Avoiding the Worst Decisions: A Simulation and Experiment

The Central European Review of Economics and Management, 2015

When making decisions about voluntary insurance or about taking part in a lottery, people should consider possible states of nature and a probability of their occurrence. Classical economics assumes that decisions of people acting in risky circumstances are compliant with the expected utility hypothesis. However theories based on human behaviour (in particular the cumulative prospect theory) claim that the process of decision making involves anomalies resulting from perception of reality e.g. the sign effect, peanuts effect and others. The paper aims to verify the impact of selected factors on decisions made by people in circumstances of profits and losses. This aim was achieved by means of consecutive experiments carried out. Factors like the amount of win/loss, the probability of winning/losing were examined on the sample of over 600 people and decisions taken by them. The results indicate that assumptions made by classical economics are not always met. In the experiments conducted, the attitude towards risks was affected by the amount of bet (with lower values there was a tendency to act safely), the probability of winning, a reference point and whether results of gaming were described as profits or losses.

Theory and Decision, 2018

This paper attempts to identify behavioral patterns and compare their average success considering several criteria of bounded rationality. Experimentally observed choice behavior in various decision tasks is used to assess heterogeneity in how individual participants respond to 15 randomly ordered portfolio choices, each of which is experienced twice. Treatments differ in (not) granting probability information and in (not) eliciting aspirations. Since in our setting neither other regarding concerns nor risk attitude matter and probability of the binary chance move is (optimal) choice irrelevant, categorizing decision types relies on parameter dependence and choice adaptations. We find that most participants reduce systematically sub-optimality when following the identified criteria.

Organizational Behavior and Human Decision Processes, 1996

chosen over a bet offering a high payoff at a low proba-In a series of three experiments, subjects made risky bility, but the average stated selling price is higher for decisions under conditions of hypothetical or real consethe latter bet. Preference Reversals have frequently quences. Task variations across experiments included: been demonstrated regardless of whether or not real (1) type of risk (monetary gambles or investments of time money is involved. Lichtenstein and Slovic (1971) and and effort), (2) within-subject and between-subjects ma-Mowen and Gentry (1980) found a high proportion of nipulations of consequence condition, and (3) single or reversals among subjects who made purely hypothetimultiple decisions. The hypothesis of no difference becal selections, while Lichtenstein and Slovic (1971, tween choices in real and hypothetical consequence con-1973); Grether and Plott (1979); Pommerehne, Schneiditions was retained in each experiment. Supplemental der, and Zweifel (1982); and Reilly (1982) found a high analyses ruled out various ''artifactual'' interpretations of the null results. Discussion focused on conditions in proportion of reversals to occur when the gambles inwhich researchers can and cannot infer decision makvolved real money. ers' actual risk preferences from their responses in labo-A second EUT violation, labeled as the Endowment ratory tasks.

2013

In this article, we tested two concepts of decision making: expected utility theory and heuristic choice. In Experiment 1, we applied think-aloud protocols to investigate violations of expected utility theory. In Experiments 2 to 4, we introduced a new process-tracing method-called predictaloud protocols-that has advantages over previously suggested research methods. Results show the following: (i) people examine information between rather than within gambles; (ii) the priority heuristic emerges as the most frequently used strategy when problems are difficult; and (iii) people check for similarity when problems are easy.

In experiments on risky decisions with gambles as alternatives the central factors determining decision behaviour are: The subjective values of the outcomes, and their subjective probability. The present paper first reports results of a number of experiments indicating that this central result cannot be generalized. In quasi-realistic risky scenarios, many decision makers are not interested in probability information and many search actively for risk-defusing operators (RDOs). An RDO is an action intended by the decision maker to be performed additionally to a specific alternative in order to decrease the risk. The paper also gives an overview about experimental research with RDOs. Topics include the factors that determine the search for RDOs and the factors affecting the acceptance of an RDO. Finding an acceptable RDO has a distinct effect on choice: If for a specific risky alternative an RDO is available, this alternative is chosen most often. The consequences of the concept of RDOs on theories about decision behaviour and on aiding decision making are discussed.

2013

SSHRC grant: Social Sciences and Humanities Research Council via Dr. Bram Cadsby Professor Department of Economics, University of Guelph

Psychological Science, 2004

When people have access to information sources such as newspaper weather forecasts, drug-package inserts, and mutual-fund brochures, all of which provide convenient descriptions of risky prospects, they can make decisions from description. When people must decide whether to back up their computer's hard drive, cross a busy street, or go out on a date, however, they typically do not have any summary description of the possible outcomes or their likelihoods. For such decisions, people can call only on their own encounters with such prospects, making decisions from experience. Decisions from experience and decisions from description can lead to dramatically different choice behavior. In the case of decisions from description, people make choices as if they overweight the probability of rare events, as described by prospect theory. We found that in the case of decisions from experience, in contrast, people make choices as if they underweight the probability of rare events, and we explored the impact of two possible causes of this underweighting-reliance on relatively small samples of information and overweighting of recently sampled information. We conclude with a call for two different theories of risky choice.

Journal of Economic Studies

PurposeThe authors believe that comparing individuals to groups' decision making is crucial provided that many important choices in society are made by groups, i.e. committees, governing bodies, juries, business partners and families. This study aims to discuss the aforementioned topic.Design/methodology/approachThe authors analyze risky decision making in the context of the television game show Deal or No Deal – Italian edition. Specifically, the authors scrutinize and compare individual (standard “Deal or No Deal” edition) and group (special edition) choices in the risky choice context provided by programe.FindingsAfter analyzing contestant's behavior in the standard edition episodes plus a special edition the authors calculate a risk index observing that no statically significant difference is present between individuals' and groups' actions.Originality/valueIn the “Deal or No Deal” special edition contestant were groups of two strangers. It is not uncommon to hav...

When people have access to information sources such as newspaper weather forecasts, drug-package inserts, and mutual-fund brochures, all of which provide convenient descriptions of risky prospects, they can make decisions from description. When people must decide whether to back up their computer's hard drive, cross a busy street, or go out on a date, however, they typically do not have any summary description of the possible outcomes or their likelihoods. For such decisions, people can call only on their own encounters with such prospects, making decisions from experience. Decisions from experience and decisions from description can lead to dramatically different choice behavior. In the case of decisions from description, people make choices as if they overweight the probability of rare events, as described by prospect theory. We found that in the case of decisions from experience, in contrast, people make choices as if they underweight the probability of rare events, and we explored the impact of two possible causes of this underweighting-reliance on relatively small samples of information and overweighting of recently sampled information. We conclude with a call for two different theories of risky choice.