The role of information search and its influence on risk preferences

According to the ‘Description–Experience gap’ (DE gap), when people are provided with the descriptions of risky prospects they make choices as if they overweight the probability of rare events; but when making decisions from experience after exploring the prospects’ properties, they behave as if they underweight such probability. This study revisits this discrepancy while focusing on information-search in decisions from experience. We report findings from a lab-experiment with three treatments: a standard version of decisions from description and two versions of decisions from experience: with and without a ‘history table’ recording previously sampled events. We find that people sample more from lotteries with rarer events. The history table proved influential; in its absence search is more responsive to cues such as a lottery’s variance while in its presence the cue that stands out is the table’s maximum capacity. Our analysis of risky choices captures a significant DE gap which is mitigated by the presence of the history table. We elicit probability weighting functions at the individual level and report that subjects overweight rare events in experience but less so than in description. Finally, we report a measure that allows us to compare the type of DE gap found in studies using choice patterns with that inferred through valuation and find that the phenomenon is similar but not identical across the two methods

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

Translated attributes as choice architecture: Aligning objectives and choices through decision signposts

© 2017 INFORMS. Every attribute can be expressed in multiple ways. For example, car fuel economy can be expressed as fuel efficiency ("miles per gallon"), fuel cost in dollars, or tons of greenhouse gases emitted. Each expression, or "translation," highlights a different aspect of the same attribute. We describe a new mechanism whereby translated attributes can serve as decision "signposts" because they (1) activate otherwise dormant objectives, such as proenvironmental values and goals, and (2) direct the person toward the option that best achieves the activated objective. Across three experiments, we provide evidence for the occurrence of such signpost effects as well as the underlying psychological mechanism. We demonstrate that expressing an attribute such as fuel economy in terms of multiple translations can increase preference for the option that is better aligned with objectives congruent with this attribute (e.g., the more fuel-efficient car for those with proenvironmental attitudes), even when the new information is derivable from other known attributes. We discuss how using translated attributes appropriately can help align a person's choices with their personal objectives

Risky decision making: Testing for violations of transitivity predicted by an editing mechanism

Transitivity is the assumption that if a person prefers A to B and B to C, then that person should prefer A to C. This article explores a paradigm in which Birnbaum, Patton and Lott (1999) thought people might be systematically intransitive. Many undergraduates choose C = ($96, .85;$90, .05; $12, .10) over A = ($96, .9; $14, .05;$12, .05), violating dominance. Perhaps people would detect dominance in simpler choices, such as A versus B = ($96, .9;$12, .10) and B versus C, and yet continue to violate it in the choice between A and C, which would violate transitivity. In this study we apply a true and error model to test intransitive preferences predicted by a partially effective editing mechanism. The results replicated previous findings quite well; however, the true and error model indicated that very few, if any, participants exhibited true intransitive preferences. In addition, violations of stochastic dominance showed a strong and systematic decrease in prevalence over time and violated response independence, thus violating key assumptions of standard random preference models for analysis of transitivity. Keywords: transitivity, true and error models, dominance, stochastic dominance, preference models </p

Risky decision making: Testing for violations of transitivity predicted by an editing mechanism

Transitivity is the assumption that if a person prefers A to B and B to C, then that person should prefer A to C. This article explores a paradigm in which Birnbaum, Patton and Lott (1999) thought people might be systematically intransitive. Many undergraduates choose C = ($96, .85;$90, .05; $12, .10) over A = ($96, .9; $14, .05;$12, .05), violating dominance. Perhaps people would detect dominance in simpler choices, such as A versus B = ($96, .9;$12, .10) and B versus C, and yet continue to violate it in the choice between A and C, which would violate transitivity. In this study we apply a true and error model to test intransitive preferences predicted by a partially effective editing mechanism. The results replicated previous findings quite well; however, the true and error model indicated that very few, if any, participants exhibited true intransitive preferences. In addition, violations of stochastic dominance showed a strong and systematic decrease in prevalence over time and violated response independence, thus violating key assumptions of standard random preference models for analysis of transitivity. Keywords: transitivity, true and error models, dominance, stochastic dominance, preference models </p