Changing plans: dynamic inconsistency and the effect of experience on the reference point
1Indiana University, Bloomington 47405, USA.
Psychonomic Bulletin & Review
|February 22, 2000
Summary
People often change their decisions after experiencing outcomes, showing inconsistency in decision-making. Experiencing gains leads to risk aversion, while losses lead to risk seeking, impacting future choices.
Area of Science:
- Behavioral Economics
- Decision Science
- Psychology
Background:
- Dynamic consistency is a key principle in decision-making theory.
- Understanding how experience influences choices is crucial for behavioral economics.
Purpose of the Study:
- To experimentally test the principle of dynamic consistency in decision-making.
- To investigate systematic inconsistencies in choices following gambles.
Main Methods:
- Participants made planned choices for a second gamble before a first gamble.
- Participants then made final choices for the second gamble after experiencing the first gamble's outcome.
- Choices were analyzed for consistency between planned and final decisions.
Main Results:
- Decisions were frequently inconsistent with initial plans, even with identical outcomes.
- Experiencing a gain led to increased risk aversion.
- Experiencing a loss led to increased risk seeking.
Conclusions:
- Actual experience systematically alters decision-making, violating dynamic consistency.
- The reference point for evaluating decisions shifts based on experienced outcomes.
- This challenges traditional economic models assuming stable preferences.
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