Age differences in risky choice: A meta-analysis

Does risk taking change as a function of age? We conducted a systematic literature search and found 29 comparisons between younger and older adults on behavioral tasks thought to measure risk taking (N= 4,093). The reports relied on various tasks differing in several respects, such as the amount of learning required or the choice framing (gains vs. losses). The results suggest that age-related differences vary considerably as a function of task characteristics, in particular the learning requirements of the task. In decisions from experience, age-related differences in risk taking were a function of decreased learning performance: older adults were more risk seeking compared to younger adults when learning led to risk-avoidant behavior, but were more risk averse when learning led to risk-seeking behavior. In decisions from description, younger adults and older adults showed similar risk-taking behavior for the majority of the tasks, and there were no clear age-related differences as a function of gain/loss framing. We discuss limitations and strengths of past research and provide suggestions for future work on age-related differences in risk taking

Of Black Swans and Tossed Coins: Is the Description-Experience Gap in Risky Choice Limited to Rare Events?

When faced with risky decisions, people tend to be risk averse for gains and risk seeking for losses (the reflection effect). Studies examining this risk-sensitive decision making, however, typically ask people directly what they would do in hypothetical choice scenarios. A recent flurry of studies has shown that when these risky decisions include rare outcomes, people make different choices for explicitly described probabilities than for experienced probabilistic outcomes. Specifically, rare outcomes are overweighted when described and underweighted when experienced. In two experiments, we examined risk-sensitive decision making when the risky option had two equally probable (50%) outcomes. For experience-based decisions, there was a reversal of the reflection effect with greater risk seeking for gains than for losses, as compared to description-based decisions. This fundamental difference in experienced and described choices cannot be explained by the weighting of rare events and suggests a separate subjective utility curve for experience

The dual process account of reasoning: historical roots, problems and perspectives.

Despite the great effort that has been dedicated to the attempt to redefine expected utility theory on the grounds of new assumptions, modifying or moderating some axioms, none of the alternative theories propounded so far had a statistical confirmation over the full domain of applicability. Moreover, the discrepancy between prescriptions and behaviors is not limited to expected utility theory. In two other fundamental fields, probability and logic, substantial evidence shows that human activities deviate from the prescriptions of the theoretical models. The paper suggests that the discrepancy cannot be ascribed to an imperfect axiomatic description of human choice, but to some more general features of human reasoning and assumes the “dual-process account of reasoning” as a promising explanatory key. This line of thought is based on the distinction between the process of deliberate reasoning and that of intuition; where in a first approximation, “intuition” denotes a mental activity largely automatized and inaccessible from conscious mental activity. The analysis of the interactions between these two processes provides the basis for explaining the persistence of the gap between normative and behavioral patterns. This view will be explored in the following pages: central consideration will be given to the problem of the interactions between rationality and intuition, and the correlated “modularity” of the thought.

A Conceptual Model of Investor Behavior

Based on a survey of behavioral finance literature, this paper presents a descriptive model of individual investor behavior in which investment decisions are seen as an iterative process of interactions between the investor and the investment environment. This investment process is influenced by a number of interdependent variables and driven by dual mental systems, the interplay of which contributes to boundedly rational behavior where investors use various heuristics and may exhibit behavioral biases. In the modeling tradition of cognitive science and intelligent systems, the investor is seen as a learning, adapting, and evolving entity that perceives the environment, processes information, acts upon it, and updates his or her internal states. This conceptual model can be used to build stylized representations of (classes of) individual investors, and further studied using the paradigm of agent-based artificial financial markets. By allowing us to implement individual investor behavior, to choose various market mechanisms, and to analyze the obtained asset prices, agent-based models can bridge the gap between the micro level of individual investor behavior and the macro level of aggregate market phenomena. It has been recognized, yet not fully explored, that these models could be used as a tool to generate or test various behavioral hypothesis.behavioral finance;financial decision making;agent-based artificial financial markets;cognitive modeling;investor behavior

Underweighting rare events in experience based decisions: Beyond sample error

Recent research has focused on the \u201cdescription-experience gap\u201d: while rare events are overweighted in description based decisions, people tend to behave as if they underweight rare events in decisions based on experience. Barron and Erev (2003) and Hertwig, Barron, Weber and Elke (2004) argue that such findings are substantive and call for a theory of decision making under risk other than Prospect Theory for decisions from experience. Fox and Hadar (2006) suggest that the discrepancy is due to sampling error: people are likely to sample rare events less often than objective probability implies, especially if their samples are small. A strand of papers has responded examining the necessity of sample error in the underweighting of rare events. The current paper extends the results of such contributions and further strengthens the evidence on underweighting. The first experiment shows that the discrepancy persists even when people sample the entire population of outcomes and make a decision under risk rather than under uncertainty. A reanalysis of Barron and Erev (2003) further reveals that the gap persists even when subjects observe the expected frequency of rare events. The second experiment shows that the gap exists in a repeated decision making paradigm that controls for sample biases and the \u201chot stove\u201d effect. Moreover, while underweighting persists in actual choices, overweighting is observed in judged probabilities. The results of the two experiments strengthen the suggestion that descriptive theories of choice that assume overweighting of small probabilities are not useful in describing decisions from experience. This is true even when there is no sample error, for both decisions under risk and for repeated choices

Comparative inspiration : from puzzles with pigeons to novel discoveries with humans in risky choice

Both humans and non-human animals regularly encounter decisions involving risk and uncertainty. This paper provides an overview of our research program examining risky decisions in which the odds and outcomes are learned through experience in people and pigeons. We summarize the results of 15 experiments across 8 publications, with a total of over 1300 participants. We highlight 4 key findings from this research: (1) people choose differently when the odds and outcomes are learned through experience compared to when they are described; (2) when making decisions from experience, people overweight values at or near the ends of the distribution of experienced values (i.e., the best and the worst, termed the “extreme-outcome rule”), which leads to more risk seeking for relative gains than for relative losses; (3) people show biases in self-reported memory whereby they are more likely to report an extreme outcome than an equally-often experienced non-extreme outcome, and they judge these extreme outcomes as having occurred more often; and (4) under certain circumstances pigeons show similar patterns of risky choice as humans, but the underlying processes may not be identical. This line of research has stimulated other research in the field of judgement and decision making, illustrating how investigations from a comparative perspective can lead in surprising directions