Risky Prospects Research Articles

Forgetting the past: Individual differences in recency in subjective valuations from experience.

Recent research investigating decisions from experience suggests that not all information is treated equally in the decision process, with more recently encountered information having a greater impact. We report 2 studies investigating how this differential treatment of sequentially encountered information affects subjective valuations of risky prospects when observations of past outcomes must be used to estimate the prospect's payoff distribution, and examine how individual differences in cognitive capacities influence information usage. In Study 1 we found that a sliding window of information model that averages a subset of (only) the most recently encountered outcomes (samples) fit the subjective valuation data for a portion of individuals better than models that integrate all observed outcomes. This pattern of results is replicated in Study 2, in which we also found that the amount of information used to form valuations varies greatly between individuals, and that individual difference in memory span explains a portion of this variation. Combined, these results suggest a process in which information usage is in part reliant on cognitive capacity, and where information aggregation appears to be memory based rather than online, providing new insight into the processes involved in the construction of valuation in experiential decisions.

Framing Influences Willingness to Pay but Not Willingness to Accept

The authors show, with real and hypothetical payoffs, that consumers are willing to pay substantially less for a risky prospect when it is called a “lottery ticket,” “raffle,” “coin flip,” or “gamble” than when it is labeled a “gift certificate” or “voucher.” Willingness to accept, in contrast, is not affected by these frames. This differential framing effect is the result of an aversion to bad deals, which causes buyers to focus on different aspects than sellers. Buyers’ willingness to pay is influenced by the extent to which a risky prospect's frame is associated with risk (Experiment 1) as well as the prospect's lowest (but not highest) possible outcome (Experiment 2). Sellers’ willingness to accept, in contrast, is influenced by a prospect's lowest and highest possible outcomes but not by the risk associated with its frame (Experiments 2 and 3). The framing effect on willingness to pay is independent of the objective level of uncertainty (Experiment 4) and can lead to the uncertainty effect. The findings have important implications for research on risk preferences and marketing practice.

A Satisficing Approach to Measure Risk Preference

We explore a satisficing approach (Simon, 1955) to measure risk preference, which suggests cognitive limitations to decision making. In an experiment, subjects invest in a portfolio that contains a risk-free bond and a risky asset which has high or low return states with equal probability. The experiment elicits aspirations of subjects and predicts asset allocation in the bond and risky asset so that it meets their aspirations. A measure of risk is developed using the aspiration data since a more risk-averse subject shall conservatively set her aspiration in A1. Intuitively, satisficing by aspiration setting tones down the extreme possibilities and thus presents less risky prospects to subjects. The study also calibrates the degree of satisficing by mapping the satisficing approach to the expected utility approach. The degree of satisficing exhibits how the decision maker limits her possible loss by forgoing possible gains. The findings of the study are reflective that in certain situations, the utility from a satisficing decision is greater than maximising, therefore making it a valuable approach for market design.

New algorithms for optimal reduction of technical risks

The article features exact algorithms for reduction of technical risk by (1) optimal allocation of resources in the case where the total potential loss from several sources of risk is a sum of the potential losses from the individual sources; (2) optimal allocation of resources to achieve a maximum reduction of system failure; and (3) making an optimal choice among competing risky prospects. The article demonstrates that the number of activities in a risky prospect is a key consideration in selecting the risky prospect. As a result, the maximum expected profit criterion, widely used for making risk decisions, is fundamentally flawed, because it does not consider the impact of the number of risk-reward activities in the risky prospects. A popular view, that if a single risk-reward bet with positive expected profit is unacceptable then a sequence of such identical risk-reward bets is also unacceptable, has been analysed and proved incorrect.

Introduction

Introduction Hollis Griffin, editor (bio) At the 2011 Society for Cinema and Media Studies (SCMS) conference in New Orleans, I participated in the workshop “Generations of Media Studies.” Here, several established, senior scholars in the field discussed their career trajectories. They talked about the various shifts in their research interests, watershed moments in their teaching experiences, and what it was like to influence cohort after cohort of graduate students. As the most junior person presenting (by far), my own contribution was pointedly more forward looking than retrospective. I stressed how the political economy of higher education has shifted in a way that makes having a long, storied career—with plenty of support for research and ample energy for teaching—a luxury and privilege that fewer media academics will get to enjoy in the years ahead. As the labor market for media scholars increasingly moves toward contract appointments, and even tenure-track jobs now involve a substantial decrease in the perks long associated with them (e.g., research money, sabbatical time), I emphasized that a career in academia looks a lot different for those of us who are just embarking on the path. My presentation was structured by a certain worry about what lies ahead—not just for the field but also for the academy as a whole. When I blogged about that conference for the SCMS website, I wrote about presenting at this workshop. Because I presented last, and was ultimately asked to participate because I was (am) so junior, I called the experience one of “bringing up the rear with the bad news.” When Cinema Journal’s editor invited me to put an “In Focus” section together featuring “new voices” in the field of film and media studies, I thought about my role in that workshop as the young naysayer. I worried about personal essays from early-career academics signifying as a chorus of wailing, whining violins. If employment anxiety and professional malaise have always been realities in academic life, it seems that the current scarcity in, and increasing corporatization of, higher education has made these characteristics far more [End Page 121] palpable in recent years. But I needn’t have worried. While the pages ahead feature a considerable amount of apprehension and concern, what I think comes across louder is the enthusiasm this group shares for intellectual pursuits, as well as the joy they feel in being able to study and teach for a living, and the camaraderie they share with friends and mentors in the field. If the intimate nature of this section is a departure from the writing typically found on these pages, I hope that it is a welcome one. In assembling the list of contributors, my goal was depth and breadth: people from a variety of different subdisciplines, from an array of different institutions. Here you will find essays on film history, new media, television criticism, reception analysis, critical race scholarship, and queer theory. The contributors also embody a diverse cross section of locations: major universities, liberal arts colleges, urban schools, rural institutions, international research institutes, and so on. Another goal I had in putting this section together was to mirror the increasingly global reach of SCMS as an organization. Thus, the essays feature scholars whose teaching, research interests, and current home institutions are located far and wide. As a group, we have also attempted to create some dialogue across the pieces so that the assortment of viewpoints assembled here is united by a tone that is as conversational as it is introspective. Essays of this sort are a risky prospect. Writing them is fraught with all kinds of concerns about authors “saying too much” or “being overly presumptuous.” For this reason, I want to publicly thank the contributors for agreeing to be part of this section. It is to their credit as scholars and writers that the pieces veer away from solipsism and navel-gazing and toward incisiveness and generosity—even as their mode of articulation is personal and affective. Typically, the kinds of insights shared here circulate informally—thoughts and impressions that bubble up in conversations among peers and, maybe, on blogs and Internet message boards. My hope is that the discourse...

On the descriptive value of loss aversion in decisions under risk: Six clarifications

AbstractPrevious studies of loss aversion in decisions under risk have led to mixed results. Losses appear to loom larger than gains in some settings, but not in others. The current paper clarifies these results by highlighting six experimental manipulations that tend to increase the likelihood of the behavior predicted by loss aversion. These manipulations include: (1) framing of the safe alternative as the status quo; (2) ensuring that the choice pattern predicted by loss aversion maximizes the probability of positive (rather than zero or negative) outcomes; (3) the use of high nominal (numerical) payoffs; (4) the use of high stakes; (5) the inclusion of highly attractive risky prospects that creates a contrast effect; and (6) the use of long experiments in which no feedback is provided and in which the computation of the expected values is difficult. In addition, the results suggest the possibility of learning in the absence of feedback: The tendency to select simple strategies, like “maximize the worst outcome” which implies “loss aversion”, increases when this behavior is not costly. Theoretical and practical implications are discussed.

Change in Risk and Bargaining Game

This paper studies the comparative statics regarding changes in risk on Nash's solution to bargaining games with stochastic outcome and disagreement points. When absolute risk tolerance is linear with constant slope, the Nash's solution to bargaining with risky outcomes and risky disagreement points can be viewed as division of divisible certainty equivalent between two risk-averse agents. We show that whether a deterioration of a bargainer's risky prospect is advantageous to his opponent often depends on whether preference displays decreasing absolute risk aversion (DARA). Specifically, for perfectly correlated risky prospects, DARA a la Arrow-Pratt works to the concavity of the joint certainty equivalent with respect to a bargainer's initial wealth or size of risky exposure; for independent risky prospects, DARA a la Ross vulnerates his risk bearing under Rothschild-Stiglitz increase in risk taking the form of adding an independent noise, both leading to the bargainer's increased propensity for risk aversion as well as the joint size of the pie. These results illuminate how individual risky prospect as well as risk preference influence the cooperating partners' income shares and thus the market equilibrum of marriage formation. We also show that this result is robust under Rubinstein's non-cooperative bargaining game.

Biological correlates of the Allais paradox

We conducted a questionnaire study with student subjects to look for explicit correlations between selected biological characteristics of the subjects and manifestation of the Allais paradox in the pattern of their choices between sets of two pairs of risky prospects. We found that particular characteristics, such as gender, menstrual cycle, mother's age at delivery, parenthood, second- to fourth-digit ratio, perceived negative life events, and emotional state, can be related to the paradox. Women, particularly when not menstruating, are less susceptible to the paradox. Those born to not-too-young mothers are also less prone to the paradox. The same holds true for men who have fathered children and had been exposed to high levels of prenatal testosterone, people who had experienced many negative life events, and those who were anxious, excited, aroused, happy, active, or fresh at the time of the experiment. Further, left-handers and atheists may be less inclined to display the paradox.

De-Synchronized Clocks in Preemption Games with Risky Prospects

We study an optimal timing decision problem where an agent endowed with a risky investment opportunity trades the benefits of waiting for additional information against a potential loss in first-mover advantage. The players' clocks are de-synchronized in that they learn of the investment opportunity at different times. Thus, the model captures situations where players are heterogenous with respect to the amount of information that they possess at any instant. In this framework, previous literature has uncovered an inverted-U shaped relationship between a player's equilibrium expected expenditures and the measure of his competitors. This result no longer holds when the increase in the measure of players leads to a decrease in the degree of clock synchronization in the game. We show that the result reemerges if information arrives only at discrete times, and thus, a player's strategic beliefs are updated between decision times in a measurably meaningful way.

De-synchronized clocks in preemption games with risky prospects

We study an optimal timing decision problem where an agent endowed with a risky investment opportunity trades the benefits of waiting for additional information against a potential loss in first-mover advantage. The players’ clocks are de-synchronized in that they learn of the investment opportunity at different times. Thus, the model captures situations where players are heterogeneous with respect to the amount of information that they possess at any instant. In this framework, previous literature has uncovered an inverted-U shaped relationship between a player’s equilibrium expected expenditures and the measure of his competitors. This result no longer holds when the increase in the measure of players leads to a decrease in the degree of clock synchronization in the game. We show that the result reemerges if information arrives only at discrete times, and thus, a player’s strategic beliefs are updated between decision times in a measurably meaningful way.

The ex ante aggregation of opinions under uncertainty

This paper presents an analysis of the problem of aggregating preference orderings under subjective uncertainty. Individual preferences, or opinions, agree on the ranking of risky prospects, but are quite general because we do not specify the perception of ambiguity or the attitude toward it. A convexity axiom for the ex ante preference characterizes a (collective) decision rule that can be interpreted as a compromise between the utilitarian and the Rawlsian criteria. The former is characterized by the independence axiom as in Harsanyi (1955). Existing results are special cases of our representation theorems, which also allow us to interpret Segal’s ( 1987) two-stage approach to ambiguity as the ex ante aggregation of (Bayesian) future selves’ opinions.

When does aggregation reduce risk aversion?

We study the problem of risk sharing within a household or syndicate. A household shares risky prospects using a social welfare functional. We characterize the social welfare functionals such that the household is collectively less risk averse than each member, and satisfies the Pareto principle and an invariance axiom. We single out the sum of certainty equivalents as the unique member of this family which is quasiconcave over riskless allocations.

Aspirations as reference points: an experimental investigation of risk behavior over time

This paper examines the importance of aspirations as reference points in a multi-period decision-making context. After stating their personal aspiration level, 172 individuals made six sequential decisions among risky prospects as part of a choice experiment. The results show that individuals make different risky-choices in a multi-period compared to a single-period setting. In particular, individuals’ aspiration level is their main reference point during the early stages of decision-making, while their starting status (wealth level at the start of the experiment) becomes the central reference point during the later stages of their multi-period decision-making.

EVALUATING LIFE OR DEATH PROSPECTS

We consider a special set of risky prospects in which the outcomes are either life or death (or, more generally, binary utilities). There are various alternatives to the utilitarian objective of minimizing the expected loss of lives in such prospects. We start off with the two-person case with independent risks and construct taxonomies of ex ante and ex post evaluations for such prospects. We examine the relationship between the ex ante and the ex post in this restrictive framework: There are more possibilities to respect ex ante and ex post objectives simultaneously than in the general framework, i.e. without the restriction to binary utilities (cf. Harsanyi's aggregation theorem). We extend our results to n persons and to dependent risks. We study optimal strategies for allocating risk reductions given different objectives. We place our results against the backdrop of various pro-poorly off (or prioritarian) value functions (Diamond 1967; Rabinowicz 2002; Fleurbaey 2010) for the evaluation of risky prospects.

Strategy Selection in Risky Choice: The Impact of Numeracy, Affect, and Cross‐Cultural Differences

ABSTRACTReal‐world decisions often involve options with outcomes that are uncertain and trigger strong affect (e.g., side effects of a drug). Previous work suggests that when choosing among affect‐rich risky prospects, people are rather insensitive to probability information, potentially compromising decision quality. We modeled the strategies of less and more numerate participants in the United States and in Germany when choosing between affect‐rich prospects and between monetarily equivalent affect‐poor prospects. Using large probabilistic national samples (n = 1047 from the United States and Germany), Study 1 showed that compared with more numerate participants, less numerate participants chose the normatively better option (i.e., the one with the higher expected value) less often, guessed more often, and relied more on a simple risk‐minimizing strategy. U.S. participants—although less numerate—selected the normatively better option more frequently and were more consistent across affect‐rich and affect‐poor problems than the German participants. Using a targeted quota sample (n = 118 from Germany), Study 2 indicated that although both more and less numerate participants paid less attention to probability information in affect‐rich than in affect‐poor problems, the two numeracy groups relied on different outcome‐based heuristics: More numerate participants often followed the minimax heuristic, and less numerate participants the affect heuristic. The observed strategy differences suggest that attempts to improve decision‐making need to take into account individual differences in numeracy as well as cultural‐specific experiences in making trade‐offs. Copyright © 2012 John Wiley & Sons, Ltd.

Why are lotteries valued less? Multiple tests of a direct risk-aversion mechanism

AbstractRecent studies have identified the uncertainty effect (UE), whereby risky prospects (e.g., a binary lottery that offers either a $50 or $100 gift certificate) are valued less than their worst possible outcome (a $50 certificate). This effect has been proposed to result from “direct risk-aversion” which posits that the mere uncertainty of a lottery directly decreases its value. However, this effect may also be driven by the potential disappointment inherent in not receiving the better of the two outcomes (disappointment aversion), or the mere fact that the risky prospect is referred to as a “lottery”. The results of two experiments do not support either of these two alternatives. Specifically, the results of Experiment 1 indicate that the UE is observed even when the values of the two lottery outcomes are similar, or even identical. Experiment 2 further replicates the UE in a context in which the word “lottery” is never used (a company promotional). These results are consistent with a direct risk-aversion mechanism (Gneezy et al., 2006; Simonsohn, 2009) and suggest that the UE obtains across a number of different contexts.

When a risky prospect is valued more than its best possible outcome

AbstractIn this paper, we document a violation of normative and descriptive models of decision making under risk. In contrast to uncertainty effects found by Gneezy, List and Wu (2006), some subjects in our experiments valued lotteries more than the best possible outcome. We show that the overbidding effect is more strongly related to individuals’ competitiveness traits than comprehension of the lottery’s payoff mechanism.

Strategic Insight and Age-Related Goal-Neglect Influence Risky Decision-Making

Maximizing long-run gains often requires taking on some degree of risk, yet decision-makers often exhibit risk aversion (RA), rejecting risky prospects even when these have higher expected value (EV) than safer alternatives. We investigated whether explicit strategy instruction and practice can decrease prepotent RA, and whether aging impacts the efficacy of such an intervention. Participants performed a paired lottery task with options varying in risk and magnitude, both before and after practice with a similar task that encouraged maximization of EV and instruction to use this strategy in risky decisions. In both younger and older adults (OAs), strategy training reduced RA. Although RA was age-equivalent at baseline, larger training effects were observed in younger adults (YAs). These effects were not explained by risk-related (i.e., affective) interference effects or computation ability, but were consistent with a progressive, age-related neglect of the strategy across trials. Our findings suggest that strategy training can diminish RA, but that training efficacy is reduced among OAs, potentially due to goal neglect. We discuss implications for neural mechanisms that may distinguish older and YAs’ risky decision-making.

Leader‐driven distortion of probability and payoff information affects choices between risky prospects

AbstractResearch indicating that decision makers often distort new information to favor nascent preferences has focused primarily on riskless choice rather than risky choice. In addition, the critical assumption that information distortion mediates the link between the initially preferred alternative and the final choice has not been tested in a compelling manner. In an experiment designed to fill these gaps, participants made six choices involving pairs of hypothetical three‐outcome monetary gambles. We manipulated initial preferences by varying the order in which gamble features were presented. Multilevel regressions indicated that participants distorted their evaluations of precise probabilities and payoffs in the direction of their emerging preferences and that they used their biased evaluations to update those preferences. As expected, information distortion mediated the effect of initial preferences on final choices and final preference strength. In a follow‐up experiment, we compared a standard measure of information distortion (based on comparisons to mean ratings in a no‐choice control task) to a more personalized measure (based on participants' own ratings in the control task) and found the mean‐based measure to be superior for the probability and payoff information in question. Other findings in Experiment 2 corroborated the results of Experiment 1. In both studies, the distortion of quantitative inputs in a simple task highlights the non‐normative circularity of the choice process. Copyright © 2010 John Wiley & Sons, Ltd.

Uncertainty, rationality and cooperation in the context of climate change

Climate change represents the largest social dilemma humans have ever faced, where individual actors maximise their personal gain by emitting greenhouse gases into the atmosphere even though this is detrimental to the collective global good. Cooperation on a global scale is urgently required if we are to overcome this problem. However, this is difficult to achieve because cooperators pay the cost of reducing emissions while any benefits are shared between cooperators and free-riders alike. In a risk-free, rational world cooperative behaviour can be promoted through mechanisms that increase the benefit of cooperating relative to free-riding, such as rewards or sanctions. In reality, however, outcomes are seldom certain and humans rarely behave rationally when confronted with risky prospects. Here, we argue that effective policies to mitigate global climate change should incorporate mechanisms to foster cooperation, but also account for both uncertainty and irrational responses that may inhibit collective action.