How risk-prone are people when facing a sure loss? Negative interest rates as a convenient conceptual framework

Emir Efendić,Catherine D'Hondt,Olivier Corneille,Rudy De Winne

doi:10.3758/s13423-021-01921-0

Emir Efendić, Catherine D'Hondt + Show 2 more

Open Access

https://doi.org/10.3758/s13423-021-01921-0

Copy DOI

Abstract

People occasionally face sure loss prospects. Do they seek risk in search of better outcomes or contend with the sure loss and focus on what is left to be saved? We addressed this question in three experiments akin to a negative interest rate framework. Specifically, we asked participants to allocate money (Experiments 1 and 2) or choose (Experiment 3) between two options: (i) a loss option where, for sure, they would end up with less, or (ii) a mixed gamble with a positive expected outcome, but also the possibility of an even larger loss. Risk aversion (i.e., choosing the sure loss) ranged from 80% to 36% across the three experiments, dependent on varied sizes of sure losses or expected outcomes. However, overall, the majority (> 50%) of allocations and choices were for the sure loss. Our findings indicate a tolerance for sure losses at the expense of mixed gambles yielding much better expected outcomes. We discuss the implications of this sure-loss tolerance for psychological research, its implications in terms of (cumulative) prospect theory, and what the results mean for the implementation of negative interest rates.

Highlights

IntroductionDo they seek risk in search of better outcomes or contend with the sure loss and focus on what is left to be saved?
We regressed the percentages allocated to the sure loss option on the four factors and their interactions
The results show that there was a main effect of risky option expected outcome, b = −5.38, SE = 0.49, 95% CI [−6.34, −4.42], t(114.99) = −10.98, p < .001, dz = 1.0.2 Participants allocated less money into the sure loss option as the expected outcome of the risky option increased

Summary

Introduction

Do they seek risk in search of better outcomes or contend with the sure loss and focus on what is left to be saved? We contrast the prospect of a sure loss to the uncertainty of a mixed gamble (i.e., a risky option with a high positive expected return that offers a possibility of a large gain and of a loss, larger than the sure one). It has been shown that, when faced with a choice between a sure option that entails a $0 outcome and an attractive yet risky mixed gamble (e.g., 50% chance to gain $2,000 or 50% chance to lose $500), most people prefer the sure $0

Objectives

Methods

Results

Conclusion