Portfolio Choice vs. Single Choice: Neural Differences in Cognitive Control

Abstract

In experimental economics, an important issue for obtaining reliable behavioral results is the design of payoff procedures for giving incentives to the subjects. One common payoff procedure in multiple lottery choice tasks is the random payoff mechanism. This mechanism provides incentives for a truthful response in every single choice task since every decision should be treated as independent from other decisions. A second, often used payoff procedure is to realize all decision. Since all decisions are determining the final reward, subjects are not incentivized to treat their decisions independently. The difference in risk behavior between both payoff procedures is known as the portfolio effect. In our study, we address the question how these two payoff mechanisms differ in their evaluation process since the portfolio effect is caused by a divergence in the independent valuation of a choice task. Evaluation processes occur before observable behavior takes place and can be assigned to cognitive control mechanisms. In order to reveal such processes, we performed an EEG paradigm comprising two sessions with an identical lottery choice task design, but different payoff procedures. We focused on the stimulus-locked N200 component, an event-related potential closely related to cognitive control processes. Our behavioral data show differences between both payoff mechanisms which can be assigned to a portfolio effect. The analysis of the event-related potentials reveals a characteristic pattern of the N200 amplitude between choices inside and outside an area of indifference. Choices inside the indifference area evoke higher N200 amplitudes which can be attributed to a higher action control conflict when subjects are indecisive. Furthermore, a higher N200 amplitude is present for risky outside the indifference area choices when all decision are paid out. This is contrary to the random payoff mechanism in which an increased N200 is absent. This implies that more resources are allocated in a portfolio choice task when lotteries are chosen. Risky portfolio choices seem to involve additional choice criteria such as the relevance of previous decisions. As a consequence, a potential portfolio effect has to be related to a non-independent choice task evaluation solely in risky portfolio choices.