A Fuzzy-Trace Theory of Risk and Time Preferences in Decision Making: Integrating Cognition and Motivation

Abstract

We provide an overview of fuzzy-trace theory (FTT) and its implications for risk and time preferences, drawing on evidence from behavioral economics, psychology, and neuroscience. FTT’s central construct is mental representation, specifically verbatim (literal surface form) and gist (bottom-line meaning) representations. The differences between these types of representation determine risk and time preferences, in combination with social values as well as developmental and individual differences. In particular, sensitivity to rewards and inhibitory control vary across the life span and across people, but impulsivity and risk taking can be modified by applying principles of FTT. We discuss the origins of FTT in prospect theory and distinguish risk preference, impulsivity versus intuition, temporal discounting (i.e., delay discounting), and delay of gratification, as well as FTT’s approach compared to standard dual-process models of judgment and decision making. As we discuss, there are parallels in FTT’s explanations of people’s willingness to tolerate risk as well as their willingness to wait for future rewards. FTT predicts theoretically crucial effects, such as increasing cognitive biases from childhood to adulthood, greater “rational” analysis among adolescents compared to adults, elimination of gain–loss biases through truncation of zero parts of gambles in risky choice framing, and hidden-zero effects in temporal discounting. We conclude that FTT yields qualitatively different interpretations of risk preference and time preference compared to other theories and that it offers new approaches to understanding and improving problem behaviors.