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Between Hope and Fear: The Psychology of Risk
Abstract
This chapter discusses the psychology of risk: what risk is (if it is anything at all), how people think about it, what they feel about it, and what they do about it. The chapter describes the way psychologists think about risk: how they study it, what tasks they use, what factors they vary, and what models they build (or borrow) to describe risk-taking behavior. Technically, the word risk refers to situations in which a decision is made whose consequences depend on the outcomes of future events having known probabilities. Psychological studies of risky choice (it is the term used conventionally to refer to all but the most extreme instances of ignorance or ambiguity) fall into two groups. At one extreme are the studies run by mathematically inclined experimental psychologists in which subjects make decisions about gambles described in terms of amounts and probabilities. At the other extreme are studies run by personality psychologists, who are mostly interested in individual differences in risk taking. A theory of risky choice is presented in the chapter that attempts to meld the strengths of both approaches. Empirically and methodologically it is tied to the experimental approach to risky choice. But theoretically it is more strongly tied to motivational approaches.
... In their Behavioral Portfolio Theory, Shefrin and Statman (2000) argue that the emotions of fear and hope can shape financial investors' buying and selling decisions. These insights were based on ideas from Lopes (1984Lopes ( , 1987, according to whom hope underlies the desire for potential (i.e., possible positive prospects) and makes decision-makers act optimistically, while fear underlies the desire for security. When people hold losing stocks, they experience a desire for potential (Lopes, 1984) and thus ...
... Although the current research focuses on the inclination to keep losing stocks, it is interesting for future research to examine the factors that might influence the selling intention. When holding losing stocks, people tend to have negative emotions such as regret, disappointment, reluctance of realizing the loss (Summer & Duxbury 2012), and fear of losing more in the future if keep holding (Duxbury et al. 2020, Lopes, 1987Shefrin & Statman, 2000). In current paper, we assume that people immediately feel bad when seeing that the stock price dropped below the purchase price. ...
... In medical research, hope is considered a survival-level emotion and is vital for terminally-ill patients (Herth, 1990) to continue investing effort in medical activities. As a positive emotion, hope is also suggested to be an important buffer to ward of negative emotions, including fear (see the decision model for financial investment, Lopes, 1987) and disappointment (Summers & Duxbury, 2012), when people are facing difficult situations. Up to now, however, limited empirical research has addressed how hope can be acquired. ...
... Thus, including both of these emotions allowed us to address multiple user motivation types (both intrinsic and extrinsic) in order to make further knowledge contributions. Specifically, we found that both internal and external attributions-perceived fairness (external) and perceived accuracy (internal)-have positive impacts on focal users' excitement (Watson et al., 1988) and hope (Lopes, 1987). Furthermore, our findings indicate that these emotions have significant further impacts on users' willingness to contribute. ...
... Positive feedback, which is analogous to winning, can increase the overall emotional intensity and arousal (Verbruggen et al., 2017). Given the risky nature of making contributions, we also draw upon the literature on the psychology of risk (Lopes, 1987) and posit that in addition to excitement, hope will increase as part of emotional arousal. This helps to account for the risky nature of answering questions, which could be either upvoted or downvoted. ...
... In addition to the attribution-linked variables, the users' emotions can also impact their propensity to contribute. The literature on the psychology of risk (Lopes, 1987) suggests that when people feel more hopeful, they tend to take higher risks. As users receive more positive feedback, they are likely to get more excited about the task and feel more hopeful about making impactful contributions. ...
Peer feedback is often associated with an increase in the contributions of members in online communities. Verbal feedback (such as a review) can give details about how the recipient can improve their contribution, but it requires the recipient to read and process the feedback. Conversely, nonverbal feedback (such as an upvote) is easy to comprehend but does not convey much helpful information. Prior studies have mainly focused on the impact of verbal feedback. However, little has been done to explore the underlying mechanism of the effect of nonverbal peer feedback on people’s tendency to contribute more. We present two experimental studies conducted on Amazon Mechanic Turk. Study 1 demonstrates how verbal and nonverbal feedback impact user contributions differently. Next, building on attribution-emotion-action theory, we use Study 2 to establish a causal mechanism between nonverbal feedback and users’ knowledge contribution. Specifically, users who receive nonverbal peer feedback make internal and external attributions, which in turn impact their emotions and contribution decisions. We find that users receiving more positive feedback attribute this in equal measure internally to perceived self-efficacy and externally to perceived fairness, whereas users who receive negative feedback attribute it more to the lack of perceived fairness of peer feedback. These findings have important implications for both content-sharing platforms and researchers trying to better understand the drivers of online content-sharing behavior.
... So tendieren Individuen beispielsweise dazu, geringe Wahrscheinlichkeiten zu überschätzen und hohe Wahrscheinlichkeiten zu unterschätzen. Dieser Forschungsstrang der verhaltensökonomischen Entscheidungstheorie definiert das Konzept des Risikos ausgehend von der Erwartungsnutzentheorie über die Form der individuellen Nutzenfunktion, die zur Beschreibung der Risikoneigung von Personen herbeigezogen wird (Brachinger & Weber, 1997;Machina, 1982;Levy, 1992;Hershey & Schoemaker, 1980;Lopes, 1987;Edwards, 1961;Kahneman & Tversky, 1979 vgl. zu statistischen Modellen zur Messung der Risikowahrnehmung z. ...
... mathematisch bestimmbaren Erwartungswerts aufzeigen. In diesem Forschungsstrang wird die Risikoeinstellung von Individuen basierend auf ihren Präferenzen für Lotterien anhand individueller Nutzenfunktionen definiert, die Individuen als risikoavers, risikoneutral oder risikofreudig beschreiben (Laux et al., 2018;Lopes, 1987;Kahneman & Tversky, 1979Brachinger & Weber, 1997). ...
... (Levy, 1992;Edwards, 1961;vgl. auch Hershey & Shoemaker, 1980 (Laux et al., 2018;Lopes, 1987;Levy, 1992). Dies soll an einem Beispiel verdeutlicht werden (Kahneman & Tversky, 1984, S. 341ff.;Lopes, ...
Zusammenfassung
In diesem Kapitel werden Ansätze und Messverfahren zur Erfassung der Risikowahrnehmung und der Risikoeinstellung erörtert. Aus methodischer Sicht wird das psychometrische Paradigma zur Messung der subjektiven Risikowahrnehmung vorgestellt und vom objektiven (bekannten) Risiko aus der vorherrschenden ökonomischen Entscheidungstheorie abgegrenzt. Dabei werden eigene empirische Befunde aus einer repräsentativen Bevölkerungsstudie zur Risikowahrnehmung und Reiseabsicht während der Coronapandemie aus psychometrischer Perspektive präsentiert. Dieses Forschungsprojekt wurde im Rahmen des Nationalen Forschungsprogramms „Covid-19“ (NFP 78) des Schweizerischen Nationalfonds (SNF) durchgeführt (Grant-N° 40784P_198336). Zum Schluss des Kapitels werden Ansatzpunkte für die evidenzbasierte Interventionsforschung für sicheres Reisen vorgestellt, die auf Theorien und Ergebnissen aus empirischen Studien gründen und denen somit Wirksamkeit attestiert werden kann.
... We note that the distortion function w(·) used in SP/A theory [25] to capture investor risk-seeking tendencies for higher "Potential" and risk aversion attitudes for "Security", is a nonlinear, strictly increasing and differentiable function in [0, 1] with w(0) = 0, w(1) = 1. Specifically, it is a weighted combination of a convex and a concave function and can be written as ...
... In order to show that problem (24) and problem (25) are equivalent, we need to prove the existence of the Lagrange multipliers α and β such that ...
In this article, we study a behavioral robust mean-variance portfolio selection model involving an intractable claim, which may not be directly associated with the underlying financial market but can significantly impact the terminal payoff. Also, an investor often overestimates small probabilities and underestimates large ones due to different attitudes toward gains and losses. This behavioral phenomenon of the investor is captured through a probability distortion function. We simultaneously consider a random variable representing the payoff of the behavioral investor and an intractable claim together in the terminal payoff. The distribution function of the behavioral payoff is a distorted distribution of investment payoff based on the financial market, accounting for the impact of probability distortion. We formulate a robust optimization problem by considering the worst-case scenario among all possible identically distributed random variables representing the intractable claim. By integrating the martingale method and quantile function, we analytically obtain a closed-form optimal solution of the behavioral robust mean-variance model with an intractable claim. Furthermore, we develop a numerical algorithm to compute the efficient frontiers of our models and compare their performances with an existing model that does not incorporate probability distortion.
... The organizational decision-making is affected by the proximity to the sub-goal deadline because of a combination of ambiguity resolution and improvement opportunities. Decision making below aspiration levels with some distance to a deadline is done with high ambiguity on whether the performance shortfall will continue, giving decision makers greater hopes for improvement (Lopes, 1987) and opportunities for self-enhancement (Audia and Greve, 2021). As the deadline draws nearer and the performance shortfall persists, the ambiguity is resolved, reducing hope and self-enhancement opportunities, leaving problem-solving as the best option (Jordan and Audia, 2012). ...
... The theoretical arguments assume that organizations are not overly above or below the level required to achieve the primary goal, so the data exclude observations with extreme levels of over and under-performance in the primary goal (11,533), as success (or failure) is near-certain for these situations. This follows the argument that theory on risk taking requires some amount of hope or fear (Lopes, 1987). When the final outcome is near-certain, attention may instead turn to personal goals (Van Yperen, 2022). ...
There is increased research on how organizations respond to performance feedback on multiple goals. Most of it considers goals that have ambiguous ranking and thus differs from goal hierarchies with sub‐goals that are instrumental for accomplishing a primary goal. We develop theory on how goal hierarchies lead to primary goal and sub‐goal interactions influencing organizational decision‐making. We show that sub‐goals are important because they are temporally prior and instrumental for primary goals, making organizational responses to sub‐goals and primary goal interdependent in interesting ways. Empirically, we demonstrate a more sophisticated approach to multiple goals than earlier work suggests. This advances the behavioural theory of the firm, and supports and refines key assumptions for organizational design and organizational economics, encouraging further research on the role of goal structures and incentive schemes. Our theory and findings call for increased consideration of the March and Simon's (1958) hierarchical goals’ model in management research.
... In the case of ambiguous risk, pessimism is the general tendency to see more negative possibilities (bad outcomes) than positive possibilities and, moreover, to attach higher probabilities that these negative possibilities will materialize (see e.g. Lopes, 1987). The same pessimism applies to the likelihood that if problems occur, solutions will be found and to the new unforeseen, negative side-effects that these solutions will introduce. ...
... Likewise, it can be doubted whether it is possible to reject an outcome as "unacceptable" without any knowledge of its probability and what might be gained by taking risks. The maximin principle finally clearly shows a precautionary approach based on ambiguity aversion and risk aversion: a high desire for security and heavy weight on worst outcomes and a low desire for potential and low weight on the best outcomes (Lopes, 1987). In fact, Rawls believes any "normal" and "reasonable" person would show a high level of risk aversion (1971: 144). ...
Many studies have observed a correlation between beliefs regarding nature's resilience and (political) preferences regarding the organization of society. Liberal‐egalitarians, for example, generally believe nature to be much more fragile than libertarians, who believe nature to be much more resilient. Cultural theory explains this correlation by the idea that people are only able to see those risks that fit their preferred organization of society. This article offers an alternative, second explanation for the observed correlation: Both beliefs regarding nature's resilience and political preferences can be explained by the same cognitive biases toward ambiguous risk, that is, dispositions determining our expectations regarding the possible state of affairs resulting from our acts and their probabilities. This has consequences for political philosophy and the psychology of risk. In particular, there is a knowledge gap in psychology regarding the cognitive biases underlying the belief that despite ambiguity, experts can determine safe limits for human impacts on the environment.
... A reference point is an outcome, , that holds a special place in the decision-maker's process. The reference point might be a payoff of zero or the maintenance of the status quo, it might be an idol or rival's achievements, or it might be a goal or aspiration (Lopes 1987;Lopes & Oden 1999). Whatever it is and whatever its origin, the reference point is the outcome against which other outcomes are framed as gains or losses. ...
... The expected utility maximiser evaluates payoffs in absolute terms. 7 This is inverted if good outcomes are least likely.Lopes (1987) andLopes & Oden (1999) talk of fear and hope. The explanation that we have just provided is an interpretation of their explanation for probability weighting. ...
Technological solutions cannot completely protect companies and governments from human actors driven by money, greed, or simply the thrill of the steal. In fact, each technological countermeasure for industrial espionage is itself the product of human decision-making attempting to pre-empt and inhibit the decisions and actions of the industrial spy. Nobody knows for sure who the spy is. And the spy doesn’t know for sure that he hasn’t already been detected or, even if he hasn’t, whether his plans will succeed, and his desired payoffs attained. Searching, deciding, detecting, and stopping the industrial spy when both sides of the game face risk and uncertainty is the subject matter of this paper. We focus on closing the spy’s window of opportunity.
... Compensatory control theory (CCT; Gibbs et al., 2023;Kay et al., 2008Kay et al., , 2009Landau et al., 2015; for a summary see Figure 2, lower part) proposes that humans have a basic desire to perceive the world as an orderly and structured, and thus, certain and predictable, place. In line with previous social psychological theories on uncertainty management (see, e.g., Festinger, 1954;Heine et al., 2006;Hogg & Mullin, 1999;Lopes, 1987;Sorrentino & Roney, 1986;van den Bos, 2009;Weary et al., 2001), it assumes that people have a fundamental need to feel certain about their world and their place within it. According to CCT, this need is thwarted when they perceive their personal control to be low. ...
... Within the Big Five personality traits, we expect both risk styles to positively correlate with extraversion and openness to experience. Drawing from the behavioral activation framework, extraversion is characterized by a greater sensitivity toward rewards, which is a main motivational force for risk takers (Joseph and Zhang 2021;Lopes 1987;Scholer et al. 2010). Openness to experience reflects a preference for novelty, which is present in all forms of risk. ...
Risk preference is a key concept across social, economic, and decision sciences. While existing measures assess risk taking either as domain‐specific preferences (e.g., finance and health) or as a general trait, they have largely overlooked individual differences in the narrow, domain‐general aspects of risk preference. Drawing from a dual‐process framework, we advance a multidimensional domain‐general measure of risk preference. We develop and validate the Calculated and Spontaneous Risk‐Taking Scale across seven studies ( N = 2116). Results show (1) the two risk styles are moderately correlated and align with existing risk preference measures; (2) they are distinct from personality traits like the Big Five and cognitive traits like decision style; (3) calculated risk‐takers show more variability in risk attitudes across contexts; (4) calculated risk‐taking predicts adaptive outcomes (e.g., creativity and entrepreneurship), while spontaneous risk‐taking predicts maladaptive behaviors (e.g., crime, safety violations); and (5) the scale is invariant across sex and age. Overall, calculated risk‐takers engage in more adaptive risks, leading to healthier, more meaningful lives.
... Within the Big Five personality traits, we expect both risk styles to positively correlate with extraversion and openness to experience. Drawing from the behavioral activation framework, extraversion is characterized by a greater sensitivity toward rewards, which is a main motivational force for risk takers (Joseph & Zhang, 2021;Lopes, 1987;Scholer et al., 2010). Openness to experience reflects a preference for novelty, which is present in all forms of risk. ...
Risk preference is a key concept across social, economic, and decision sciences. While existing measures assess risk taking either as domain-specific preferences (e.g., finance, health) or as a general trait, they have largely overlooked individual differences in the narrow, domain-general aspects of risk preference. Drawing from a dual-process framework, we advance a multi-dimensional domain-general measure of risk preference. We develop and validate the Calculated and Spontaneous Risk-Taking Scale across seven studies (N = 2,116). Results show: (1) the two risk styles are moderately correlated and align with existing risk preference measures; (2) they are distinct from personality traits like the Big Five and cognitive traits like decision style; (3) calculated risk-takers show more variability in risk attitudes across contexts; (4) calculated risk-taking predicts adaptive outcomes (e.g., creativity, entrepreneurship), while spontaneous risk-taking predicts maladaptive behaviors (e.g., crime, safety violations); and (5) the scale is invariant across sex and age. Overall, calculated risk-takers engage in more adaptive risks, leading to healthier, more meaningful lives.
... It's crucial to underscore the link between empirical findings from northern pastoral China and broader theoretical insights on risk perception and decision-making. The literature demonstrates the interactive effects of risk preference and perception on individual decisions (He et al., 2018;He et al., 2020;Lopes, 1987;Lv, 2014), suggesting that integrating risk perception and preference is effective in analyzing herders' behaviours. Our study further reveals that a positive interactive effect suggests a more pronounced negative relationship between risk preference and adaptive behaviour among herders with a higher perception of risk. ...
Herders risk perception and preference critically shape their’ decision-making and management strategies. This study aims to determine how these factors affect herders’ adaptative behaviours pre- and post-disaster events and whether decision-making remains consistent across these stages. Using an ordered Probit model, we analysed survey data collected in 2020 from 828 herder households across six counties in Inner Mongolia and Gansu Province, China. The results showed that risk-averse individuals or those with a high-risk perception are more inclined toward preventative behaviours to pre-disaster. Group heterogeneity analysis revealed significant demographic interaction effects among female, middle-aged, and low-income herders, risk perception notably increased the adoption of adpatation behaviours, whereas among male, middle-aged, and high-income herders, higher risk preference negatively affected adaptive actions. The findings highlight the importance of understanding and evaluating the risks involved so herders in pastoral regions can better adapt to climate change.These insights also underscore the need for demographic-targeted extension services to enhance climate-adaptation among pastoral communities.
... In contrast to anger, however, emotion theorists typically frame fear as an internal "signal" for the organism to meet needs of security/ safety (LaBar, 2016). Of additional interest, fear-unlike anger-(a) is associated with avoidance, not approach, motivation, (b) interferes with ability to focus, and (c) makes people risk-averse (Harmon-Jones et al., 2011;Lerner & Keltner, 2001;Lopes, 1987). In combination, these characteristics of fear-especially, risk aversion-seem less likely to stimulate support for engaging in (potentially dangerous) decisions to initiate military confrontation. ...
Terrorism represents one of the most commonly studied types of threat in the social and political psychology literature. Of particular note, many studies (along with national polls) have shown that the threat of Islamist fundamentalism increases the appeal of conservativism. However, there are some important—and unresolved—questions regarding these threat-driven “shifts to the right.” Our primary focus was on the role of emotion. Are these conservative shifts due to the activation of fear, as long assumed by researchers in this area? Or might other emotions, such as anger, play the more central role? We also sought additional clarity on the relative breadth of these ideological shifts. When such threats are salient, is their impact relatively narrow, that is, constrained to political preferences specifically linked to terrorism? Or do these effects generalize to relatively distal political preferences, such as those related to abortion or affirmative action? This article proposes and tests an integrative model stipulating that (a) anger plays the primary role in driving these shifts and that (b) these anger-driven shifts are relatively narrow. Across three experiments, two of which were preregistered (total N = 2,395), we found strong support for both predictions. We discuss the implications of these findings for several well-known models in the social and political psychology literature. Our work also considers contrasts between the dynamics triggered by these acts of terrorism and their relation to other threats, including environmental disasters as well as mass shootings.
... (2) By comparison theorem for nonlinear ODE (see, e.g. Lieberman [27]), we can show that is non-decreasing in and there exists a (depending on ) such that (assuming is a continuous function). Moreover, the map is non-increasing. ...
... Empirical research has provided mixed results on the correlation between risk-taking and entrepreneurial success. Some studies indicate that a moderate level of risk-taking is essential for optimal entrepreneurial performance [16], while others suggest that too much risk-taking may lead to business failure [17]. Research also shows that the relationship between risk-taking and entrepreneurship varies significantly across cultures and economic systems [18], indicating that environmental and contextual factors play a critical role in shaping entrepreneurial behavior. ...
This study utilizes bibliometric analysis to explore the structure and dynamics of global research collaborations, particularly focusing on the field of entrepreneurial risk-taking. Utilizing data sourced from major academic databases and visualized through VOSviewer, we map the collaboration networks between countries, analyzing the roles of central hubs and their influence on global research trends. Our findings highlight the United States' pivotal role in the global research network, acting as a central hub with extensive international collaborations. The study reveals a trend toward multipolar contributions with significant inputs from countries like China, Germany, and Canada. These collaborations not only enhance the diversity and quality of research outputs but also underscore the importance of international cooperation in addressing complex global challenges. The study discusses the implications of these findings for policy-making and academic strategies, emphasizing the need to support international research collaborations to foster innovation and address global challenges effectively.
... Here, risk tolerance-or risk-taking ability-pertains to an individual's willingness to accept variations from their objectives during goal pursuit, influenced by their risk preferences (Wu, Xiao, and Xue 2019). It reflects the specific stance (favorable, neutral, or averse) that individuals adopt toward potential risks, indirectly shaping their approach to managing those risks (Lopes 1987). ...
Rural areas in China are undergoing significant transformations and development phases. This study employs fuzzy‐set qualitative comparative analysis (fsQCA) on quantitative data from a survey of 168 college students to investigate the configurations of factors leading to a high willingness to return to their hometowns for employment. The study focuses on their intentions to return as the dependent variable, with independent variables including rural sentiment, social compatibility, risk tolerance, family support, and life satisfaction. The findings reveal nine distinct pathways that meet the criteria of perfect consistency (1.0) and demonstrate high explanatory power (coverage of 89.19%). These pathways are categorized into four types based on underlying motivations: emotion‐oriented, value‐oriented, responsibility‐oriented, and social‐oriented. The results offer theoretical and practical insights into encouraging talent return in rural China, emphasizing the importance of a multifaceted approach that incorporates emotional, social, and familial considerations. The study's findings are contextualized within the Chinese socioeconomic environment, offering valuable insights into rural–urban dynamics in China. These findings could also be applied to other countries and regions with similar urban–rural dynamics and immigration patterns.
... A typical example of the utility function is l(x) = x γ γ , 0 < γ < 1, while that for the distortion function is the decumulative weighting function used in Lopes's SP/A theory [17] which takes the form: ...
Within the framework of the cumulative prospective theory of Kahneman and Tversky, this paper considers a continuous-time behavioral portfolio selection problem whose model includes both running and terminal terms in the objective functional. Despite the existence of S-shaped utility functions and probability distortions, a necessary condition for optimality is derived. The results are applied to various examples.
... This design is supported by research in behavioral finance. Lopes' SP/A (Security-Potential/Aspiration) model (Lopes (1987)), an improved version of the classic Friedman/Savage (1948) utility curves, argues that many unsophisticated gamblers prefer strategies of buying safe prospects with a few longshots (the "Cautiously Hopeful" pattern of SP/A). Regarding large jackpots, Daniel Kahneman has written "For emotionally significant events, the size of the probability simply doesn't matter. ...
Despite its unusual payout structure, the Canadian 6/49 Lotto is one of the few government sponsored lotteries that has the potential for a favorable strategy we call "buying the pot." By buying the pot we mean that a syndicate buys each ticket in the lottery, ensuring that it holds a jackpot winner. We assume that the other bettors independently buy small numbers of tickets. This paper presents (1) a formula for the syndicate's expected return, (2) conditions under which buying the pot produces a significant positive expected return, and (3) the implications of these findings for lottery design.
... This approach has however faced significant criticisms and researchers have explored optimal payoff choices under alternative decision theories. Notable are the dual theory of Yaari (1987), the rank-dependent expected utility (RDEUT) approach of Quiggin (1993), and several behavioural approaches, including the SP/A theory of Lopes (1987) and Shefrin and Statman (2000), and the cumulative prospect theory (CPT) of Tversky and Kahneman (1992). Despite extensive research within these alternative frameworks 1 , none prove superior to EUT for the problem of optimal portfolio choice. ...
We study optimal payoff choice for an expected utility maximizer under the constraint that their payoff is not allowed to deviate ``too much'' from a given benchmark. We solve this problem when the deviation is assessed via a Bregman-Wasserstein (BW) divergence, generated by a convex function . Unlike the Wasserstein distance (i.e., when ). The inherent asymmetry of the BW divergence makes it possible to penalize positive deviations different than negative ones. As a main contribution, we provide the optimal payoff in this setting. Numerical examples illustrate that the choice of allow to better align the payoff choice with the objectives of investors.
... Secondly, Shefrin (2008) shows that a behavioral framework of choice based on Securities, Potential and Aspirations (SP/A) theory of Lopes (1987) can be posed in terms of CRRA expected utility maximization with modifications to agent endowments and beliefs. Therefore, the CRRA-based framework might also facilitate the analysis of how individual dispositions affect information strategy and portfolio selection in the context of incomplete information. ...
I incorporate behavioral and bounded rationality elements into a single asset-pricing
framework by setting up a two-period consumption-based portfolio selection problem in which a representative agent has biased priors, does not observe the current state and thus has incomplete information about future state probabilities. He forms posterior beliefs using signals that he selects according to the rational inattention discrete choice framework of Matějka and McKay (2015), where the precision of the beliefs depend intuitively on the priors and the cost of information λ. In the case of log-utility, the optimal portfolio is a convex combination of the N portfolios the investor would have selected in each of the N states if they were fully observable, where the weights reflect the subjective posterior likelihood of time-zero states. The posterior beliefs are induced by parsimonious reweighing of priors, where the weights depend on λ, discount factor β and the relative
entropies of the future state distributions induced by different time-zero states.
Using a two-state example, I demonstrate how the cost of information and biases can be jointly analyzed in this framework and discuss implied deviations from fully rational behavior. The major advantage of the proposed model is its flexibility. When the cost of information λ is zero and the agent has correct priors, the model reduces to the standard neoclassical framework. When λ is non-zero and the agent has correct priors, it is a model of bounded rationality with endogenous signals and form of information, where the cost of information reflects the mental capacity of the agent. When λ is zero and the agent has biased priors, the model reduces to the behavioral framework with standard preferences. The proposed framework could lay the foundations for multi-periods heterogeneous-agents models in which the effects of biases and costly information can be jointly analyzed and its consumption-based formulation might render it useful well beyond the asset pricing context.
... The decision-making behavior of herders is not only directly affected by risk preference and risk perception but is also affected by the interaction between risk preference and risk perception. In the impact of risk preference on behavioral decision-making, risk perception plays a moderating role, which means that in groups with a high degree of risk perception, the effect of risk preference on decisionmaking behavior is more obvious than in low-risk groups (Lopes, 1987). ...
Encouraging and guiding herders to participate in grassland transfer promotes the high‐quality development of grassland animal husbandry. We conducted a survey among 356 herders from Qinghai and Gansu provinces in China, to explore the impact of herders' risk preference and perceptions on their grassland transfer strategies. We used experimental economics methods to measure the risk preferences of herders. Our results indicate that the majority of herders exhibit risk‐averse attitudes. A theoretical model was used to establish hypotheses on the relationship between risk preference and grassland transfer decision‐making. The double‐hurdle model and moderating effect model were used to test these hypotheses. Our analysis shows that herders' risk preferences have a significant negative effect on their decisions to engage in grassland transfer. Both risk preferences and risk perception have a significant impact on grassland transfer‐in decisions, but no significant impact on grassland transfer‐out. A heterogeneity analysis revealed that the impact of risk preferences on grassland transfer participation is more pronounced among herders in Qinghai compared to those in Gansu. Moreover, we found that risk perception plays a moderating role on the influence of risk preferences on decisions regarding grassland transfer. These findings are crucial to formulate strategies for the sustainable management of the grassland transfer market.
... The methods proposed in the above-mentioned literature optimize a portfolio from the perspective of objective return and risk, and they do not need parameters that reflect investor psychology. In contrast, with the help of prospect theory (PT) (Kahneman & Tversky, 1979) and security-potential/aspiration (SP/A) (Lopes, 1987), Shefrin and Statman (2000) propose behavioral portfolio theory (BPT). ...
Each portfolio model has its own advantages. Behavioral portfolio models can depict investor psychology, but it is not easy to obtain the preference parameters. We propose an interaction‐based combined (InCo) portfolio that determines the proportions of assets based on investor preferences. We take the existing models as alternatives and innovatively develop a visualization tool to present the portfolio performance. Hesitant fuzzy set theory is used to describe investor evaluations and to then determine the proportions of alternatives. The out‐of‐sample performance of four strategies is tested on four datasets. The results show that InCo portfolio performs better in various markets.
... A concise overview of the development and definition of decision-making and the reason for the continued research on decision-making lies in its profound influence on judgment and choice. Furthermore, it is established that a wrong decision can have a negative effect on the quality of the result, while a right decision can significantly increase people's explanatory power [23], as evidenced by Lope's investigation. ...
In the context of the advancing construction engineering field in China, there has been a significant increase in the adoption of building information modeling (BIM) technology within engineering–procurement–construction (EPC) projects. This emerging technology is expected to significantly influence the decision-making practices of professionals in the construction and engineering domain. Consequently, there is an urgent need for comprehensive research focused on construction management specifically pertaining to the effectiveness of construction developer management. This study examines seven representative EPC projects where BIM technology was implemented and it considers various factors that have the potential to influence project decision-making while taking into account time and cost considerations. A comprehensive multidimensional evaluation method that combines the analytic hierarchy process (AHP) and the fuzzy comprehensive evaluation method is introduced in this study. The results of this study emphasize that the efficiency enhancement strategies derived from the judgment indicator method demonstrate favorable practical outcomes. This research highlights the importance of a comprehensive evaluation method combining the AHP and the fuzzy comprehensive evaluation method to enhance decision-making efficiency for construction developer management staff.
... According to BPT, investors do not make logical decisions. Rather, their decision-making is based on feelings like anxiety and anticipation (Lopes, 1987). This theory may be used to elucidate observations including undiversified stock portfolios (hopes for wealth) and avoidance of stock markets despite the evidence of advantages from diversification. ...
Over the last century, global stock markets have crashed multiple times, leading to bankruptcy and unemployment and making individuals highly cautious about investing. Hence, individual investors in developing markets are highly prone to behavioural biases in their investment decisions, which influence their investment experience. The objective of this study is to examine the relationships between behavioural factors and investment experience, as well as the moderating effect of financial knowledge on individual investors in Bangladesh. Data was analysed using the partial least squares structural equation modelling (PLS-SEM) technique. The results revealed that behavioural factors such as anchoring, gambler’s fallacy, social interaction, and locus of control significantly influenced individual investors’ investment experiences. Moreover, financial knowledge had a moderating effect on these relationships. The study has important implications for investors, as it highlights the potential pitfalls of behavioural factors and the importance of financial knowledge in investors’ investment experience. The study’s findings imply that the government should develop new market opportunities through innovative products and take the necessary steps to incorporate regulations that will offer investors a better market experience.
... However, a review and analysis of existing research reveal that studies on the impact of risk preferences on insurance decisions primarily focus on life insurance [44][45][46], crop insurance [47][48][49], and motor insurance [50], with a noticeable lack of research on the influence of risk preferences on livestock insurance decisions. It is also noteworthy that the existing literature typically uses risk perception as a moderating variable to analyze the specific mechanisms by which risk preferences influence behavioral decisions [51]. Overall, the existing literature sufficiently demonstrates that risk attitudes have a broad and profound impact on agricultural management and decision-making. ...
In the context of advancing the transformation and upgrading of grassland animal husbandry, encouraging and guiding the widespread adoption of livestock insurance plays an important role in promoting the sustainable development of the livestock industry. This paper explores the impact of herders’ attitudes and perceptions towards climate change risks on their livestock insurance strategies. Firstly, experimental economics methods are employed to measure the risk preferences of herders on the Tibetan Plateau. Secondly, a theoretical model incorporating risk preferences and insurance adoption behavior is constructed. Finally, the effects of herders’ risk preferences on insurance adoption behavior are empirically examined through double-hurdle models, instrumental variable models, and moderating effect models. The results reveal that (1) most herders on the Tibetan Plateau exhibit risk-averse characteristics. (2) The degree of risk preference has a significant negative impact on herders’ insurance adoption behavior, while the risk perception significantly positively influences insurance adoption. The results remain valid even after addressing issues of endogeneity and conducting robustness checks. (3) Livestock income plays a crucial moderating role in the mechanism through which risk attitudes affect insurance adoption behavior. (4) The impact of risk preference on insurance adoption behavior shows regional and income heterogeneity.
... Uncertainty can act as an impediment to decision making (Duncan 1972). Prior research has shown individuals seek to reduce or eliminate uncertainty to make a situation more cognitively manageable (Festinger 1954;Fiske and Taylor 1991;Hogg and Mulin 1999;Lopes 1987;Sorrentino and Roney 1986;Weary, Jacobson, Edwards, and Tobin 2001). The level of detail of guidance, to the extent it influences uncertainty, is thus expected to influence management decision making. ...
Purpose
This paper aims to examine how managers make non-GAAP exclusion decisions depending on the regulatory guidance provided and their motivations. Guidance detail is a double-edged sword: resolving uncertainty but risking rule-based compliance over principled judgment.
Design/methodology/approach
This paper uses the context of non-GAAP measures in reporting, given the history of Securities and Exchange Commission changes in guidance detail. Drawing on theories of epistemic motivation and process accountability, this paper manipulates the goal of management (informativeness vs. opportunism) and guidance detail to examine effects on management decisions to exclude an ambiguous charge.
Findings
The 2×2 between participants experiment with 132 managers reveals that more detailed guidance increases likelihood of exclusion of an ambiguous charge. This paper further finds that this exclusion is more likely when management is given an informativeness goal, a result of a mediating effect of epistemic motivation. However, these findings only hold at low levels of process accountability.
Practical implications
The findings regarding the psychological concepts recognize the influence of perceived decision uncertainty by suggesting how managers respond to the level of regulatory guidance detail, offering regulators and auditors a basis for understanding and anticipating managerial reporting choices. Also, awareness of heightened epistemic motivation under the informativeness goal provides a nuanced practical understanding of non-GAAP decision drivers. Finally, the finding that effects are more pronounced for managers with lower process accountability highlights the significance of organizational accountability structures in guiding managerial choices, which can inform board-level governance and control decisions.
Originality/value
Pragmatically, this paper finds that detailed guidance leads to more appropriate exclusion decisions under a goal of informativeness but finds no such evidence where the goal is opportunism. No prior study has examined how the level of detail in guidance affects managers’ disclosure choices.
... This discrepancy may be attributed to the context-dependent nature of emotion induced by risk (Wilson et al., 2005;Xu et al., 2022). Risk can elicit different emotions depending on the situation, such as excitement, fear, or worry (Lopes, 1987;van Winden et al., 2011;Wilson et al., 2005). Therefore, introducing risk to a gain outcome might intensify excitement but could also trigger other emotions like fear of loss, creating a mixed emotional state that complicates the interpretation of the results. ...
People often experience uncertain waiting times, like when awaiting job interview decisions. Despite its prevalence, the preference for waiting time-ambiguity has received limited research attention. Drawing on the information gap theory, which suggests ambiguity avoidance is influenced by the affective response to the missing information caused by uncertainty, this work examined the effect of outcome desirability on ambiguity preference in the context of waiting time. Across five studies in China and the United States, this work observed that people strongly dislike unknown waiting time for undesirable outcomes compared with desirable outcomes. This effect held true in both rating tasks and choice tasks. Furthermore, this study explores factors influencing this desirability effect. Using calendar dates instead of waiting time units and evaluating the options separately rather than jointly, reduced the impact of outcome desirability on ambiguity preference. Additionally, this desirability affect was more pronounced for utilitarian than hedonic outcomes. Altogether, these findings highlight the role of outcome desirability, temporal description, and evaluation mode in shaping individuals' preference for ambiguity in the domain of waiting time.
... In other words, the decision may be correct for most of the herd, but it may be wrong for you. (Lopes, 1987;Shefrin and Statman, 2000) define fear as an overweighing of the worst-case scenario relative to the best-case scenario. Furthermore, as stated above, fear is a temporary reactive emotion to a situation. ...
The importance of the housing market to households and the economy is paramount to monetary policies. However, there is limited literature on the behavioural factors influencing the decision-making process in the housing market. This article profoundly examines the psychological and neurological factors influencing the housing market. It reviews how cognitive and emotional influences shape the householders, both sellers and buyers, decisions in the housing market. More importantly, we review the literature on neuroeconomics (and neurofinance) to initiate an understanding of how the brain could work in the housing market. In summary, the householders' reactions to information and news are consistent with behavioural finance theories. Householders tend to underreact to news regarding the housing market and often suffer from biases and heuristics. One of the critical effects that householders suffer from is an illusion of control; this could be traced to the emotions of householders towards the house. Householders do not just show positive emotions towards the property; they fall in love with it. This strong emotional bond is one reason buyers overpay and sellers overprice. Both governments and monetary policymakers need to understand the psychology influencing the householders' decision-making process mainly because the housing market is vital to the economy.
... However, since the St. Petersburg paradox described by Bernoulli (Bernoulli, 1954), the EV maximization principle has been challenged as a valid positive model. Alternative explanations of human decision making have instead considered the maximization of expected utility (Von Neumann & Morgenstern, 1944), maximization of subjective value RECURRING IRRATIONALITY 8 (Tversky & Kahneman, 1992), satisfying (Simon, 1990b), aspirations (Lopes, 1987), or feelings (Loewenstein et al., 2001) as pivotal factors that motivate choices and shape the human decision-making process. Despite the irrefutable advantage of these descriptive models for theorizing about human decision making, from a formal perspective, the EV model still functions as a reference point for making optimal choices under risk. ...
A vast body of research has indicated that individuals with higher statistical numeracy, in comparison to individuals with lower statistical numeracy, make superior decisions by employing more deliberative processes leading to selecting options with the highest expected value (EV). However, it is not feasible to deliberate every time we make a choice due to cognitive and environmental constraints. In one simulation study and three well-powered, fully-incentivized empirical studies using the decision-from-experience task, we identified conditions where recurring suboptimal choices were more rewarding than a normatively superior strategy. That is, even if individual choices in isolation are considered suboptimal in light of the EV maximization principle, individuals with higher numeracy can adapt their decision strategy in accordance with changes in the task structure, and make faster suboptimal (or random in terms of EV maximization) decisions that result in overall superior performance (e.g., earning more money). We found that individuals who maximized EV without time constraints accumulated higher total gain. However, the trend reversed in the following two studies. Participants who made more suboptimal choices, under time constraints, earned more money than those who spent more time maximizing EV. Importantly, we found that more numerate individuals made significant adjustments to their meta-cognitive decision processes and made more quick suboptimal choices resulting in better overall earnings than less numerate individuals. Finally, our results also indicate that more numerate individuals are better at identifying the changes in the task structure and are more rational in their use of cognitive and environmental resources.
... Security concerns associated with blockchain technology have also contributed to perceived risks surrounding cryptocurrencies (Mackenzie & Bērziņa, 2022;Yli-Huumo et al., 2016). Additionally, a lack of understanding of social and cognitive factors can lead to irrational investment decisions among participants (Lopes, 1987). The cryptocurrency market's exceptional volatility further complicates investment decisions, with tokenomics playing a crucial role in influencing market behaviour. ...
Cryptocurrency markets are inclined towards speculative usage due to the inherent high risk of financial loss and the potential for substantial gains during transaction completion. In response to this phenomenon, this study represents the inaugural effort to explore the influence of variables such as subjective norms, domain knowledge , impulsive investment tendencies, and self-control on decisions related to speculative investments. Utilising structural equation modelling with a dataset of 367 responses in India, the study is the first of its kind. The research reveals that subjective norms and domain knowledge play a significant role in influencing impulsive investment and self-control. Additionally, impulsive investment exhibits significant associations with decisions involving speculative investments. This insight underscores the complexity wherein individuals, despite exercising self-control, may still engage in speculative decisions that lead to adverse consequences. The findings have practical implications for investors and regulators, offering valuable insights into investment behaviours within the cryptocurrency realm. ARTICLE HISTORY
... fewer) number of possible outcomes is considered "riskier" (March & Shapira, 1987). Risk-taking can be defined as a goaldirected option consisting of more than one outcome of which some are undesirable (Byrnes et al., 1999;Lopes, 1987) such that a higher risk yields a higher reward. Gambling, considered a risk-taking behaviour, can lead to the pursuit of "a high probability of loss against a smaller probability of large gain" (Mishra et al., 2010, p. 616), which is consistent with participation in the 50-50 raffle in that the probability of winning is low, but the gain is large. ...
... The expected utility model explains such choices through the curvature of the utility function. Psychological empirical literature shows that peoples' orientation toward risk deviates from many axioms of utility theory being framed (Tversky and Kahneman 1981) and heuristic dependent (Kahneman et al. 1982), while other ideas point that such individual risk preferences are related to motivations such as the desire of security (Lopes 1987) or affective states (Isen 2001). Moreover, mounting evidence demonstrates that individuals' risk orientation varies across domains, such as health, gambling risks or investment risks (Prosser and Wittenberg 2007). ...
The main aim of this paper is to investigate the micro and macro predictors of Portuguese willingness to pay (WTP) more taxes to bolster funds channelled to the National Health Service (NHS). An online questionnaire was used to collect data from 584 Portuguese citizens. The statistical analysis was performed through the application of logistic regressions. The research shows that willingness to support increasing taxes depended on socioeconomic, behavioural, and psychological factors. The WTP more taxes to finance the NHS were associated with younger ages, life satisfaction and dispositional optimism, satisfaction with the NHS performance, current perceived risk exposure, and risk orientation. Identifying and understanding the main influencing factors associated with WTP more taxes for NHS is essential to assist policy-makers in developing healthcare reforms. Decision-makers may take this opportunity to improve the NHS since those who ultimately benefit from the measures can provide an additional source of health financing.
... A person's risk propensity can be defined as their current propensity either toward taking risks or staying away from them (Sitkin & Weingart, 1995;Ul Abdin et al., 2022). A person's decision-making situations and actions are significantly impacted by their propensity for taking risks, according to Lopes (1987). Risk-taking is not gambling since people can still manage their risks even when they make risky choices (March & Shapira, 1987). ...
Plain Language Summary
Low historical financial performance and managerial risk-taking propensity impact the utilization of strategic management accounting information in Vietnamese manufacturing
Strategic management accounting is an innovative management accounting tool that has been proving its usefulness when supporting upper managers in making strategic decisions. This study used UET as the foundation theory to establish and test the relationships between low historical financial performance—managerial risk taking propensity—the choice of prospector strategy—using SMA information. In addition, this study also examines the moderator role of the internal locus of control in some relationships. This study surveyed 218 CFOs in medium and large manufacturing enterprises in Vietnam, all relationships were statistically significant. The results of this study have shown that low historical financial performance is an antecedence factor which affecting on the managerial risk-taking propensity in management of CFOs, as well as affecting the choice of a risky strategy such as prospector strategy. And it all affects the use of SMA information. This result implies that the designers of the SMA system need to pay attention to the organization’s own factors such as the past financial performance, as well as the strategic characteristics that the organization is pursuing, and especially the SMA system must fit with the psychological personality of the upper managers (CFOs). In order to create the appropriateness in the operation process of the organization toward improving the efficiency of Vietnamese manufacturing enterprises
Decision-makers usually have an aspiration level, a target, or a benchmark they aim to achieve. This behavior can be rationalized within the expected utility framework, which incorporates the probability of success (achieving the aspiration level) as an important aspect of decision-making. Motivated by these theories, this study defines the probability of success as the number of days a firm’s return outperformed its benchmark in the portfolio formation month. This study uses portfolio-level and firm-level analyses, revealing an economically substantial and statistically significant relationship between the probability of success and expected stock returns, even after controlling for common risk factors and various characteristics. Additional analyses support the behavioral theory of the firm, which posits that firms act to achieve short-term aspiration levels.
In the local energy market (LEM), prosumers, participants who produce and consume energy, are typically considered rational. Nevertheless, their trading behaviors are impacted by multiple factors, such as social relations, personal preferences, and habits. Each of them holds different trading demands regarding benefits, comfort levels, and environmental consciousness, demonstrating bounded rationality. This chapter presents a mental accounting theory-based trading strategy for prosumers. This trading strategy accounts for the trading behaviors in reality via quantifying prosumers’ motivations and psychological changes, which are evaluated by the risk attitude and subjective value models during the multi-account management process. Furthermore, to increase social welfare and market efficiency, this chapter introduces the updated rules of trading decisions and the multi-round bidding market mechanism. Case studies are conducted and following conclusions are verified: (1) the proposed trading strategy can effectively reflect the prosumers’ intentional and limited rationality during the LEM; (2) the proposed market mechanism can effectively improve social welfare and market efficiency.
In this paper, we unearth a forgotten study of Pierre Des Essars, the director of research at the Banque de France in the late 19th century, enriched with comments from contemporary financial analysts. Des Essars provides the first and only existing example of the actual composition of French individual portfolios during the Belle Époque . By revisiting what is generally taught, our analyses show that many of the intuitions of “finance for normal people” were already present in the financial analysts' writings during the Belle Époque . Specifically, we show in an unprecedented way that these writings prefigure behavioral portfolio theory word for word a century before its emergence. In addition, our findings highlight that this popular science of investment was born from observations of individual portfolios and the objective of providing financial education for the masses. Finally, we reveal strong invariants in the construction of behavioral finance versus standard finance a century apart.
Very little is known about whether job crafting (JC) in fact reduces job performance (JP), and if it does, how such unintended consequences might be ameliorated. By fusing ideas from situational strength theory and behavioral decision theory into a multilevel
framework, we investigate how risk propensity interacting with organizational control mechanisms affects the performance benefits of JC. Using a sample of 388 employees included in 82 teams, we conducted multilevel path analyses via Mplus software and found that the performance benefits of JC were weakened among employees with higher levels of risk propensity. Such a moderating effect was amplified when employees had high levels of job autonomy, while it was weakened for teams with a strong accountability context. Our study offers new theoretical and practical insights by identifying risk propensity as a preventative antecedent to the benefits of JC, with organizational control mechanisms as a crucial qualifier of such effects.
Keywords: Accountability context; Job autonomy; Job crafting; Job performance; Risk propensity
Purpose
This study aims to reconcile and address Bowman’s paradox empirical criticism from the lens of financial theory, corporate strategy and their econometric adversaries based on three issues, i.e. risk conceptualization, measurement and econometric modeling in Asian emerging countries (AEC).
Design/methodology/approach
The study is conducted on panel data sampling from 2,872 firms across four Asian Emerging Countries (AEC) and employs a two-stage least squares (2SLS) estimation technique. We proposed a theoretical framework based on triangulation that outlines four risk-return relationships based on proxies derived from capital market and firm-level data and used different econometric models to answer Bowman’s paradox ongoing criticism.
Findings
The empirical results negate the empirical artifact viewpoint in AEC. The risk-return relationship estimated on firm accounting-based ratios or its combination with market-based measures supports Bowman’s paradox and thus upholds the corporate strategy point of view. Whereas the risk-return relationship based on market-based ratios upholds the financial theory point of view. However, the results are mixed when risk is subdivided into systematic and business risk. Our results are robust across standard deviation and semi-standard deviation-based measures of risk, and there is no evidence of a non-linear relationship.
Originality/value
A compelling debate exists that Bowman’s paradox is an empirical artifact. We provide an innovative approach that aims to reconcile and address the ongoing debate by employing diverse risk-return proxies and econometric models in Asian emerging countries. Methodological issues such as endogeneity, sample biases, temporal fluctuations, downside risk variations, multiple moments of a variable and model misspecification are also addressed. This triangulation enhances the robustness of our analysis, providing a comprehensive perspective on AEC and laying the groundwork for future researchers to explore Bowman’s paradox through alternative measures and models.
The study of rationality is closely linked to the formal study of human judgement and decision-making. Much of the empirical discourse on rationality has been centered on evaluation of quality of human judgments, decisions and behavior. Building upon traditional and recent models in this discourse, this paper examines how motivational and affective processes fundamentally shape rational behavior through their influence on perceptual and cognitive mechanisms. Our analysis demonstrates that rational behavior emerges from the dynamic interaction between motivational drives, emotional states, and cognitive processes, beginning at the earliest stages of information processing. This integrated perspective, grounded in empirical evidence from cognitive neuroscience and psychology, provides new insights into the nature of cognitive biases, suggesting that apparent deviations from rationality may represent adaptive responses when considering how perception and cognition are shaped by motivational and affective states. By emphasizing the foundational role of motivation and affect in driving perceptual and cognitive mechanisms, this work advances our understanding of human rationality and suggests new directions for research.
Entrepreneurship encompasses various definitions and sub-domains, reflecting its multifaceted nature. Yet, at its essence, entrepreneurship remains a deeply personal journey. This chapter explores the emotional landscape of entrepreneurship, investigating how psychological characteristics influence entrepreneurial emergence, decision-making, and performance. Passion, cognition, and motivational drives shape the entrepreneurial venture, marked by uncertainty and diverse roles. Understanding how entrepreneurs perceive and seize opportunities is crucial for unraveling the complexity of entrepreneurship. Passion, in its various forms, acts as a catalyst for entrepreneurial success, influencing venture growth through goal-setting and commitment. Conversely, the interplay between risk-taking propensity, need for achievement, and affect impacts both decision-making and performance dynamics. Ultimately, entrepreneurial success transcends mere destination, embodying the culmination of an emotional odyssey that empowers individuals to overcome challenges and realize their aspirations.
Firms often struggle to motivate managers’ CSR performance, and little attention has been paid to how performance evaluation can assist in this effort. We address this gap by examining the effects of relative performance information (RPI) on risky CSR investment decisions. Compared to when no RPI is provided, we find that providing RPI based on the size or impact rate of CSR investments improves performance on the ranked dimension, although effects are weaker in more risk-averse managers. We also find that providing both types of RPI separately may lead to similar performance as providing just one type, and that RPI based on a single composite measure that combines performance dimensions leads to the greatest performance along each dimension. Our study contributes to research and practice by identifying how RPI can motivate larger, more impactful CSR investments and by highlighting the role that managers’ risk preferences can play in these decisions.
Data Availability: Data are available upon request.
Although scholarship has established how people with a partner, child, or other domestic obligations account for these responsibilities when making career decisions, we lack conceptual apparatus around how career decision making is informed by personal aspirations. Following a cohort of 89 international aid workers over eight years, I draw on in-depth interview (n = 126), survey (n = 551), and job transition data (n = 228) to detail how career decision making serves as a platform for identity management for single professionals who have aspirations for a long-term intimate relationship. I introduce the possibility space, which conveys how the ability to realize relationship aspirations is constrained for work-devoted professionals, especially for straight women and lesbian, gay, bisexual, and queer (LGBQ) people. Yet, they resist scaling back work. I detail why, presenting the three types of career decisions they made: (1) work devotion as identity armor, protecting and affirming their current aid worker identity; (2) temporary work alterations as identity diversification, carving out time to hopefully realize their desired relationship while postponing the affirmation of their aid worker identity; and (3) durable work alterations as identity restructuring, removing the aid worker identity from their identity network. This article’s model of career decision making as identity management and the broader theoretical explanation of how different behavioral practices can manage temporally distinct identities offers important contributions to scholarship on identity, the work-nonwork interface, labor market inequalities, and career decision making.
Funding: This research was supported by the University of Minnesota’s Grant-in-Aid of Research, Artistry and Scholarship and a Stanford University Dissertation Support Grant.
Discusses 2 strategies for constructing theories of risk and reports results of testing the 1st one; 44 university students served as Ss. The 1st strategy (the most popular) utilizes parameters of distributions as its independent variables. It is shown that a simple polynomial of variables representing expectation, range, and asymmetry is not acceptable. Although the gross features of the data appear to be described satisfactorily, the fine structure of the data reveals that such variables are unacceptable for a descriptive theory of risk assessment. (19 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Reviews the literature which examined the effects of exposing organisms to aversive events which they cannot control. Motivational, cognitive, and emotional effects of uncontrollability are examined. It is hypothesized that when events are uncontrollable the organism learns that its behavior and outcomes are independent, and this learning produces the motivational, cognitive, and emotional effects of uncontrollability. Research which supports this learned helplessness hypothesis is described along with alternative hypotheses which have been offered as explanations of the learned helplessness effect. The application of this hypothesis to rats and man is examined. (114 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Ss can discriminate phonemes presented singly and in random order. Ss discriminated better between speech sounds to which they have attached different phonemic labels than between sounds which they normally put in the same phoneme class. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Investigated failure to escape, the defining characteristic of learned helplessness, with perceived and instructed locus of control Ss in a learned-helplessness paradigm. 96 undergraduates in 3 groups, equally divided between internals and externals and counterbalanced for sex, received different treatments with an aversive tone prior to the testing for helplessness. Group I could neither escape nor avoid an aversive tone, Group II could escape the tone, and Group III was not exposed to the treatment. 18 escape-avoidance trials followed, using a human analogue to an animal shuttle box in which Ss received an instructional set describing the task as skill or chance determined. In addition to a complete replication of learned helplessness in man, externals were significantly more helpless than internals, and chance-set Ss more helpless than skill-set. Since uncontrollability of noise, externality, and chance instructional set all impaired escape-avoidance in parallel ways, it is speculated that a common state may underlie all 3 dimensions-expectancy that responding and reinforcement are independent. (17 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Proposes that verbal reports are data and that accounting for them, as well as for other kinds of data, requires explication of the mechanisms by which the reports are generated, and the ways in which they are sensitive to experimental factors (instructions, tasks, etc). Within the theoretical framework of human information processing, different types of processes underlying verbalization are discussed, and a model is presented of how Ss, in response to an instruction to think aloud, verbalize information that they are attending to in short-term memory (STM). Verbalizing information is shown to affect cognitive processes only if the instructions require verbalization of information that would not otherwise be attended to. From an analysis of what would be in STM at the time of report, the model predicts what could be reliably reported. The inaccurate reports found by other research are shown to result from requesting information that was never directly heeded, thus forcing Ss to infer rather than remember their mental processes. (112 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Tested a distributional model of risk using positive lotteries in 6 experiments with 580 undergraduates. Exps I and II investigated Ss' preferences for lotteries; Exps 3–6 investigated judgments of riskiness. In all experiments, Ss were presented with a target set of stimulus lotteries in all possible pairs. Overall data support the distributional model of risk for judgments of preference and of riskiness, demonstrating the usefulness of Lorenz curves in capturing the salient psychological features of risk and revealing, as hypothesized, that people's judgments of positive risks are functionally similar to judgments of distributional inequality. It is suggested that although the distributional model must be supplemented to handle features of the risk domain that are absent in welfare economics, it is preferable to other models of decision making under risk because it can express in a psychologically acceptable way many significant features of people's processing of and preference for risks. (38 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Suggests that the psychological concept of risk has been limited by the reliance of experimenters on simple, static lotteries or gambles. Several treatments of risk from the older economic literature are presented to illustrate aspects of risk that psychologists tend not to consider. These aspects include the distinction between risk and uncertainty, the problem of ambiguity in risky choice, and the relation between risk preference and planning. The role of the decision makers' goals and aspirations in risky decisions is highlighted. (14 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
In an experiment with 60 undergraduates, the robustness of the reflection effect was examined both within Ss and across Ss differing in risk style for a set of multi-outcome lotteries. Reflection was found to be weak and irregular for all choice pairs except those that included a lottery with a riskless component. The latter were generally preferred for gains but not for losses by both risk-averse and risk-seeking Ss. In all other choices, risk-averse and risk-seeking Ss differed systematically from one another, but in ways that are more complex than pure risk aversion or risk seeking would predict. It is concluded that the findings suggest a general inability of weighted value theories such as the prospect theory described by D. Kahneman and A. Tversky (1979) to adequately describe the pattern of risk preferences over individuals and over the full range of lottery types. Such inadequacy suggests the need for an alternative approach to risk with emphasis on the goals and strategies that individuals bring to the risky choice process. (21 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Notes that learned helplessness-the interference with instrumental responding following inescapable aversive events-has been found in animals and man. The present study tested for the generality of the debilitation produced by uncontrollable events across tasks and motivational systems. 4 experiments with a total of 96 college students were simultaneously conducted: (a) pretreatment with inescapable, escapable, or control aversive tone followed by shuttlebox escape testing; (b) pretreatment with insoluble, soluble, or control discrimination problems followed by anagram solution testing; (c) pretreatments with inescapable, escapable, or control aversive tone followed by anagram solution testing; and (d) pretreatments with insoluble, soluble, or control discrimination problems followed by shuttlebox escape testing. Learned helplessness was found with all 4 experiments: Both insolubility and inescapability produced failure to escape and failure to solve anagrams. It is suggested that inescapability and insolubility both engendered expectancies that responding is independent of reinforcement. The generality of this process suggests that learned helplessness may be an induced "trait." (24 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Discusses the cognitive and the psychophysical determinants of choice in risky and riskless contexts. The psychophysics of value induce risk aversion in the domain of gains and risk seeking in the domain of losses. The psychophysics of chance induce overweighting of sure things and of improbable events, relative to events of moderate probability. Decision problems can be described or framed in multiple ways that give rise to different preferences, contrary to the invariance criterion of rational choice. The process of mental accounting, in which people organize the outcomes of transactions, explains some anomalies of consumer behavior. In particular, the acceptability of an option can depend on whether a negative outcome is evaluated as a cost or as an uncompensated loss. The relationships between decision values and experience values and between hedonic experience and objective states are discussed. (27 ref)
Criticizes and reformulates the learned helplessness hypothesis. It is considered that the old hypothesis, when applied to learned helplessness in humans, has 2 major problems: (a) It does not distinguish between cases in which outcomes are uncontrollable for all people and cases in which they are uncontrollable only for some people (universal vs personal helplessness), and (b) it does not explain when helplessness is general and when specific, or when chronic and when acute. A reformulation based on a revision of attribution theory is proposed to resolve these inadequacies. According to the reformulation, once people perceive noncontingency, they attribute their helplessness to a cause. This cause can be stable or unstable, global or specific, and internal or external. The attribution chosen influences whether expectation of future helplessness will be chronic or acute, broad or narrow, and whether helplessness will lower self-esteem or not. The implications of this reformulation of human helplessness for the learned helplessness model of depression are outlined. (92 ref)
Level of aspiration can be related to decision theory where an achievement scale is viewed as a scale of utility of achievement goals. One's level of aspiration can be reduced to the measurement of ordered metric goals which include a ranking of the goals and the distance between them. A behavioral model of decision making should contain not only subjective probability but also utility whose main concepts are LA and reinforcement effects. Given several choices the individual tries to maximize the subjective expected utility where utility is a function of LA and reinforcement. Experimental evidence supporting these ideas are given. 28 references.
A model explaining how the motive to achieve and the motive to avoid failure influences behavior assumes strength of motivation as being a multiplicative function of motive, expectancy, and incentive. This accounts for level of aspiration and also performance level when only one task is presented. "It also assumes that the incentive value of success is a positive linear function of difficulty as inferred from the subjective probability of success; and negative incentive value of failure to be a negative linear function of difficulty." 2 theoretical implications are "that performance level should be greatest when there is greatest uncertainty about outcome" and people with strong motive to achieve should prefer immediate risk whereas those with strong motive to avoid failure will prefer easy tasks or extremely difficult and risky tasks. Experimental results are cited with implications for research on gambling and social mobility aspirations. 22 references.
Psychologists trained in psychophysics tend to think that subjective probability is related to objective probability in more or less the same way that the subjective loudness of a tone is related to its objective intensity. The purpose of this paper is to examine the content, merits, and limitations of such an approach. The discussion will focus on two closely related matters. The first is the idea of a set of functions relating subjective to objective probability. The second is whether or not the subjective probabilities of a set of mutually exclusive events, one of which must happen, should add up to one. The paper begins by denning two classes of decision theories. After some preliminary discussion of utility and subjective probability functions, it next considers the class of theories which result when subjective probabilities are assumed to add up to one. This class turns out to have some serious difficulties. A brief review of experimental evidence provides empirical reasons for avoiding these difficulties by rejecting additivity. Then the paper examines models which do not require subjective probabilities to add up to one. Such models require a reformulation of the concept of utility; utility scales must have true zero points. Finally the paper derives two experimentally testable properties which any plausible utility-subjective probability model, additive or otherwise, must have, and presents a model which I find attractive.
Experimental studies have shown that the key behavioral assumption of expected utility theory, the so-called "independence axiom," tends to be systematically violated in practice. Such findings would lead us to question the empirical relevance of the large body of literature on the behavior of economic agents under uncertainty which uses expected utility analysis. The first purpose of this paper is to demonstrate that the basic concepts, tools, and results of expected utility analysis do not depend on the independence axiom, but may be derived from the much weaker assumption of smoothness of preferences over alternative probability distributions. The second purpose of the paper is to show that this approach may be used to construct a simple model of preferences which ties together a wide body of observed behavior toward risk, including the Friedman-Savage and Markowitz observations, and both the Allais and St. Petersburg Paradoxes.
This is the direct English translation, which appears for the first time, of ‘Fondements d’une Théorie Positive des Choix Comportant un Risque et Critique des Postulats et Axiomes de L’Ecole Americaine’ which was published in French as Memoir III annexed to Econometrie, Colloques Internationaux du Centre National de la Recherche Scientifique, Vol. XL, Paris, 1953, pp.257–332 (see p.447 below).
A previously published model, based on introspective cardinalism, is summarized. A slightly revised version more clearly implies predictions of ‘paradoxes’ while excluding ‘counter paradoxes’, i.e. deviations from the Neumann-Morgensternconsistent behaviour in the opposite direction.
Empirical tests on school teachers and a new test on science faculty confirm asymmetric deviation from N-M-consistent behaviour.
The result of the theoretical development and the empirical evidence is also expressed in ordinalistic language in a field of preferences.
In a space where coordinates are probabilities for prizes indifference sets are convex towards the origin and somewhat twisted as compared with the parallel and linear sets of equal expected utility.
This article examines the explanation for risk/return. The content of corporate annual reports is analyzed in order to explore the hypothesis that low-profit companies are more likely to enter into new (riskier) ventures.
This study explores the implications of dissapointment, a psychological reaction caused by comparing the actual outcome of a lottery to one's prior expectations, for decision making under uncertainty. Explicit recognition that decision makers may be paying a premium to avoid potential disappointment provides an interpretation for some known behavioral paradoxes, and suggests that decision makers may be sensitive to the manner in which a lottery is resolved. The concept of disappointment is integrated into utility theory in a prescriptive model.
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.
Introduction, 99. — I. Some general features of rational choice, 100.— II. The essential simplifications, 103. — III. Existence
and uniqueness of solutions, 111. — IV. Further comments on dynamics, 113. — V. Conclusion, 114. — Appendix, 115.
Examines the commonly accepted idea that the only rational measure of the worth of a gamble is its expected value or some subjective counterpart such as expected utility. The argument is made that for short-run situations, it is reasonable to consider the probability of coming out ahead instead of, or in addition to, the long-run expectation. Changes are discussed that might be called for in theories of rational choice when the prescriptions of rational models violate common sense. (23 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
I. Are there uncertainties that are not risks? 643. — II. Uncertainties that are not risks, 647. — III. Why are some uncertainties
not risks? — 656.
A psychological theory of perceived risk is developed. The theory is formulated in terms of an ordering of options, conceived of as probability distributions with respect to risk. It is shown that, under the assumptions of the theory, the risk of an option is expressible as a linear combination of its mean and variance. The relationships to other theories of risk and preference are explored.
Empirical tests of some properties of the perceived riskiness of gambles are reported. In experiments conducted with U.S. and German subjects, we observed a remarkable consistency in risk judgments. Four possible measures of risk, derived by R. Duncan Luce, were examined. We found that risk decreases as a constant amount is added to all outcomes of a gamble. Two of Luce's measures require that risk not change with the addition of a constant, and thus these measures are not appropriate for describing perceived risk. We also found that Luce's logarithmic measure is not empirically valid. Luce's fourth measure (the expectation of the absolute value of the outcomes raised to a parameter θ) seems to have more promise than his other three measures. These results provide some necessary conditions that a new theory or extension of Luce's measures must satisfy.
Throughout the 18th century, the notion of probabilistic expectation was a matter of controversy among mathematicians. Despite its seminal role in the earliest formulations of mathematical probability, such as that of Huygens, expectation did not remain a fixed concept but underwent several striking shifts in definition. This paper argues that the conception of expectation was altered by mathematicians in a deliberate effort to capture the salient aspects of rational decision making. As the notion of rationality successively took on legal, economic, and then psychological overtones, the definition of probabilistic expectation followed suit.
Rational choice involves two guesses, a guess about uncertain future consequences and a guess about uncertain future preferences. Partly as a result of behavioral studies of choice over a twenty-year period, modifications in the way the theory deals with the first guess have become organized into conceptions of bounded rationality. Recently behavioral studies of choice have examined the second guess, the way preferences are processed in choice behavior. These studies suggest possible modifications in standard assumptions about taste and their role in choice. This paper examines some of those modifications, some possible approaches to working on them, and some complications.
The psychological principles that govern the perception of decision problems and the evaluation of probabilities and outcomes
produce predictable shifts of preference when the same problem is framed in different ways. Reversals of preference are demonstrated
in choices regarding monetary outcomes, both hypothetical and real, and in questions pertaining to the loss of human lives.
The effects of frames on preferences are compared to the effects of perspectives on perceptual appearance. The dependence
of preferences on the formulation of decision problems is a significant concern for the theory of rational choice.
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)