How does decision-making change during challenging times?

Area of Science:

• Behavioral Economics
• Cognitive Psychology
• Decision Science

Background:

• Prospect Theory explains how cognitive biases influence decisions, deviating from rational expected utility.
• Individual decision-making may shift during significant global events.
• Previous research indicates altered choice patterns during uncertain periods.

Purpose of the Study:

• To investigate changes in individual decision-making attitudes during globally challenging events.
• To test whether Prospect Theory's principles hold under conditions of heightened uncertainty.
• To examine risk aversion shifts in gain and loss domains.

Main Methods:

• Conducted three partial replications of Kahneman and Tversky's (1979) Prospect Theory experiments.
• Collected data from 134 subjects after a Paris terror attack (2015).
• Collected data from 176 subjects during Italy's first Covid-19 lockdown (2020) and 140 subjects after reopening.

Main Results:

• Confirmed patterns of choice consistent with decision-making in uncertain times.
• Observed a significant and consistent increase in risk aversion across both gain and loss domains in all three replications.
• The observed phenomenon is suggested to stem from stress-related effects on decision-making.

Conclusions:

• Globally challenging events, such as terror attacks and pandemics, significantly increase risk aversion.
• Stress-related psychological effects appear to be a primary driver of these decision-making shifts.
• Findings underscore the impact of external stressors on cognitive biases and economic choices.