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Adaptive learning and risk taking.

Jerker Denrell1

  • 1Stanford University.

Psychological Review
|January 18, 2007
PubMed
Summary
This summary is machine-generated.

Adaptive sampling, where individuals learn from past outcomes, can lead to risk-averse or risk-seeking behavior. This study formalizes how learning influences risk-taking decisions, even for risk-neutral agents.

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Area of Science:

  • Decision Sciences
  • Behavioral Economics
  • Cognitive Psychology

Background:

  • Humans and animals learn from experience by adjusting their choices based on past outcomes.
  • Previous work by J. G. March (1996) used simulations to show adaptive sampling can result in both risk-averse and risk-seeking behaviors.

Purpose of the Study:

  • To develop a formal theory explaining how adaptive sampling influences risk-taking behavior.
  • To investigate the conditions under which a risk-neutral decision-maker might exhibit risk-averse or risk-seeking tendencies.

Main Methods:

  • Development of a formal theoretical model.
  • Analysis of decision-making processes under conditions of uncertainty and learning.
  • Simulations to explore behavioral outcomes.

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Main Results:

  • A risk-neutral decision-maker can learn to prefer a certain outcome over an uncertain one with the same expected value and symmetric distribution.
  • Risk-seeking behavior can emerge when the distribution of the uncertain alternative is negatively skewed.
  • Information about foregone payoffs is shown to increase risk-taking.

Conclusions:

  • Adaptive sampling is a key mechanism influencing risk preferences.
  • The structure of outcome distributions and available information significantly impact learning-based risk-taking.
  • The model provides theoretical support for experimental findings on risk behavior.