People's Risk Preferences Research Articles

Hedonic Risk Preference Associated with High-Risk Behaviors under COVID-19 Pandemic among Medical Students in Japan.

Public health measures to mitigate the spread of COVID-19 have focused on raising awareness and disseminating knowledge. Few considered people's risk preferences and no measurement was adapted to the context of COVID-19. This study aims (1) to investigate the association between risk preference and risk behaviors and (2) to compare a novel hedonic preference question with traditional risk preference assessment tools in the context of the COVID-19 pandemic among medical students in Japan. An online survey of fourth-year medical students was conducted. Logistic regression analysis adjusted for gender, age, household income, and the overconfidence effect were performed to investigate the association. We observed significantly higher odds of high-risk behaviors in general risk preference (odds ratio (OR): 4.04; 95% confidence interval (CI): 1.05-15.50) and hedonic preference (OR: 6.58; 95% CI: 1.86-23.28) when adjusted, whereas monetary preference showed no significant association. Concerning specific risky behaviors, hedonic preference were significantly associated with four items after adjusting for covariates ("dine out" (OR: 2.78, 95% CI: 1.13-6.85), "go out" (OR: 4.35, 95% CI: 1.65-11.46), "not practicing safety precautions" (OR: 2.79, 95% CI: 1.11-7.04) and "travel" (OR: 4.36, 95% CI: 1.42-13.44)), and general preference in two ("dine out" (OR: 4.82, 95% CI: 1.66-14.00) and "go out" (OR: 6.48, 95% CI: 2.07-20.24)). Hedonic and general risk preferences were significantly associated with high-risk behaviors during the COVID-19 pandemic. Future application of the novel risk-for-pleasure-seeking preference question is warranted.

Empirical underidentification in estimating random utility models: The role of choice sets and standardizations.

A standard approach to distinguishing people’s risk preferences is to estimate a random utility model using a power utility function to characterize the preferences and a logit function to capture choice consistency. We demonstrate that with often‐used choice situations, this model suffers from empirical underidentification, meaning that parameters cannot be estimated precisely. With simulations of estimation accuracy and Kullback–Leibler divergence measures we examined factors that potentially mitigate this problem. First, using a choice set that guarantees a switch in the utility order between two risky gambles in the range of plausible values leads to higher estimation accuracy than randomly created choice sets or the purpose‐built choice sets common in the literature. Second, parameter estimates are regularly correlated, which contributes to empirical underidentification. Examining standardizations of the utility scale, we show that they mitigate this correlation and additionally improve the estimation accuracy for choice consistency. Yet, they can have detrimental effects on the estimation accuracy of risk preference. Finally, we also show how repeated versus distinct choice sets and an increase in observations affect estimation accuracy. Together, these results should help researchers make informed design choices to estimate parameters in the random utility model more precisely.

Adult age differences in monetary decisions with real and hypothetical reward

AbstractAge differences in monetary decisions may emerge because younger and older adults perceive the value of outcomes differently. Yet, age‐differential effects of monetary rewards on decisions are not well understood. Most laboratory studies on aging and decision making have used scenarios in which rewards were merely hypothetical (decisions did not have any real consequences) or in which only small amounts of money were at stake. In the current study, we compared younger adults' (20–29 years) and older adults' (61–82 years) decisions in probabilistic choice problems with real or hypothetical rewards. Decision‐contingent rewards were in a typical range of previous studies (gains of up to ~4.25 USD) or substantially scaled up (gains of up to ~85 USD per participant). Reward type (real vs. hypothetical) affected decision quality, including value maximization, switching between options, and dominance violations (choices of an option that was inferior to another option in all respects). Decision quality was markedly better with real than hypothetical rewards in older adults and correlated with numeracy in both age groups. However, we found no evidence that reward type affected people's risk preferences. Overall, the findings portray a fairly positive picture regarding the use of hypothetical scenarios to assess preferences: With carefully prepared instructions, people from different age groups indicate preferences in hypothetical scenarios that match their decisions with real and much higher rewards. One advantage of using real rewards is that they help to reduce decision noise.

Distinguishing three effects of time pressure on risk taking: Choice consistency, risk preference, and strategy selection

AbstractQuick decision making under risk is ubiquitous in modern times, yet its consequences are not fully understood. Time pressure might change people's risk preferences, lead to less consistent choices, or change people's decision strategy. With the present work, we make the novel contribution of testing all hypotheses against each other in a unifying hierarchical Bayesian model. In two studies, participants decided repeatedly between two risky gambles either with or without high time pressure. We found a significant increase in risky choices under time pressure. With modeling, we show that time pressure decreased choice consistency but did not systematically affect people's risk preferences. In addition, the number of participants using simple, noncompensatory strategies increased slightly under time pressure. Finally, participants did not systematically choose easier gambles more often under time pressure. Thus, a reliable analysis of the effect of time pressure on preferential choice requires a model framework that allows for the distinction between the various effects time pressure can have.

The role of memory in distinguishing risky decisions from experience and description.

People's risk preferences differ for choices based on described probabilities versus those based on information learned through experience. For decisions from description, people are typically more risk averse for gains than for losses. In contrast, for decisions from experience, people are sometimes more risk seeking for gains than losses, especially for choices with the possibility of extreme outcomes (big wins or big losses), which are systematically overweighed in memory. Using a within-subject design, this study evaluated whether this memory bias plays a role in the differences in risky choice between description and experience. As in previous studies, people were more risk seeking for losses than for gains in description but showed the opposite pattern in experience. People also more readily remembered the extreme outcomes and judged them as having occurred more frequently. These memory biases correlated with risk preferences in decisions from experience but not in decisions from description. These results suggest that systematic memory biases may be responsible for some of the differences in risk preference across description and experience.

Discrepancies in Risk Preference in Other-regarding Decision Making

We explored the discrepancies in risk preference in other-regarding decision making from the perspective of construal level theory. We recruited 166 university undergraduates to participant in a 2 (other: close or distant) × 2 (role of the decision maker: deciding for others vs. predicting the decisions of others) × 2 (domain: gain or loss) experiment. Results showed that participants were more risk seeking in distant other-regarding decisions than in close other-regarding decisions, when predicting the decisions of others than when deciding for others, and in the loss domain than in the gain domain. Such effects were stronger in the gain domain than in the loss domain. These findings suggest that people's risk preferences in other-regarding decision making are changeable, depending on whom they decide for and which role they play.

Rank-Dependent Utility and Risk Taking in Complete Markets

Experimental studies show that people's risk preferences depend nonlinearly on probabilities, but relatively little is known about how probability weighting influences investment decisions. In this paper we analyze the portfolio choice problem of investors who maximize rank-dependent utility in a single-period complete market. We prove that investors with a less risk averse preference relation in general choose a more risky final wealth distribution, receiving a risk premium in return for accepting conditional-mean-zero noise (more risk). We also propose a new scenario-based notion of less risk taking that can be applied when state probabilities are unknown or not agreed upon.

How to reveal people's preferences: Comparing time consistency and predictive power of multiple price list risk elicitation methods.

The question of how to measure and classify people’s risk preferences is of substantial importance in the field of economics. Inspired by the multitude of ways used to elicit risk preferences, we conduct a holistic investigation of the most prevalent method, the multiple price list (MPL) and its derivations. In our experiment, we find that revealed preferences differ under various versions of MPLs as well as yield unstable results within a 30-minute time frame. We determine the most stable elicitation method with the highest forecast accuracy by using multiple measures of within-method consistency and by using behavior in two economically relevant games as benchmarks. A derivation of the well-known method by Holt and Laury (American Economic Review 92(5):1644–1655, 2002), where the highest payoff is varied instead of probabilities, emerges as the best MPL method in both dimensions. As we pinpoint each MPL characteristic’s effect on the revealed preference and its consistency, our results have implications for preference elicitation procedures in general.Electronic supplementary materialThe online version of this article (doi:10.1007/s11166-016-9247-6) contains supplementary material, which is available to authorized users.

Rank-Dependent Utility and Risk Taking in Complete Markets

Experimental studies show that people's risk preferences depend non-linearly on probabilities, but relatively little is known about how probability weighting influences investment decisions. In this paper we analyze the portfolio choice problem of investors who maximize rank-dependent utility in a single-period complete market. We prove that investors with a less risk averse preference relation in general choose a more risky final wealth distribution, receiving a risk premium in return for accepting conditional-zero-mean noise (more risk). We also propose a new scenario-based notion of less risk taking that can be applied when state probabilities are unknown.

How to Reveal People's Preferences: Comparing Time Consistency and Predictive Power of Multiple Price List Risk Elicitation Methods

The question of how to measure and classify people's risk preferences is of substantial importance in the field of Economics. Inspired by the multitude of ways used to elicit them, we conduct a holistic investigation of the most prevalent method, the multiple price list (MPL) and its derivations. In our experiment, we find that revealed preferences differ under various versions of MPLs as well as yield unstable results within a 30-minute time frame. We determine the most stable elicitation method with the highest forecast accuracy by using multiple measures of within-method consistency and by using behavior in two economically relevant games as benchmarks. A derivation of the well-known method by Holt and Laury (2002), where the highest payoff is varied instead of probabilities, emerges as the best MPL method in both dimensions. As we pinpoint each MPL characteristic's effect on the revealed preference and its consistency, our results have implications for preference elicitation procedures in general.

Preferences induced by accessibility: Evidence from priming.

In one experiment, we studied risky preferences using a semantic-priming paradigm where accessibility is manipulated independently of beliefs about the frequencies of risky events. We compared the risks taken for precautionary decisions primed by relevant information (enhancing accessibility to relevant events) with those taken for unprimed decisions and decisions primed by irrelevant information. We found that both priming and the subjective frequency of beliefs independently influence decision making. The results indicate that decisions are the result of an integration of influences derived from both the description (specified probability) and experience (accessibility to pre-experiment beliefs about event frequencies and temporarily activated relevant events) of risks. People's risk preferences are influenced by the accessibility of events in memory, such that increasing accessibility causes risk aversion to a potential loss to increase. Our research findings are not anticipated by the descriptive invariance axiom of expected utility theory, which states that equivalent formulations of a choice problem give rise to the same preference order.

Uncertainty Breeds Decreasing Impatience: The Role of Risk Preferences in Time Discounting

Future events are uncertain by their very nature. Therefore, people's risk preferences are likely to play a role in the valuation of allegedly guaranteed future outcomes. We show that future uncertainty conjointly with people's proneness to nonlinear probability weighting generates a unifying framework for explaining many anomalies in intertemporal choice, such as hyperbolic discounting and subadditivity of discount factors. Moreover, our approach implies that higher uncertainty of future prospects increases the hyperbolicity of discount rates, suggesting that institutional deficiencies such as lack of contract enforcement, may be a source ofnhyperbolic discounting behavior. Based on an experiment with monetary incentives, we show that people's risk taking behavior is indeed a significant determinant of their time discounting behavior: Greater departures from linear probability weighting predict a stronger decline in impatience on the level of individual behavior.

Mismeasuring the value of statistical life

The value of a statistical life (VSL) is an important tool for cost–benefit analysis of regulatory policies that concern fatality risks. Its proponents claim that it measures people's risk preferences, and that VSL therefore is a tool of vicarious governance. This paper criticizes the revealed preference method for measuring VSL. It specifies three minimal conditions for vicarious governance: sensitivity, fairness and hypothetical compromise, and shows that the VSL measure, in its common application in policy formation and analysis, violates these conditions. It therefore concludes that the revealed preference VSL measure, in its current form, is not a tool of vicarious governance.

Risk Taking and Problem Context in the Domain of Losses: An Expected Utility Analysis

This paper presents an experimental investigation of risk taking in the domain of losses. The results are partly compatible with expected utility theory, assuming an inflection point in the utility function over losses. However, overweighting of low probabilities and underweighting of high ones was observed, which runs counter to the expected utility model. Additionally, a strong context effect was observed in which choices presented in an insurance context were judged with greater risk aversion than mathematically identical choices presented as standard gambles. Both the normative and descriptive implications for expected utility theory are discussed. This article examines two related issues regarding decision-making under conditions of objective or known risk. The first one concerns the nature of people's risk preferences for losses, and its compatibility with expected utility theory; the second concerns the extent to which such risk preferences are influenced by problem context.