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Measuring the Subjective Value of Risky and Ambiguous Options using Experimental Economics and Functional MRI Methods
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Experiencing risk: Higher-order risk attitudes in description- and experience-based decisions.
Christoph K Becker1, Eyal Ert2, Stefan T Trautmann1
1Alfred-Weber-Institute for Economics, University of Heidelberg.
Journal of Experimental Psychology. Learning, Memory, and Cognition
|November 12, 2020
Summary
People make prudent decisions from description but not from experience. Decisions from experience are influenced by sampled mean, not skewness, revealing a prudence gap.
Area of Science:
- Cognitive Psychology
- Behavioral Economics
- Decision Science
Background:
- Risky decisions involve uncertainty in outcomes and likelihoods, alongside inherent background risks.
- Information collection can mitigate outcome uncertainty, but background risks remain unavoidable.
- Understanding risk attitudes, prudence, and temperance is crucial for analyzing decision-making processes.
Purpose of the Study:
- To investigate risk attitude, prudence, and temperance in both decisions from description and decisions from experience.
- To identify and analyze the potential description-experience gap concerning these decision-making traits.
- To compare the influence of sampled mean and skewness on decisions from experience versus description.
Main Methods:
- Elicitation of risk attitude, prudence, and temperance through controlled experiments.
- Comparison of decision-making behavior in 'decisions from description' versus 'decisions from experience' paradigms.
- Statistical analysis to determine the influence of sampled mean and skewness on choices.
Main Results:
- A novel description-experience gap was identified for prudence; widespread prudence observed in decisions from description was absent in decisions from experience.
- The known description-experience gap for general risky decisions was replicated.
- In decisions from experience, the sampled mean significantly influenced choices, whereas skewness played a lesser role compared to decisions from description.
Conclusions:
- Decision-making under risk exhibits a significant divergence between abstract descriptions and direct experience, particularly regarding prudence.
- Experience-based decisions are heavily weighted towards the average outcome, potentially overlooking distributional characteristics like skewness.
- Findings highlight the need to consider the decision-making context (description vs. experience) when assessing risk preferences and behaviors.
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