lower compliance. We explore risk-avoidance and pro-social motivations for this relationship, and find suggestive evidence that people who are older or have certain medical preconditions seem to be behave in line with risk-avoidance, whereas motivations of people who are less at risk of Covid-19 seem more mixed. Overall, our findings indicate that life satisfaction is important, both as a policy end in itself and for complying with new long-term preventive health measures.
... The probability weighting function was inverse S-shaped 25,26 , S-shaped 24,27 , or concave 26,49 . Although we consistently found that the probability weighting functions of our two well-trained monkeys were concave, most studies conducted in humans found inverse-S-shaped probability weighting functions at the aggregate level, with a large amount of heterogeneity at the individual level 13,15,[50][51][52][53][54] indicating an inconsistency between the two species. Furthermore, the monkeys in the present study had concave utility functions (i.e., risk aversion), while most previous studies have found that monkeys have convex (i.e., risk-seeking) 24,25 or concave 23,47-49 utility over rewards in the gain domain. ...
Prospect theory, arguably the most prominent theory of choice, is an obvious candidate for neural valuation models. How the activity of individual neurons, a possible computational unit, obeys prospect theory remains unknown. Here, we show, with theoretical accuracy equivalent to that of human neuroimaging studies, that single-neuron activity in four core reward-related cortical and subcortical regions represents the subjective valuation of risky gambles in monkeys. The activity of individual neurons in monkeys passively viewing a lottery reflects the desirability of probabilistic rewards parameterized as a multiplicative combination of utility and probability weighting functions, as in the prospect theory framework. The diverse patterns of valuation signals were not localized but distributed throughout most parts of the reward circuitry. A network model aggregating these signals reconstructed the risk preferences and subjective probability weighting revealed by the animals’ choices. Thus, distributed neural coding explains the computation of subjective valuations under risk.
... For instance, people might show systematically different attentional biases depending on whether they learned about the options from description or experience, which might explain the descriptionexperience gap in terms of probability weighting. Likewise, other psychological variables known to modulate risky decision making (e.g., affect) might operate by modulating the attentional process (e.g., Fehr-Duda et al., 2011). Moreover, the analyses point toward novel ways of designing interventions that might render probability weighting more objective (i.e., linear). ...
For a long time, the dominant approach to studying decision making under risk has been to use psychoeconomic functions to account for how behavior deviates from the normative prescriptions of expected value maximization. While this neo-Bernoullian tradition has advanced the field in various ways—such as identifying seminal phenomena of risky choice (e.g., Allais paradox, fourfold pattern)—it contains a major shortcoming: Psychoeconomic curves are mute with regard to the cognitive mechanisms underlying risky choice. This neglect of the mechanisms both limits the explanatory value of neo-Bernoullian models and fails to provide guidance for designing effective interventions to improve decision making. Here we showcase a recent “attentional turn” in research on risk choice that elaborates how deviations from normative prescriptions can result from imbalances in attention allocation (rather than distortions in the representation or processing of probability and outcome information) and that thus promises to overcome the challenges of the neo-Bernoullian tradition. We argue that a comprehensive understanding of preference formation in risky choice must provide an account on a mechanistic level, and we delineate directions in which existing theories that rely on attentional processes may be extended to achieve this objective.
... Drouvelis, & Grosskopf, 2016, successfully associated subjects' cooperation and sanctioning behavior with their current emotional states and revealed that the average net earnings are lower when subjects are in an angry mood. Fehr-Duda et al. 2011, also in a laboratory experiment, showed that preexisting good mood is significantly associated with decision rules on probability weighting, especially for female participants. In the same direction, Carpa (2004) tested the effect of induced mood on behavior in a one-shot dictator, ultimatum and trust economic game. ...
We explore whether there is a link between mood and hiring decisions. This research examines how positive mood affects the discrimination faced by homosexual job candidates compared to heterosexual ones. Our experimental design allows us to track the complete hiring process and monitor employers' behavior within and without our treatment context in both online and offline labor market settings. Constructing pairs of curriculum vitae, distinguished only by the sexual orientation or the gender of the applicants in each case, leads to the observation that women and gay men faced a significantly lower chance of getting hired regardless of the labor market context. We also find that female employers proposed higher levels of discrimination only in the case of female applicants. Our positive mood manipulation leads to a decrease of discrimination levels, with more robust effects in the online labor context. Thus, there is substantial experimental evidence to suggest that discrimination based on sexual orientation and gender also exists in online labor markets. Contributions to the literature on hiring discrimination, mood research, and the online economy are discussed. JEL codes: D91, D87, D53, D23, D01
... This effect was especially pronounced in the loss domain. Fehr-Duda et al. (2011) observed that when choosing between options with positive outcomes women in a neutral or "worse than usual" mood had slightly lower probability sensitivity and less elevated weighting functions-resulting in a more distorted weighting function-than women in a "better than usual" mood. When choosing between options with negative outcomes, women in "worse than usual" mood exhibited substantially more elevated weighting functions. ...
The assumption of an inverse S-shaped probability weighting function allows cumulative prospect theory to explain several well-established regularities in risky choice between monetary lotteries. Empirical evidence indicates that in choices between options with nonmonetary outcomes, the shape of the weighting function is strongly influenced by the negative emotions often associated with these outcomes. In its current form, however, cumulative prospect theory is silent with respect to how to formally integrate the influence of affective processes on the shape of the weighting function. Here, we propose an affective probability weighting function in which the two main features of the weighting function, probability sensitivity and elevation, gradually change with the affective value of the nonmonetary outcomes. We test our proposition in a model competition with three data sets. The results show that the affective probability weighting function improves the ability of (cumulative) prospect theory to predict choices between options with nonmonetary outcomes. We observed approximately linear probability weighting for the least affective nonmonetary outcomes and probability neglect for the worst or multiple outcomes. These findings demonstrate that integrating the effect of affective processes in formal decision models is crucial for advancing the understanding of choices between nonmonetary risky options—and thus ensuring the generalizability of the models beyond choices between monetary lotteries.
... They took individual preferences as a given and were less interested in its determinants (Fehr & Hoff, 2011). However, the past decades show an increased academic interest in investigating personal attributes that affect decision-making and preferences, including emotions (Conte, Levati, & Nardi, 2018;Fehr-Duda, Epper, Bruhin, & Schubert, 2011), religion (Benjamin, Choi, & Fisher, 2016;Jiang, Jiang, Kim, & Zhang, 2015), and culture (e.g., Benjamin, Choi, & Strickland, 2010;Fehr & Hoff, 2011;Li, Griffin, Yue, & Zhao, 2013). ...
... They took individual preferences as a given and were less interested in its determinants (Fehr & Hoff, 2011). However, the past decades show an increased academic interest in investigating personal attributes that affect decision-making and preferences, including emotions (Conte, Levati, & Nardi, 2018;Fehr-Duda, Epper, Bruhin, & Schubert, 2011), religion (Benjamin, Choi, & Fisher, 2016;Jiang, Jiang, Kim, & Zhang, 2015), and culture (e.g., Benjamin, Choi, & Strickland, 2010;Fehr & Hoff, 2011;Li, Griffin, Yue, & Zhao, 2013). ...
This paper examines the effect of national culture on corporate risk-taking worldwide. Specifically, we focus on one particular cultural trait – Individualism – a culture dimension linked to risk-taking and overconfidence. Using a sample of 48 countries from 1998 to 2019 (a total of 111,697 firm-year observations), we document a positive relationship between Individualism and corporate risk-taking. This result is robust to potential endogeneity concerns, alternative default horizons, an alternative measure for corporate risk-taking, and alternative measures of Individualism.
... The academic literature shows the effect of various emotions (fear, happiness, surprise, disgust, and anger) on probability weighing (Baker & Nofsinger, 2002;Fehr-Duda, Epper, Bruhin, & Schubert, 2011;Kliger & Levy, 2008;Rottenstreich & Hsee, 2001). ...
The aim of this article is to evaluate the effect of emotional biases (namely overconfidence bias, self‐control bias, loss aversion bias, and regret aversion bias) on risk preferences of individual investors. A structured questionnaire is developed by taking excerpts from various existing studies to evaluate emotional biases and the construct of risk preferences is adopted from “domain specific risk‐taking scale” (DOSPERT). The data are analyzed using structural equation modeling. The findings reveal that overconfidence bias and self‐control bias have significant positive relationship with risk preferences, whereas with loss aversion bias and regret aversion bias, a significant negative relationship of the risk preferences is found. The study contributes to the existing literature by examining the effect of feelings and emotions on risk. The findings of the study further confirm that risk is influenced by emotions and feelings. The results of this study will be of great use to policy makers, investment consultants, retail investors, regulators, and various other stakeholders associated with preparing and suggesting investment strategies for their own or for others.
... For example, sensitivity to probability changes tends to decrease when decision problems elicit strong negative emotions (Pachur, Hertwig, & Wolkewitz, 2013;Suter, Pachur, Hertwig, Endestad, & Biele, 2015). Moreover, Fehr-Duda, Epper, Bruhin, and Schubert (2011) showed that participants who reported a more positive mood at the beginning of their study exhibited more optimism for gains and less pessimism for losses, which was reflected in the elevation of PWF. Additionally, among females, a more positive mood was associated with decreased sensitivity to probability changes. ...
Processing information about probabilities is an integral part of decision making under risk. Even when objective probabilities are explicitly provided, people tend to distort them, which is reflected by an inverted S-shaped probability weighting function. Such distortions depend on different factors such as numeracy and affect. The present study contributes to the understanding of how people use probabilities in risky decision making by introducing the concept of consistency in probability processing―a measure of how coherent people are in using objective probabilities. We hypothesized that consistency would depend on factors similar to those that influence the shape of the probability weighting function. Moreover, we predicted that probability processing consistency would be related to better decision outcomes in an experimental betting task. In three experiments, participants were presented with the probability of a potential gain/loss and had to place a bet on a given chance to maximize their total earnings. We defined probability processing consistency as the variance of bets placed on the same probability value, with higher variance indicating lower consistency. We found that consistency in probability processing was lower in relatively affect-rich conditions and greater for people with higher numeracy. Additionally, people who exhibited more consistent processing of probabilities gained higher earnings from the experimental task irrespective of whether their betting strategy was optimal and of their risk preference. Our findings imply that consistency in processing probabilities may be an important factor in understanding betting strategies and the quality of decisions.
... First, several studies have demonstrated that incidental affect that is not causally related to a decision itself may influence processing probabilities by distorting decision weights (Fehr-Duda, Epper, Bruhin, & Schubert, 2011;Kliger & Levy, 2008;Traczyk & Fulawka, 2016). That is, emotions, affect, or mood may impact subsequent financial decisions by diminishing sensitivity to changes in probabilities. ...
In this chapter, we discuss how theorizing about the role of emotions in financial decision making has changed over the years and review results that indicate the impact of feelings on different stages of the decision process. We show that views on how emotions influence and modify financial decision making have switched from a notion that they are only a side product of choice to concepts positing that feelings may be pivotal and causal factors that serve as an informative cue in the decision-making process. We highlight a distinction between integral (i.e., directly related to a decision problem) and incidental (i.e., irrelevant to a decision problem) emotions and the regulatory role that these two categories play in financial choices. We also focus on specific integral emotions that are elicited by mental imagery and provide empirical evidence from our own research that demonstrate how the interplay between emotions and mental imagery provides inputs to decisions in uncertain circumstances. We also review research on the effects of mood on financial decision making. Finally, we discuss how integral and incidental emotions may guide financial decision making and how we can use this knowledge to improve the decision-making process.
... First, several studies have demonstrated that incidental affect that is not causally related to a decision itself may influence processing probabilities by distorting decision weights (Fehr-Duda, Epper, Bruhin, & Schubert, 2011;Kliger & Levy, 2008;Traczyk & Fulawka, 2016). That is, emotions, affect, or mood may impact subsequent financial decisions by diminishing sensitivity to changes in probabilities. ...
This book reviews the latest research from psychology, neuroscience, and behavioral economics evaluating how people make financial choices in real-life circumstances. The volume is divided into three sections investigating financial decision making at the level of the brain, the level of an individual decision maker, and the level of the society, concluding with a discussion of the implications for further research.
Among the topics discussed:
Neural and hormonal bases of financial decision making
Personality, cognitive abilities, emotions, and financial decisions
Aging and financial decision making
Coping methods for making financial choices under uncertainty
Stock market crashes and market bubbles
Psychological perspectives on borrowing, paying taxes, gambling, and charitable giving
Psychological Perspectives on Financial Decision Making is a useful reference for researchers both in and outside of psychology, including decision-making experts, consumer psychologists, and behavioral economists.
... First, several studies have demonstrated that incidental affect that is not causally related to a decision itself may influence processing probabilities by distorting decision weights (Fehr-Duda, Epper, Bruhin, & Schubert, 2011;Kliger & Levy, 2008;Traczyk & Fulawka, 2016). That is, emotions, affect, or mood may impact subsequent financial decisions by diminishing sensitivity to changes in probabilities. ...
This book reviews the latest research from psychology, neuroscience, and behavioral economics evaluating how people make financial choices in real-life circumstances. The volume is divided into three sections investigating financial decision making at the level of the brain, the level of an individual decision maker, and the level of the society, concluding with a discussion of the implications for further research.
Among the topics discussed:
• Neural and hormonal bases of financial decision making
• Personality, cognitive abilities, emotions, and financial decisions
• Aging and financial decision making
• Coping methods for making financial choices under uncertainty
• Stock market crashes and market bubbles
• Psychological perspectives on borrowing, paying taxes, gambling, and charitable giving
Psychological Perspectives on Financial Decision Making is a useful reference for researchers both in and outside of psychology, including decision-making experts, consumer psychologists, and behavioral economists.
Promotion represents the most crucial element of the marketing mix for
acquiring and retaining customers. However, the promotion strategy needs
to be carefully formulated and implemented as various promotional cam-
paigns have varying outcomes ranging from the creation of awareness about
the product, attracting customers to retail outlets, and demonstration of the
products by the salespeople. The study empirically explores the promotional
capability of retailers on the basis of the data obtained from customers and
retailers through the questionnaires. With the dyadic approach and cross-
validation, there can be more lucidity about the nature and extent of the
promotional capability of retailers. The findings indicate that retailers apply
advertising and sales promotion to present their brands and attract custom-
ers by offering huge discounts, coupons, gifts, vouchers, and extra benefits
for increasing their sales and margins. The findings of the study provide
implications for retailers, customers, researchers, and decision-makers
Emotions have been theorized to be important drivers of economic choices, such as intertemporal or risky decisions. Our systematic review and meta-analysis of the previous literature (378 results and 50,972 participants) indicates that the empirical basis for these claims is mixed and the cross-cultural generalizability of these claims has yet to be systematically tested. We analysed a dataset with representative samples from 74 countries (n = 77,242), providing a multinational test of theoretical claims that individuals’ ongoing emotional states predict their economic preferences regarding time or risk. Overall, more positive self-reported emotions generally predicted a willingness to wait for delayed rewards or to take favourable risks, in line with some existing theories. Contrary to the assumption of a universal relationship between emotions and decision-making, we show that these relationships vary substantially and systematically across countries. Emotions were stronger predictors of economic decisions in more economically developed and individualistic countries.
Purpose
The investment behaviour of individuals has been a major area of interest for several researchers and policymakers due to its great impact on the economy. This study aimed to assess the investment behaviour of individuals in light of their risk appetite and how financial literacy regulates this relationship.
Design/methodology/approach
A self-administered structured questionnaire was used to collect responses from individuals using purposive and convenience sampling techniques. Individuals were presented with 16 investment avenues widely offered by the Indian financial market to choose from to construct a hypothetical portfolio. The association between risk appetite, financial literacy and the composition of the hypothetical portfolio was analysed using a gologit model.
Findings
Increased risk appetite increased the probability of respondents creating a portfolio with a greater proportion of risky assets and less diversification. Lower levels of financial literacy pointed towards portfolios with traditional and low-risk avenues. The results also revealed a significant moderating impact of financial literacy on risk appetite and the creation of the type of a hypothetical portfolio.
Research limitations/implications
Even though the intended behaviour is a close estimate of actual behaviour, there is a possibility of deviation that cannot be ignored.
Originality/value
The present study provides insights into how individuals make portfolio choices by incorporating risk appetite and diversification factors whilst making investment decisions, thereby expanding the literature from an emerging economy perspective. The role of financial literacy as a moderator has not been studied in the domain of hypothetical portfolio creation in India, which has been empirically explored in the current study.
This study examines the effect of lottery characteristics on analysts’ earnings forecasts. We find that analysts are more optimistic for lottery firms. Compensation incentives and access to private information from management are key drivers for analysts’ optimistic forecasts. The optimism of earnings forecast for lottery stocks decreases with analysts’ general and firm-specific experience. Our findings suggest that both behavioral biases and rational incentives help explain analysts’ optimism toward lottery stocks. Moreover, investor sentiment positively affects the effect of lottery characteristics on analyst optimism. Firm-specific risk and market uncertainty enhance the effect of lottery characteristics on analysts’ earnings forecast bias. The level of optimism on lottery stocks increases during up markets and economic expansion.
This paper explores the link between personal experience with COVID-19 and US retail investors' financial decision-making during the first COVID-19 wave. Do retail investors that have personally experienced COVID-19 change their investments after the pandemic outbreak, and if so, why? We use a cross-sectional dataset from an online survey of US retail investors collected in July and August 2020 to assess if and how respondents change their investment decisions after the COVID-19 outbreak. On average retail investors increase their investments during the first wave of COVID-19 by 4.7%, while many of them decrease their investments suggesting a high heterogeneity of investor behaviours. We provide the first evidence that personal experience with the virus can have unexpected positive effects on retail investments. Investors who have personal experience with COVID-19, who are in a vulnerable health category, who tested positive, and who know someone in their close circle of friends or family who died because of COVID-19, increase their investments by 12%. We explain our findings through terror management theory, salience theory and optimism bias, suggesting that reminders of mortality, focussing on selective salient investment information, and over-optimism despite personal vulnerable health contribute to the increase in retail investments. Increased levels of savings, saving goals and risk capacity are also positively associated with increased investments. Our findings are relevant to investors, regulators, and financial advisors, and highlight the importance of providing retail investors with access to investment opportunities in periods of unprecedented shocks such as COVID-19.
In this article, we examine the impact of emotions towards financial investments and emotions towards life in general on attitudes to financial risk using questionnaire data from 970 UK‐based retail investors. We show that risk tolerance monotonically increases with positive emotions towards investments and life, and decreases with negative emotions. We incorporate a broader range of relevant emotions than in comparable existing studies, and we show, perhaps surprisingly, that positive emotions have a more substantial impact on risk tolerance than negative emotions. We find that emotions towards investments have a considerably greater explanatory power for the cross‐section of risk aversion than gender, age, income, investment experience and investment knowledge. Our research sheds light on the different impacts that integral and background emotions have on retail investor financial decision‐making. We suggest several implications for regulators and financial advisors, and we emphasize the importance for financial educators to support investors in developing emotional resilience.
Risky choices often involve a tradeoff between expected payoff and payoff variability. Subjects in a simple experiment, however, exhibit more aversion to “downside risk” (with a small probability of a low payoff) and more attraction to “upside risk” (with a small probability of a high payoff). Women tend to be more averse than men for downside risk, but not for upside risk. These patterns are evaluated in terms of the utility curvature and probability weighting components of risk preferences. Gender differences in downside risk are relevant for the design of appropriately gender-tailored policies and algorithms for saving, financing, and entrepreneurship.
We report experimental data from standard market entry games and winner-take-all games. At odds with traditional decision-making models with risk aversion, the winner-take-all condition results in substantially more entry than the expected-payoff-equivalent market entry game. We explore three candidate explanations for excess entry: blind spot, illusion of control, and joy of winning, none of which receive empirical support. We provide a novel theoretical explanation for excess entry based on cumulative prospect theory and test it empirically. Our results suggest that excess entry into highly competitive environments is not caused by a genuine preference for competing, but is instead driven by probability weighting. Market entrants overweight the small probabilities associated with the high payoff outcomes in winner-take-all markets, while they underweight probable failures.
This paper was accepted by Yan Chen, behavioral economics and decision analysis.
Farmers' aversion to risk can play a key role in how they make production decisions on the farm. While there is evidence that experience of shocks could alter risk preferences, most of this research relies on just one dimension of risk aversion. Using a series of incentivized lottery games, we estimated a broader set of risk preference coefficients that correspond to cumulative prospect theory, namely the probability weighting function, the curvature of the value function and loss aversion, along with a coefficient for ambiguity aversion. We attempted to understand how past harvest shocks and the sociodemographic characteristics of maize farmers in southern Mexico related to these preference parameters. Our results provide evidence that experience of more severe harvest losses is associated with greater risk aversion and stronger overweighting of small probabilities. Greater harvest shock severity was not related to loss or ambiguity aversion.
How do people distribute defenses over a directed network attack graph, where they must defend a critical node? This question is of interest to computer scientists, information technology and security professionals. Decision-makers are often subject to behavioral biases that cause them to make sub-optimal defense decisions, which can prove especially costly if the critical node is an essential infrastructure. We posit that non-linear probability weighting is one bias that may lead to sub-optimal decision-making in this environment, and provide an experimental test. We find support for this conjecture, and also identify other empirically important forms of biases such as naive diversification and preferences over the spatial timing of the revelation of an overall successful defense. The latter preference is related to the concept of anticipatory feelings induced by the timing of the resolution of uncertainty.
Little is known to date regarding how the framing of investment communication impacts retail investor propensity to engage with financial products. To explore this lacuna, we apply insights from regulatory focus theory and construal level theory, and we vary investment communications in terms of the motivation (protect vs. achieve) and the time horizon (distant vs. near) presented in a 2 × 2 quasi‐experimental design. We also include an analysis of investor characteristics and find that communication of ‘short‐term achieve’ investments attracts particularly risk‐tolerant and sensation‐seeking individuals, posing questions of responsibility towards potentially vulnerable groups. We also find that negative attitudes towards finance may be troublesome, as they can stop individuals from engaging with ‘long‐term’ investment products. Positive attitudes towards finance, in contrast, lead investors to engage with ‘protect’ products of both ‘short‐’ and ‘long‐term’ horizon, highlighting benefits for individuals and society from interventions aimed at financial education and exposure. The study concludes by discussing insights for the literature and practitioners from the application of new theory and new data to the management of investment communications.
This paper presents evidence suggesting men’s (but not women’s) risk and time preferences have systematically become sensitive to local economic conditions since the Global Financial Crisis (GFC) of 2008. Studying longitudinal, nationally representative data for 22,579 Australian-based respondents in up to 11 survey waves from 2002-2015, men respond with increased risk aversion and impatience to a rise in their region’s unemployment rate – but only since 2008. We find no such relationship for women or before the crisis. This conclusion persists when accounting for (i) fixed effects on the individual, regional, and time level, (ii) demographics, (iii) national economic conditions, as well as (iv) the respondent’s employment situation, income, and wealth. Results prevail when employing an instrumental variable approach based on initial industry shares in the respondent’s region. Exploring one potential mechanism, higher regional unemployment rates are also linked to men (but not women) being more unhappy since 2008. This ‘happiness channel’, however, can only partially explain the link between the local unemployment rate and risk preferences.
With the proliferation of information and communication technologies, especially with recent developments in Artificial Intelligence, social robots at home and the workplace are no longer being treated as lifeless and emotionless, leading to proposals which aim at incorporating affective elements within agents. Advances in areas such as affective decision-making and affective computing drive this interest. Our motivation in this paper is to use affection as a basic element within a decision-making process to facilitate robotic agents providing more seemingly human responses. We use earlier research in cognitive science and psychology to provide a model for an autonomous agent that makes decisions partly influenced by affective factors when interacting with humans and other agents. The factors included are emotions, mood, personality traits, and activation sets in relation with impulsive behavior. We describe several simulations with our model to study and compare its performance when facing various types of users. Through them, we essentially showcase that our model allows for a powerful agent design mechanism regulating its behavior and provides greater decision-making adaptivity when compared to emotionless agents and simpler emotional models. We conclude describing potential uses of our model in several application areas.
The authors conducted a meta-analysis of 150 studies in which the risk-taking tendencies of male and female participants were compared. Studies were coded with respect to type of task (e.g., self-reported behaviors vs. observed behaviors), task content (e.g., smoking vs. sex), and 5 age levels. Results showed that the average effects for 14 out of 16 types of risk taking were significantly larger than 0 (indicating greater risk taking in male participants) and that nearly half of the effects were greater than .20. However, certain topics (e.g., intellectual risk taking and physical skills) produced larger gender differences than others (e.g., smoking). In addition, the authors found that (a) there were significant shifts in the size of the gender gap between successive age levels, and (b) the gender gap seems to be growing smaller over time. The discussion focuses on the meaning of the results for theories of risk taking and the need for additional studies to clarify age trends.
The Blackwell Handbook of Judgment and Decision Making is a state-of-the art overview of current topics and research in the study of how people make evaluations, draw inferences, and make decisions under conditions of uncertainty and conflict. Contains contributions by experts from various disciplines that reflect current trends and controversies on judgment and decision making. Provides a glimpse at the many approaches that have been taken in the study of judgment and decision making and portrays the major findings in the field. Presents examinations of the broader roles of social, emotional, and cultural influences on decision making. Explores applications of judgment and decision making research to important problems in a variety of professional contexts, including finance, accounting, medicine, public policy, and the law.
Investigated the role of affect in judgments of risk in 4 experiments. 557 Ss were recruited on college campuses and read paragraphs modeled after newspaper reports that described fatal or nonfatal accidents or (Exp III) positive events. Ss were later asked to estimate the chances of specific fatal or nonfatal accidents happening to them and/or to the population in general. Experimental manipulations of affect induced by report of a tragic event produced a pervasive increase in Ss' estimates of the frequency of many risks and other undesirable events. Contrary to expectation, the effect was independent of the similarity between the report and the estimated risk: An account of a fatal stabbing did not increase the frequency estimate of homicide more than the estimates of unrelated risks such as natural hazards. An account of a happy event that created positive affect produced a comparable global decrease in judged frequency of risks. (12 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
The authors conducted a meta-analysis of 150 studies in which the risk-taking tendencies of male and female participants were compared. Studies were coded with respect to type of task (e.g., self-reported behaviors vs. observed behaviors), task content (e.g., smoking vs. sex), and 5 age levels. Results showed that the average effects for 14 out of 16 types of risk taking were significantly larger than 0 (indicating greater risk taking in male participants) and that nearly half of the effects were greater than .20. However, certain topics (e.g., intellectual risk taking and physical skills) produced larger gender differences than others (e.g., smoking). In addition, the authors found that (a) there were significant shifts in the size of the gender gap between successive age levels, and (b) the gender gap seems to be growing smaller over time. The discussion focuses on the meaning of the results for theories of risk taking and the need for additional studies to clarify age trends. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Previous research has confounded judgment versus choice with the response scale used to express preference. When these factors are crossed in a 2 × 2 design, 6 pairs of preference reversals are possible. Experiment 1 demonstrates that all of these reversals exist in one-outcome gambles. We then develop
expression theory, which assumes that the basic evaluation of a gamble is expressed on various scales via a subjective interpolation process. A quantitative model is developed that accounts for both the magnitude and direction of the various reversals. In Experiment 2, the model correctly predicts that the strength of reversals is weakened using two-outcome gambles. Nevertheless, 5 of the 6 reversals are still significant. In Experiment 3, empirical violations of dominance are demonstrated and the results are shown to be consistent with expression theory. In Experiment 4, the model is used to predict ratings from prices and vice versa. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
The relation between emotion and rationality is assessed by reviewing empirical findings from multiple disciplines. Two types of emotional phenomena are examined incidental emotional states and integral emotional responses and three conceptions of rationality are considered logical, material, and ecological. Emotional states influence reasoning processes, are often misattributed to focal objects, distort beliefs in an assimilative fashion, disrupt self-control when intensely negative but do not necessarily increase risk-taking. Integral emotional responses are often used as proxies for values, and valuations based on these responses exhibit distinct properties: efficiency, consistency, polarization, myopia, scale- insensitivity, and reference-dependence. Emotions seem to promote social and moral behavior. Conjectures about the design features of the affective system that gives rise to these seeming sources of rationality or irrationality are proposed. Therefore, any categorical statement about the overall rationality or irrationality of emotion would be misleading.
In many real-world gambles, a non-trivial amount of time passes before the uncertainty is resolved but after a choice is made. An individual may have a preference between gambles with identical probability distributions over final outcomes if they differ in the timing of resolution of uncertainty. In this domain, utility consists not only of the consumption of outcomes, but also the psychological utility induced by an unresolved gamble. We term this utility anxiety. Since a reflective decision maker may want to include anxiety explicitly in analysis of unresolved lotteries, a multiple-outcome model for evaluating lotteries with delayed resolution of uncertainty is developed. The result is a rank-dependent utility representation (e.g., Quiggin, 1982), in which period weighting functions are related iteratively. Substitution rules are proposed for evaluating compound temporal lotteries. The representation is appealing for a number of reasons. First, probability weights can be interpreted as the cognitive attention allocated to certain outcomes. Second, the model disaggregates strength of preference from temporal risk aversion and thus provides some insight into the old debate about the relationship between von Neumann–Morgenstern utility functions and strength of preference value functions.
How is risk-taking affected by prior gains and losses? While normative theory implores decision makers to only consider incremental outcomes, real decision makers are influenced by prior outcomes. We first consider how prior outcomes are combined with the potential payoffs offered by current choices. We propose an editing rule to describe how decision makers frame such problems. We also present data from real money experiments supporting a "house money effect" (increased risk seeking in the presence of a prior gain) and "break-even effects" (in the presence of prior losses, outcomes which offer a chance to break even are especially attractive).
We investigate the effects of mood on decisions in random nth-price auctions. There are two possible ways in which mood can affect behavior: (1) mood can affect the valuation of the object being auctioned or the willingness to pay (WTP), and (2) mood can affect the bidding behavior itself. To identify these two possible effects, we study decisions with induced values and with homegrown values. Our data show that positive mood generates an upward bidding bias in the induced value condition. However, only under certain conditions do we observe weak mood effects on WTP.
A person's mood may directly affect a judgment of the uncertainty of a future event. Subjective probabilities were reported by subjects in a happy, neutral, or sad mood for personal and nonpersonal events. Two moods were induced by having the subject focus on particularly happy and sad personal experiences. Large, consistent mood effects are indicated. Relative to control subjects, happy people are “optimistic;” i.e., they report higher probabilities for positive events and lower probabilities for negative events. Conversely, sad people are “pessimistic,” providing lower (higher) probabilities for positive (negative) events. Mood-state-dependent retrieval of information is indicated.
Empirical studies have shown that decision makers do not usually treat probabilities linearly. Instead, people tend to overweight small probabilities and underweight large probabilities. One way to model such distortions in decision making under risk is through a probability weighting function. We present a nonparametric estimation procedure for assessing the probability weighting function and value function at the level of the individual subject. The evidence in the domain of gains supports a two-parameter weighting function, where each parameter is given a psychological interpretation: one parameter measures how the decision maker discriminates probabilities, and the other parameter measures how attractive the decision maker views gambling. These findings are consistent with a growing body of empirical and theoretical work attempting to establish a psychological rationale for the probability weighting function.
z-Tree (Zurich Toolbox for Ready-made Economic Experiments) is a software for developing and conducting economic experiments. The software is stable and allows programming almost any kind of experiments in a short time. In this article, I present the guiding principles behind the software design, its features, and its limitations. Copyright Economic Science Association 2007
This article reviews recent developments in the economic theory of individual decision making under risk. Since the 1950s it has been known that individual choices violate the standard model of expected utility in predictable ways. Considerable research effort has now been devoted to the project of developing a superior descriptive model. Following an overview of non-expected utility theories which distinguishes between "conventional" and "non-conventional" approaches, the paper seeks to assess these alternative models in terms of empirical success (using laboratory and field data) and theoretical usefulness. The closing sections reflect on some new directions emerging in this literature.
A number of generalizations of the expected utility preference functional are estimated using experimentally generated data involving 100 pairwise choice questions repeated on two separate occasions. Likelihood ratio tests are conducted to investigate the statistical superiority of the various generalizations and the Akaike information criterion is used to distinguish between them. The economic superiority of the various generalizations is also explored and the paper concludes that, for many subjects, the superiority of several of the generalizations is not established. Copyright 1994 by The Econometric Society.
A probability weighting function w(p) is a prominent feature of several nonexpected utility theories, including prospect theory and rank-dependent models. Empirical estimates indicate that w(p) is regressive with respect to the diagonal (w(p) > p for small p, and w(p)< p for large p), s-shaped (concave near p = 0, convex near p = 1), and asymmetrical (intersecting the diagonal at about p = l/3). The paper provides axioms for several families of weighting functions, including a "compound invariant" form, w(p) = exp{-{-ln p}[superscript alpha]}, 0 < alpha < 1, which is regressive, s-shaped, and which has invariant fixed and inflection points at p = 1/e.
This paper presents results of laboratory experiments that test the effect of induced mood on behavior in one-shot dictator, ultimatum, and
trust games. Consistent with the psychology literature, the data show that good-mood yields more altruistic and helpful behaviors; whereas, bad moods promotes reciprocity.
Two studies conducted simultaneously investigated the influence of positive affect on risk taking. Results of the study, which employed an actual measure of subjects' willingness to bet something of value, supported the prediction of an interaction between level of risk and positive affect: subjects who had reason to be feeling elated bet more than control subjects on a low-risk bet, but wagered less than controls on a high-risk bet. At the same time, in contrast, a study involving hypothetical risk-taking showed that in general subjects were more willing to take the chance as probability of success went up; but that elated subjects were more daring than controls on a “long shot.” Differences in hypothetical vs real risk taking were noted, and the complexity (the interaction) of the influence of positive feelings on real risk taking was emphasized. The results were related to other research suggesting an influence of feeling states on cognitive processes and decision making.
EVIDENCE EXISTS THAT PEOPLE DO NOT ALWAYS MAKE DECISIONS INVOLVING UNCERTAIN MONETARY REWARDS AS IF THEY WERE MAXIMIZING EXPECTED UTILITY OF FINAL ASSETS. EXPLANATIONS FOR THIS BEHAVIOR POSTULATE THAT THE COGNITIVE DEMANDS OF CONSISTENCY TO SUCH A THEORY ARE TOO GREAT. HOWEVER, SITUATIONS EXIST IN WHICH MORE THAN MENTAL SHORTCUTS ARE INVOLVED AND THESE ANOMALIES RAISE EQUATIONS ABOUT EXPECTED UTILITY THEORY AS A GUIDE TO BEHAVIOR. THIS STUDY EXPLORES THE POSSIBILITY THAT EXPECTED UTILITY THEORY APPEARS TO FAIL BECAUSE THE SINGLE OUTCOME DESCRIPTOR - MONEY - IS NOT SUFFICIENT. AFTER MAKING A DECISION UNDER UNCERTAINTY, A PERSON MAY DISCOVER, ON LEARNING THE RELEVANT OUTCOMES, THAT ANOTHER ALTERNATIVE WOULD HAVEBEEN PREFERABLE. THIS KNOWLEDGE MAY IMPART A SENSE OF LOSS,OR REGRET. THE DECISION MAKER WHO IS PREPARED TO TRADEOFF FINANCIAL RETURN IN ORDER TO AVOID REGRET WILL EXHIBIT SOME OF THE BEHAVIORAL PARADOXES OF DECISION THEORY.
People usually overweight small probabilities and underweight large probabilities leading to the familiar inverse S‐shaped weighting function. This research explores the link between affect and the structure of probability weighting from the perspective of thinking dispositions, a concept central to dual system theories of reasoning. The effects of affective priming and cognitive load on both probability weighting and the value function are also examined. The evidence suggests that thinking styles do have predictive implications for risky decision‐making. Participants with a more affective thinking style tend to be more risk‐seeking in small probability gambles. However, increasing access to the affective system by affective priming or cognitive load manipulations tend to reduce risk‐seeking behavior in small probability gambles as well as reduce risk averse behavior in large probability gambles. Previous research, manipulating the affective nature of lottery outcomes, found evidence for an increase in curvature (more overweighting of small probabilities and more underweighting of large probabilities) of the weighting function for affect‐rich outcomes, lending support to a hope‐and‐fear deconstruction of probability weighting. The present research suggests that increased anticipatory emotions characterized by the elevation of the weighting function (more overweighting at all probabilities) is also important and could sometimes be more significant than hope‐and‐fear in decision‐making under risk. An integrated approach incorporating the impact of affect on all three, the elevation and curvature of probability weighting as well as the curvature of the value function explains the empirical findings. Copyright © 2010 John Wiley & Sons, Ltd.
experimental medical treatment, or steal a base, involve risk. Purchasing insurance is sensible if you believe a flood will happen, but a bad idea if you are convinced it won’t. The study of risky decision making has addressed two broad questions. How should individuals behave when faced with a risky choice like the ones above? How do individuals behave when faced with a risky choice? The first question is normative; the second, descriptive. 1 Although the first question is clearly important, our aim in this chapter is to provide answers to the second question. The study of risky decision making has a long, distinguished, and interdisciplinary history. The list of contributors include some of the most prominent figures in economics and psychology, including several Nobel Prize winners in Economics, and these ideas have in turn been applied with great success to business, law, medicine, political science, and public policy. 2 We hope to give the reader an overview of the exciting developments made by these researchers and others. In particular, the goals of this chapter are fourfold: (i) survey the evolution of questions asked by researchers of risky decision making; (ii) review the major intellectual contributions; (iii) summarize the present state of knowledge; and (iv) offer a research agenda for
The effectiveness and validity of 11 important mood induction procedures (MIPs) were comparatively evaluated by meta-analytical procedures. Two hundred and fifty effects of the experimental induction of positive, elated and negative, depressed mood in adult, non-clinical samples were integrated. Effect sizes were generally larger for negative than for positive mood inductions. The presentation of a film or story turned out to be most effective in inducing both positive and negative mood states. The effects are especially large when subjects are explicitly instructed to enter the specified mood state. For elated mood, all other MIPs yielded considerably lower effectiveness scores. For the induction of negative mood states, Imagination, Velten, Music, Social Interaction and Feedback MIPs were about as effective as the Film/Story MIP without instruction. Induction effects covaried with several study characteristics. Effects tend to be smaller when demand characteristics are controlled or subjects are not informed about the purpose of the experiment. For behavioural measures, effects are smaller than for self-reports but still larger than zero. Hence, the effects of MIPs can be partly, but not fully due to demand effects.
This paper demonstrates gender differences in risk aversion and ambiguity aversion. It also contributes to a growing literature relating economic preference parameters to psychological measures by asking whether variations in preference parameters among persons, and in particular across genders, can be accounted for by differences in personality traits and traits of cognition. Women are more risk-averse than men. Over an initial range, women require no further compensation for the introduction of ambiguity but men do. At greater levels of ambiguity, women have the same marginal distaste for increased ambiguity as men. Psychological variables account for some of the interpersonal variation in risk aversion. They explain none of the differences in ambiguity. (JEL: J24, D03, D80) (c) 2009 by the European Economic Association.
We often deal with uncertain events for which no probabilities are known. Several normative models have been proposed. Descriptive studies have usually been qualitative, or they estimated ambiguity aversion through one single number. This paper introduces the source method, a tractable method for quantitatively analyzing uncertainty empirically. The theoretical key is the distinction between different sources of uncertainty, within which subjective (choice-based) probabilities can still be defined. Source functions convert those subjective probabilities into willingness to bet. We apply our method in an experiment, where we do not commit to particular ambiguity attitudes but let the data speak. (JEL D81)
We test the effect of mood on behavior in a gift-exchange game. To induce a ‘bad mood’, second movers watched a sad movie before playing the game; to induce a ‘good mood’, they watched a funny movie. Mood induction was effective: subjects who saw the funny movie reported a significantly better mood than those who saw the sad movie. These two moods lead to significant differences in behavior. We find that a bad mood implies more reciprocity while a good mood implies more generosity. Furthermore, first movers make more money when second movers are in a bad mood.
Under prospect theory, three components influence the risk attitude of a decision maker: the utility function, the probability weighting function, and loss aversion. Loss aversion reflects the observed behavior of decision makers' being more sensitive to losses than to gains, resulting in a utility function that is steeper for losses than for gains. Much of the empirically observed risk aversion is due to loss aversion. This paper proposes an index of loss aversion. It also demonstrates how the degree of loss aversion of two decision makers can be compared and how its influences on comparative risk aversion can be examined. The main result characterizes comparative loss aversion in terms of preferences.
This chapter reviews the results from public goods, ultimatum, and dictator experiments for evidence of systematic differences in the behavior of men and women. While the results do not offer consistent evidence of behavioral differences between men and women, there are some intriguing patterns in the data. No significant evidence of systematic differences in the play of men and women is evident in those settings where subjects are exposed to risk. In those settings where risk is absent, systematic differences are revealed. This finding is conditioned by the level of risk.
A simple non-expected utility model, “normal-randomness expected utility” (NREU), is formulated. In addition to permanent wealth effects captured by expected utility, individuals anticipate temporary emotional reactions to the resolution of uncertainty in the form of elation and disappointment. Therefore, time preference plays an important part in determining risk attitudes. A higher rate of time preference and emotional sensitivity induces distortions similar, but not identical to, rank-dependent expected utility (RDEU). A specific reaction pattern is postulated by the “NREU” model, in which individuals react more heavily to events falling outside of expected “normal” deviations. This pattern induces S-shaped transformation of probability weights.
When making sequential decisions, do prior gains induce more or less risk taking than prior losses? Prior studies have found evidence for a house-money effect, where risk taking increases following gains. These studies also found seemingly contradictory evidence for escalation of commitment, where risk taking increases following losses. We present an experimental study investigating this apparent contradiction. By manipulating the presentation format of a decision problem we can induce both types of behavior. When the problem is presented as a portfolio decision, risk taking is greater following losses than following gains, consistent with escalation of commitment. When the problem is presented as a two-stage betting game, risk taking is greater following gains than following losses, consistent with the house-money effect. Some of these results can be accounted for using the prospect-theory value function. Escalation of commitment in our experiment does not appear to be driven by a need to justify or rationalize the initial decision. These results are potentially relevant to modeling risk preference in multiperiod investment decisions.
It has long been recognized that there is considerable heterogeneity in individual risk taking behavior, but little is known about the distribution of risk taking types. We present a parsimonious characterization of risk taking behavior by estimating a finite mixture model for three different experimental data sets, two Swiss and one Chinese, over a large number of real gains and losses. We find two major types of individuals: In all three data sets, the choices of roughly 80% of the subjects exhibit significant deviations from linear probability weighting of varying strength, consistent with prospect theory. Twenty percent of the subjects weight probabilities near linearly and behave essentially as expected value maximizers. Moreover, individuals are cleanly assigned to one type with probabilities close to unity. The reliability and robustness of our classification suggest using a mix of preference theories in applied economic modeling. Copyright 2010 The Econometric Society.
We discuss the following problem given a random sample X = (X
1, X
2,…, X
n) from an unknown probability distribution F, estimate the sampling distribution of some prespecified random variable R(X, F), on the basis of the observed data x. (Standard jackknife theory gives an approximate mean and variance in the case R(X, F) = , θ some parameter of interest.) A general method, called the “bootstrap”, is introduced, and shown to work satisfactorily on a variety of estimation problems. The jackknife is shown to be a linear approximation method for the bootstrap. The exposition proceeds by a series of examples: variance of the sample median, error rates in a linear discriminant analysis, ratio estimation, estimating regression parameters, etc.
How does risk tolerance vary with stake size? This important question cannot be adequately answered if framing effects, nonlinear probability weighting, and heterogeneity of preference types are neglected. We show that, contrary to gains, no coherent change in relative risk aversion is observed for losses. The increase in relative risk aversion over gains cannot be captured by the curvature of the utility function. It is driven predominantly by a change in probability weighting of a majority group of individuals who exhibit more rational probability weighting at high stakes. These results not only challenge expected utility theory, but also prospect theory.
Prospect theory's S-shaped weighting function is often said to reflect the psychophysics of chance. We propose an affective rather than psychophysical deconstruction of the weighting function resting on two assumptions. First, preferences depend on the affective reactions associated with potential outcomes of a risky choice. Second, even with monetary values controlled, some outcomes are relatively affect-rich and others relatively affect-poor. Although the psychophysical and affective approaches are complementary, the affective approach has one novel implication: Weighting functions will be more S-shaped for lotteries involving affect-rich than affect-poor outcomes. That is, people will be more sensitive to departures from impossibility and certainty but less sensitive to intermediate probability variations for affect-rich outcomes. We corroborated this prediction by observing probability-outcome interactions: An affect-poor prize was preferred over an affect-rich prize under certainty, but the direction of preference reversed under low probability. We suggest that the assumption of probability-outcome independence, adopted by both expected-utility and prospect theory, may hold across outcomes of different monetary values, but not different affective values.
Women are commonly stereotyped as more risk averse than men in financial decision making. In this paper we examine whether this stereotype reflects gender differences in actual risk-taking behavior by means of a laboratory experiment with monetary incentives. Gender differences in risk taking may be due to differences in valuations of outcomes or in probability weights. The results of our experiment indicate that value functions do not differ significantly between men and women. Men and women differ in their probability weighting schemes, however. In general, women tend to be less sensitive to probability changes. They also tend to underestimate large probabilities of gains more strongly than do men. This effect is particularly pronounced when the decisions are framed in investment terms. As a result, women appear to be more risk averse than men in specific circumstances. Copyright Springer 2006
We develop a new version of prospect theory that employs cumulative rather than separable decision weights and extends the theory in several respects. This version, called cumulative prospect theory, applies to uncertain as well as to risky prospects with any number of outcomes, and it allows different weighting functions for gains and for losses. Two principles, diminishing sensitivity and loss aversion, are invoked to explain the characteristic curvature of the value function and the weighting functions. A review of the experimental evidence and the results of a new experiment confirm a distinctive fourfold pattern of risk: risk aversion for gains and risk seeking for losses of high probability; risk seeking for gains and risk aversion for losses of low probability. Copyright 1992 by Kluwer Academic Publishers
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.
Copyright 1998 by Kluwer Academic Publishers
Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
A new theory of cardinal utility, with an associated set of axioms, is presented. It is a generalization of the von Neumann-Morgenstern expected utility theory, which permits the analysis of phenomena associated with the distortion of subjective probability.
The appeal of expected utility theory as a basis for a descriptive model of risky decision making has diminished is a result of empirical evidence which suggests that individuals do not behave in a manner consistent with the prescriptive tenets of EUT. In this paper, we explore the influence of probability on risky choice. by proposing and estimating a parametric model of risky decision making. Our results suggest that models which provide for probability transformations are most appropriate for the majority of subjects. Further. we find that the transformation differs for most subjects depending upon whether the risky outcomes are gains or losses. Most subjects are considerably less sensitive to changes in mid-range probability than is proposed by the expected utility model and risk-seeking behavior over "long-shot" odds is common
This paper integrates considerations of mood into non-expected utility theories and extends the existing literature on how mood influences peoples' decisions and choices. An important element in many non-expected utility theories is the probability weighting function (PWF), that nonlinearly weights physical probabilities. Using US market price data, we attempt to establish an empirical relation between investors' mood and these PWFs. To proxy investors' mood, we rely on an established medical phenomenon, seasonal affective disorder, a source of depression caused by the scarcity of daylight time during fall and winter, as well as on a measure of cloudiness. We find statistical evidence indicating that bad mood causes investors to systematically distort their PWFs.
To accommodate the observed pattern of risk-aversion and risk-seeking, as well as common violations of expected utility (e.g., the certainty effect), the authors introduce and characterize a weighting function according to which an event has greater impact when it turns impossibility into possibility, or possibility into certainty, than when it merely makes a possibility more or less likely. The authors show how to compare such weighting functions (of different individuals) with respect to the degree of departure from expected utility and they present a method for comparing an individual's weighting functions for risk and for uncertainty. Copyright 1995 by The Econometric Society.
An axiomatic model of preferences over lotteries is developed. It is shown that this model is consistent with the Allais paradox, includes expected utility theory as a special case, and is only one parameter (" beta") richer than the expected utility model. Allais paradox type behavior is identified with positive values of "beta." Preferences with positive "beta" are said to be disappointment averse. It is shown that risk aversion implies disappointment aversion and that the Arrow-Pratt measures of risk aversion can be generalized in a straight-forward manner to the current framework. Copyright 1991 by The Econometric Society.
Analysis of decision making under risk has been dominated by expected utility theory, which generally accounts for people's actions. Presents a critique of expected utility theory as a descriptive model of decision making under risk, and argues that common forms of utility theory are not adequate, and proposes an alternative theory of choice under risk called prospect theory. In expected utility theory, utilities of outcomes are weighted by their probabilities. Considers results of responses to various hypothetical decision situations under risk and shows results that violate the tenets of expected utility theory. People overweight outcomes considered certain, relative to outcomes that are merely probable, a situation called the "certainty effect." This effect contributes to risk aversion in choices involving sure gains, and to risk seeking in choices involving sure losses. In choices where gains are replaced by losses, the pattern is called the "reflection effect." People discard components shared by all prospects under consideration, a tendency called the "isolation effect." Also shows that in choice situations, preferences may be altered by different representations of probabilities. Develops an alternative theory of individual decision making under risk, called prospect theory, developed for simple prospects with monetary outcomes and stated probabilities, in which value is given to gains and losses (i.e., changes in wealth or welfare) rather than to final assets, and probabilities are replaced by decision weights. The theory has two phases. The editing phase organizes and reformulates the options to simplify later evaluation and choice. The edited prospects are evaluated and the highest value prospect chosen. Discusses and models this theory, and offers directions for extending prospect theory are offered. (TNM)
The central proposition of disappointment theory is that an individual forms expectations about uncertain prospects, and that
if the actual consequence turns out to be worse than (or better than) that expectation, the individual experiences a sensation
of disappointment (or elation) generating a decrement (or increment) of utility which modifies the basic utility derived from
the consequence. By incorporating a simple disappointment-elation function into a model of individual choice, many observed
violations of conventional expected utility axioms—including violations of Savage's sure-thing principle and the “isolation
effect”—can be predicted and defended as rational and dynamically consistent behaviour.
We test whether the frequency of feedback information about the performance of an investment portfolio and the flexibility with which the investor can change the portfolio influence her risk attitude in markets. In line with the prediction of myopic loss aversion (Benartzi and Thaler (1995)), we find that more information and more flexibility result in less risk taking. Market prices of risky assets are significantly higher if feedback frequency and decision flexibility are reduced. This result supports the findings from individual decision making, and shows that market interactions do not eliminate such behavior or its consequences for prices. Copyright (c) 2003 by the American Finance Association.
We propose a new framework for pricing assets, derived in part from the traditional consumption-based approach, but which also incorporates two long-standing ideas in psychology: the prospect theory of Kahneman and Tversky #1979#, and the evidence of Thaler and Johnson #1990# and others on the in#uence of prior outcomes on risky choice. Consistent with prospect theory, the investor in our model derives utility not only from consumption levels but also from changes in the value of his #nancial wealth. He is much more sensitive to reductions in wealth than to increases, the #loss-aversion# feature of prospect utility. Moreover, consistent with experimental evidence, the utility he receives from gains and losses in wealth depends on his prior investment outcomes; prior gains cushion subsequent losses # the so-called #house-money# e#ect # while prior losses intensify the pain of subsequent shortfalls. We study asset prices in the presence of agents with preferences of this ...