A closer examination of the risk–reward correlation: an individual-level analysis and exploration in the loss domain

Abstract

ABSTRACT Utility and probability are considered independent constructs for decision-making under uncertainty. However, many studies have suggested that people assume a correlation between probability and utility. Specifically, recent studies indicated the existence of “risk–reward heuristics” that assume a negative correlation between probability and utility in the real world when inferring winning probabilities from payoffs during decisions made under uncertainty. This study aimed to explore the relationship between probability and utility by requiring participants to estimate both the probabilities from payoffs and payoffs from probabilities in a gain or loss situation. The results support the existence of risk–reward correlation both in gain and loss domain, and, at the same time, suggest the possibility that people have different intuitions for the probability-utility relationship between the gain and loss domains. This study also provides some theoretical suggestions, including a causal relationship between reward and probability, and the origin of the risk-reward correlation.