Preferences, prices, and ratings in risky decision making (original) (raw)
Related papers
1992
Three experiments were conducted to investigate contextual effects and response mode effects (e.g., preference reversals) in risky decision making. Judgments of the worth of binary gambles were examined using two different contexts (positively and negatively skewed distributions of expected values) and two different response modes (attractiveness ratings and buying prices). Changes in the response mode affected the preference order of gambles, and changes in the context due to variations in skewing influenced the metric properties of the judgments but had a minimal effect on preference orders. Data were inconsistent with contingent weighting theory (Tversky, Sattath, & Slavic, 1988) and expression theory (Goldstein & Einhom, 1987). Results could be described by a change-of-process theory which assumes that the method of elicitation influences the manner in which people combine information and arrive at judgments. Under certain conditions, attractiveness ratings could be described by an additive combination of subjective probability and utility (s and u), whereas pricing judgments were accounted for by a multiplicative function, with the same scales of s and u in both tasks. When the range of outcomes included zero and negative values, preference orders for attractiveness ratings of gambles changed. This change in rank order was consistent with the hypothesis that inclusion of these levels caused more subjects to use a multiplicative rule for combining u and s when rating the attractiveness of gambles. Thus, preference reversals can be explained by the theory that the combination rule changes, while utilities and subjective probabilities remain constant.
A change-of-process theory for contextual effects and preference reversals in risky decision making
Organizational Behavior and Human Decision Processes, 1992
Three experiments were conducted to investigate contextual effects and response mode effects (e.g., preference reversals) in risky decision making. Judgments of the worth of binary gambles were examined using two different contexts (positively and negatively skewed distributions of expected values) and two different response modes (attractiveness ratings and buying prices). Changes in the response mode affected the preference order of gambles, and changes in the context due to variations in skewing influenced the metric properties of the judgments but had a minimal effect on preference orders. Data were inconsistent with contingent weighting theory and expression theory . Results could be described by a change-of-process theory which assumes that the method of elicitation influences the manner in which people combine information and arrive at judgments. Under certain conditions, attractiveness ratings could be described by an additive combination of subjective probability and utility (s and u), whereas pricing judgments were accounted for by a multiplicative function, with the same scales of s and u in both tasks. When the range of outcomes included zero and negative values, preference orders for attractiveness ratings of gambles changed. This change in rank order was consistent with the hypothesis that inclusion of these levels caused more subjects to use a multiplicative rule for combining u and s when rating the attractiveness of gambles. Thus, preference reversals can be explained by the theory that the combination rule changes, while utilities and subjective probabilities remain constant.
Magnitude and Context Effects in Preference Reversals
Ph.D. Thesis, 2022
Preference reversal (PR) reveals that preferences over risky bets can be reversed between choices and willingness-to-accept or -pay. The present research extended limited previous studies on magnitude effects of gains on PR by examining this effect with both gains and losses. Experiment 1: Magnitude effects in PR progressively manipulated the payoff variations in bet pairs to measure the effect of ratio scales on risk preferences and PR. Undergraduates (N = 137) were asked to choose a bet they prefer from a list of bet pairs, and then to evaluate the bets indicating how much they were willing to pay for a chance to participate in each of the bets. We observed a robust dichotomous pattern of choice behavior: The majority of choices are consistent with risk aversion or risk-seeking behavior when loss ratios between bet pairs are no more than -2.5 or no less than -8.0, respectively. Moreover, different patterns of PR can be elicited with these loss stakes. Experiment 2: Binary choices in PR examined the predictions of three decision-making heuristics, namely a novel simplified approach called the loss-averse rule, the majority rule, and the equate-to-differentiate rule, as well as cumulative prospect theory that individuals may use in binary choice. Participants (N = 113) were asked to choose a bet from a list of bet pairs. We found that when the loss ratio is more than -3.0 at the level of the data, proportions of choices were in the direction predicted by cumulative prospect theory and the loss-averse rule of decision rather than by the other two rules, at both the conditional and aggregate levels. These results suggest that when loss risk reaches a level of threshold, risk behavior for binary choices on lotteries is ubiquitously influenced by loss aversion rather than by the process of value maximization. To date, neither has literature in gambling situations paid attention to whether the expected value difference between bet pairs affects the likelihood of PR, almost nor has empirical research shed light on whether episodic memory is involved in PR. In a laboratory-based study, Experiment 3: Episodic memory in PR varied bet pairs in expected value in a market-like scenario. Undergraduates (N = 64) first completed classic dual-procedure PR tasks and then performed a memory test for previous choices. Consistent with past work, participants exhibited non-negligible and systematic rates of PR between choices and valuations. The results suggest a tendency that the larger the expected value difference between bet pairs, the larger the predicted PR rate, and provide the first evidence that correct retrievals of initial choices can ameliorate PR. In a subsequent Experiment 4: Episodic memory in attraction effect PR, participants (N = 86) were incentivized to complete choice and price PR tasks and a memory test on purely risky bets in a pictorial form. We found equivocal evidence of the effect of expected value difference within bet pairs on attraction effect PR, no effect of expected value difference or level on correct recollections, and again substantial evidence that correct retrievals of initial choices can ameliorate PR. Despite the voluminous evidence in support of the paradoxical finding that PR rates can disappear, the question of whether and when small and large loss or gain ratios influence choice between safe and risky bets and impede PR remains open. In three meta-analyses of 12 experiments or treatments reported by 7 prior and current studies (N = 884), we showed that neither low nor high loss or gain ratios are more powerful---a finding counter to the data reported in Experiment 1: Magnitude effects in PR and Experiment 3: Episodic memory in PR. We also identified no indications that the PR design (gain-zero or gain-loss) or the evaluation mode (separate or join) influences safe bet choice and PR sizes. As the first meta-analytic research on this phenomenon, we reasoned possible factors that may cause those conflicting results. Overall, these results (1) reaffirm the existence of the traditional and contextual PR phenomenon, (2) indicate the fragile, context-dependent nature of PR phenomenon, (3) provide evidence about how memory retrieval operates as individuals perform binary choice and pricing tasks, and (4) may have implications for eliciting risk preferences by the specific construction of payoffs and EVs in gambling and decision making. A number of limitations in terms of materials and methods are addressed along with future research that may test other evidence of magnitude and context effects in PR.
How does preference reversal appear and disappear? Effects of the evaluation mode
Journal of Behavioral Decision Making, 2004
Preference reversal is a systematic change in the preference order between options when different response methods are used (e.g., choice vs. judgment). The present study focuses on procedures used to elicit preferences according to an evaluability hypothesis. Two experiments compared joint vs. separate evaluations and explicit vs. non-explicit joint evaluations. Subjects had to express preferences between highvariance gambles (HVGs) and low-variance gambles (LVGs) either by choosing one gamble to play in a lottery or by assigning gambles minimum selling prices. We show that HVGs are preferred in both choice and pricing conditions when gambles are evaluated separately, and LVGs are preferred in both choice and selling conditions when gambles are evaluated in pairs: i.e., when the evaluation mode is held constant, classic preference reversal disappears. These results support the evaluability hypothesis, and suggest that preferences depend on whether subjects are allowed to compare the options they are asked to choose from or judge, independently of the nature of the scale (i.e., attractiveness vs. minimum selling price) they are required to adopt.
The formation of preference in risky choice
PLOS Comp. Biology, 2019
A key question in decision-making is how people integrate amounts and probabilities to form preferences between risky alternatives. Here we rely on the general principle of integration-to-boundary to develop several biologically plausible process models of risky-choice, which account for both choices and response-times. These models allowed us to contrast two influential competing theories: i) within-alternative evaluations, based on multiplicative interaction between amounts and probabilities, ii) within-attribute comparisons across alternatives. To constrain the preference formation process, we monitored eye-fixations during decisions between pairs of simple lotteries, designed to systematically span the decision-space. The behavioral results indicate that the participants' eye-scanning patterns were associated with risk-preferences and expected-value maximization. Crucially, model comparisons showed that within-alternative process models decisively outperformed within-attribute ones, in accounting for choices and response-times. These findings elucidate the psychological processes underlying preference formation when making risky-choices, and suggest that compensatory, within-alternative integration is an adaptive mechanism employed in human decision-making. Author summary Decision-making under risk requires a selection between alternatives, such as lotteries, which offer a reward with a specified probability. Human decision between such alternatives is at the center of the normative decision theory, which assumes that decisions are rationally made by forming a value for each alternative and selecting the alternative with the highest value. To this day, there is still a considerable debate on how such values are computed. While the normative theory assumes that values of the alternatives reflect the statistically expected rewards, more recent theories have argued that alternative-values are not computed, and choices are only based on sequentially comparing the alternatives on amounts or on probabilities. Here, we carried out an experimental investigation of risky decision-making, in which participants chose between pairs of simple lottery alternatives that systematically span a range of probabilities and amounts, while we tracked their eye PLOS Computational Biology | https://doi.org/10.1371/journal.pcbi.
Magnitude Effects in Preference Reversals
Journal of Neuroscience Psychology and Economics, 2021
The finding that individual preferences are systematically inconsistent under different but formally equivalent modes of information processing is called the preference reversal (PR). The present research extended previously limited studies on magnitude effects of gains on PR by examining this effect with both gains and losses. Experiment 1 progressively manipulated the payoff variations in bet pairs to measure the effect of ratio scales on risk preferences and PR. Undergraduates (N = 137) were asked to choose a bet they prefer from a list of bet pairs, and then to evaluate the bets indicating how much they were willing to pay for a chance to participate in each of the bets. We observed a robust dichotomous pattern of choice behavior: The majority of choices are consistent with risk aversion or risk-seeking behavior when loss ratios between bet pairs are low and high, respectively. Moreover, different patterns of PR can be elicited with these loss stakes. Experiment 2 examined the predictions of three decision-making heuristics, namely a novel simplified approach called the loss-averse rule, the majority rule, and the equate-to-differentiate rule, as well as cumulative prospect theory that individuals may use in binary choice. Participants (N = 113) were asked to choose a bet from a list of bet pairs. We found that when the loss ratio is high, proportions of choices were in the direction predicted by cumulative prospect theory and the loss-averse rule of decision rather than by the other two rules, at both the conditional and aggregate levels. These results may suggest that when loss risk reaches a level of threshold, risk behavior for binary choices on lotteries is ubiquitously influenced by loss aversion. The overall results indicate the fragile, context-dependent nature of PR phenomenon.
The Fourfold Pattern of Risk Attitudes in Choice and Pricing Tasks*
The Economic Journal, 2009
Using simple gambles with real payoffs we examine the robustness of the fourfold pattern (FFP) of risk attitudes under two different elicitation procedures. That is, we determine if on average individuals are (1) risk-seeking over low-probability gains, (2) risk-averse over high-probability gains, (3) riskaverse over low-probability losses, and (4) risk-seeking over high-probability losses. We find that participants' risk attitudes are consistent with the FFP when using the Becker-DeGroot-Marschak procedure to elicit prices for the gambles. However, when instead relying on a simple choice-based elicitation where participants choose between the gamble and its expected value, individual decisions are not distinguishable from random choice. This sensitivity to the elicitation procedure holds both between-and within-participants, and it remains even when participants review their price and choice decisions simultaneously and are allowed to change them. Given the greater complexity of the price elicitation procedure this finding may be further evidence that an increase in cognitive load exacerbates behavioral anomalies.
Unexpected Utility: Experimental Tests of Five Key Questions about Preferences over Risk
2009
Experimental work on preferences over risk has typically considered choices over a small number of discrete options, some of which involve no risk. Such experiments often demonstrate contradictions of standard expected utility theory. We reconsider this literature with a new preference elicitation device that allows a continuous choice space over only risky options. Our analysis assumes only that preferences depend on the probability p and prize x; U = u(p; x): We then allow subjects to choose p and x continuously on a linear budget constraint, r 1 p + r 2 x = m, so that all prospects with a nonzero expected value are risky. We test …ve of the most importantly debated questions about risk preferences: rationality, prospect theory asymmetry, the independence axiom, probability weighting, and constant relative risk aversion. Overall, we …nd that the expected utility model does unexpectedly well.