Behavior in Risky Decisions: Focus on Risk Defusing
01 Jan 2007-pp 291-306
TL;DR: Results are reported indicating that this central result cannot be generalized, and expectations to find usable probability information and to find information about the existence of an RDO are discussed as factors explaining differences between different types of decision situations and gambles.
Abstract: In experiments on risky decisions with gambles as alternatives the central factors determining decision behaviour are: The subjective values of the outcomes, and their subjective probability. The present paper first reports results of a number of experiments indicating that this central result cannot be generalized. In quasi-realistic risky scenarios, many decision makers are not interested in probability information and many search actively for risk-defusing operators (RDOs). An RDO is an action intended by the decision maker to be performed additionally to a specific alternative in order to decrease the risk. The paper also gives an overview about experimental research with RDOs. Topics include the factors that determine the search for RDOs and the factors affecting the acceptance of an RDO. Finding an acceptable RDO has a distinct effect on choice: If for a specific risky alternative an RDO is available, this alternative is chosen most often. The consequences of the concept of RDOs on theories about decision behaviour and on aiding decision making are discussed. Expectations to find usable probability information and to find information about the existence of an RDO are also discussed as factors explaining differences between different types of decision situations and gambles.
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TL;DR: This study proposed and tested a multistage model of household response to three hazards-flood, hurricane, and toxic chemical release-in Harris County Texas and suggested that four demographic variables-gender, age, income, and ethnicity-affect the basic causal chain at different points.
Abstract: This study proposed and tested a multistage model of household response to three hazards-flood, hurricane, and toxic chemical release-in Harris County Texas The model, which extends Lindell and Perry's (1992, 2004) Protective Action Decision Model, proposed a basic causal chain from hazard proximity through hazard experience and perceived personal risk to expectations of continued residence in the home and adoption of household hazard adjustments Data from 321 households generally supported the model, but the mediating effects of hazard experience and perceived personal risk were partial rather than complete In addition, the data suggested that four demographic variables-gender, age, income, and ethnicity-affect the basic causal chain at different points
651 citations
Cites background from "Behavior in Risky Decisions: Focus ..."
...Of course, some of the predictions from the PADM would also be made by other theories such as PMT (Rogers, 1983), PrE (Mulilis & Duval, 1997), and Huber’s (2007) theory of risk diffusing operators....
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TL;DR: It is essential that scientific knowledge of people´s cognitive and other limitations is brought to bear on the issue of how to prevent such extreme circumstances to occur, and individual irrationality in stock markets would be eliminated.
Abstract: It is understandable that people ask how the current financial crisis could happen. As the market actors appear irrational, it is also understandable that people—lay people and experts alike—believe that psychological factors play a decisive role. Is there evidence for such a role, and what is the evidence? This monograph reviews, evaluates, and discusses research—primarily psychological research —that can potentially increase our understanding of the psychological antecedents and consequences of financial crises. It also highlights important areas where more psychological research is needed to advance this understanding. Individuals generally use their cognitive and other resources in sensible ways, and collectively they have developed procedures that effectively regulate economic and other social transactions. But sometimes such transactions are so complex that they exceed the ability of individuals or groups to manage effectively. It is therefore essential that scientific knowledge of people’s cognitive and other limitations be brought to bear on the issue of how to improve decision making in these domains. Financial markets such as those for stocks and credit arguably are among those domains in which actors’ capacity to make rational judgments and decisions is frequently overtaxed. In product markets with full competition, prices more closely represent the true value of the products; uncertainty in such contexts is thus minimized and the conditions are relatively conducive for making good judgments. But in stock markets, stock prices, due to excessive trading, are more volatile than they would be if they reflected stocks’ true value. Psychological explanations of excessive trading include cognitive biases such as overconfidence and overoptimism, risk aversion in the face of sure gains and risk taking and loss aversion in the face of possible losses, and influences of nominal representation (the money illusion) of stock prices. If no cognitive biases (strengthened by affective influences) existed or only some actors were susceptible to such biases, individual irrationality in stock markets would possibly be eliminated. But evidence shows such biases are in fact pervasive. In order to understand stock market booms and busts, it is also necessary to take into account the tendency among actors to imitate each other. Furthermore, in destabilized stock markets, experts are less likely to lose money than are lay people, who lack skill in constructing stock portfolios that effectively diversify risk. Credit markets allow people to lend money for investments that will pay off in the future. Yet under extreme circumstances, credit lenders offer loans without appropriately considering the risk borrowers run of not being able to pay their monthly installments. Global credit excesses in general, and the current subprime mortgage crisis in particular, also show that households often accept risky loans. Furthermore, their preparedness to use credit has been increasing and credit is no longer solely a means of investing in the personal future. An example is that, in the new member states of the European Union, citizens having a desire for a Western living standard are increasingly prepared to use credit. Credit use is a process consisting of different stages of decision making, starting with purchasing a product for borrowed money and ending with paying back the borrowed money. Decisions to save now in order to buy a desired product in the future, or not to save but to borrow money and save later, are intertemporal choices with consequences at different points in time. The rewards of possessing a commodity immediately or in the future are traded off against the costs of paying back borrowed money in installments or paying the price all at once in the future. Purchase decisions involve two interacting choices preceded by information search: Choice of the product and choice of the method of financing. Only a small percentage of credit users search extensively for credit information prior to taking up credit. The probability of search increases with the borrowed amount, the amount of previously experienced debts, higher income, and higher educational level, and it also is higher for credit novices. Furthermore, credit users fail to correctly anticipate the decrease in the experienced pleasure from the credit-financed product. They also experience decreasing pleasure with the acquired product and increasing strains from
120 citations
Cites background from "Behavior in Risky Decisions: Focus ..."
...Such means include risk-defusing operators (Huber, 2007; Huber & Huber, 2008), defined as actions intended to be performed in relation to a specific alternative and expected to decrease the associated risk of the negative outcome....
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...Huber, O. (2007). Behavior in risky decisions: Focus on risk defusing....
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TL;DR: It is found that the weighting function required to model precautionary decisions differed from that required for monetary gambles, indicating a failure of the descriptive invariance axiom of expected utility theory.
Abstract: In 5 experiments, we studied precautionary decisions in which participants decided whether or not to buy insurance with specified cost against an undesirable event with specified probability and cost. We compared the risks taken for precautionary decisions with those taken for equivalent monetary gambles. Fitting these data to Tversky and Kahneman's (1992) prospect theory, we found that the weighting function required to model precautionary decisions differed from that required for monetary gambles. This result indicates a failure of the descriptive invariance axiom of expected utility theory. For precautionary decisions, people overweighted small, medium-sized, and moderately large probabilities-they exaggerated risks. This effect is not anticipated by prospect theory or experience-based decision research (Hertwig, Barron, Weber, & Erev, 2004). We found evidence that exaggerated risk is caused by the accessibility of events in memory: The weighting function varies as a function of the accessibility of events. This suggests that people's experiences of events leak into decisions even when risk information is explicitly provided. Our findings highlight a need to investigate how variation in decision content produces variation in preferences for risk.
91 citations
Cites background from "Behavior in Risky Decisions: Focus ..."
...Although RDOs might be discovered in insurance scenarios, in choices among gambles (according to Huber, 2007), except for choosing one alternative, the decision maker cannot exert any control at all....
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...According to Huber (2007) if a decision maker finds an RDO or an RDO is available, he or she chooses the risky alternative in question much more often than without finding an RDO....
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...Huber (2007) claimed that in many real-life decisions—but not monetary gambles—many decision makers are not interested in probability information and instead actively search for RDOs....
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Journal Article•
TL;DR: In this article, the effect of time pressure on the search for risk defusing operators was investigated as the central research question, where participants had to search for information they considered to be essential for reaching a decision.
Abstract: In an experiment with 40 participants, the effect of time pressure on the search for risk defusing operators was investigated as the central research question. A risk defusing operator (RDO) is an action intended by the decision maker to be performed in addition to an otherwise attractive alternative and expected to decrease the risk. Examples in daily life are insurances or vaccinations. Decision-makers in experiments with quasi-realistic risky scenarios instead of gambles often search actively for RDOs. In the presented experiment, participants had to search for information they considered to be essential for reaching a decision. As expected, under time pressure search for information on RDOs and negative consequences increased, whereas search for positive consequences and probability decreased. Furthermore, the initially risky alternative was chosen more often under time pressure. As in other experiments on time pressure, the total amount of inspected information decreased.
54 citations
Cites background or methods from "Behavior in Risky Decisions: Focus ..."
...2 Formally, the incorporation of an RDO into an alternative can be considered as creating a new alternative (a new gamble) consisting of the original action and the RDO, see Huber (2007)....
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...With the Method of Active Information Search (Huber et al., 1997), the participant is given a short description of the decision situation first....
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...Huber (2007) summarizes the results of experiments which investigated factors influencing the search for RDOs (e.g., attractiveness of the alternative, expectation of finding relevant information) and the factors affecting the acceptance of an RDO (e.g., cost, effect)....
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...With the Method of Active Information Search (Huber et al., 1997), the participant is given a short description of the decision situation first. Then, he or she can ask questions in order to obtain more information from the experimenter. The question is recorded, and the answer is given from a list of standardized answers. Elaborate preexperiments are necessary in order to optimize the short description and to standardize the answers. Note that the participant asks the questions, not the experimenter. Different variations of the basic version of the AIS-method have been developed. An overview is presented in Huber, Schulte-Mecklenbeck and Huber (2006), where detailed instructions for the application of the method are given....
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...new gamble) consisting of the original action and the RDO, see Huber (2007). With standard methods of...
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TL;DR: People were less sensitive to probabilities in scenarios perceived as containing ethical considerations than when they were faced with a series of lotteries with different probabilities, and this sensitivity depends on two factors.
Abstract: The question addressed in the present research is whether in naturalistic risky decision environments people are sensitive to information about the probability parameter. In Study 1, we showed that in naturalistic scenarios participants generally revealed little interest in obtaining information about the outcomes and probabilities. Moreover, participants asked fewer questions about probabilities for scenarios containing moral considerations. In Study 2, it was shown that, when supplied with information on probabilities, people could be sensitive to this information. This sensitivity depends on two factors. People were less sensitive to probabilities in scenarios perceived as containing ethical considerations. People were also less sensitive to probabilities when they were faced with a single-choice situation than when they were faced with a series of lotteries with different probabilities. This can be accounted for in terms of the evaluability principle.
31 citations
References
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TL;DR: In this paper, the authors present a critique of expected utility theory as a descriptive model of decision making under risk, and develop an alternative model, called prospect theory, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights.
Abstract: This paper presents a critique of expected utility theory as a descriptive model of decision making under risk, and develops an alternative model, called prospect theory. Choices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility theory. In particular, people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses. In addition, people generally discard components that are shared by all prospects under consideration. This tendency, called the isolation effect, leads to inconsistent preferences when the same choice is presented in different forms. An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights. The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains. Decision weights are generally lower than the corresponding probabilities, except in the range of low prob- abilities. Overweighting of low probabilities may contribute to the attractiveness of both insurance and gambling. EXPECTED UTILITY THEORY has dominated the analysis of decision making under risk. It has been generally accepted as a normative model of rational choice (24), and widely applied as a descriptive model of economic behavior, e.g. (15, 4). Thus, it is assumed that all reasonable people would wish to obey the axioms of the theory (47, 36), and that most people actually do, most of the time. The present paper describes several classes of choice problems in which preferences systematically violate the axioms of expected utility theory. In the light of these observations we argue that utility theory, as it is commonly interpreted and applied, is not an adequate descriptive model and we propose an alternative account of choice under risk. 2. CRITIQUE
35,067 citations
"Behavior in Risky Decisions: Focus ..." refers background or result in this paper
...The most prominent among these theories are subjectively expected utility (SEU) theory (Edwards, 1961) and prospect theory ( Kahneman and Tversky, 1979; Tversky and Kahneman, 1992)....
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...From the behavioral point of view, these results oppose not only the SEU model, but also all other models that have their conceptual roots in the SEU model, for example, prospect theory ( Kahneman and Tversky, 1979 ) and cumulative prospect theory (Tversky and Kahneman, 1992), securitypotential/aspiration theory (Lopes, 1995), but also regret theory (e.g., Loomes and Sugden, 1982)....
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27,773 citations
TL;DR: Cumulative prospect theory as discussed by the authors applies to uncertain as well as to risky prospects with any number of outcomes, and it allows different weighting functions for gains and for losses, and two principles, diminishing sensitivity and loss aversion, are invoked to explain the characteristic curvature of the value function and the weighting function.
Abstract: We develop a new version of prospect theory that employs cumulative rather than separable decision weights and extends the theory in several respects. This version, called cumulative prospect theory, applies to uncertain as well as to risky prospects with any number of outcomes, and it allows different weighting functions for gains and for losses. Two principles, diminishing sensitivity and loss aversion, are invoked to explain the characteristic curvature of the value function and the weighting functions. A review of the experimental evidence and the results of a new experiment confirm a distinctive fourfold pattern of risk attitudes: risk aversion for gains and risk seeking for losses of high probability; risk seeking for gains and risk aversion for losses of low probability. Expected utility theory reigned for several decades as the dominant normative and descriptive model of decision making under uncertainty, but it has come under serious question in recent years. There is now general agreement that the theory does not provide an adequate description of individual choice: a substantial body of evidence shows that decision makers systematically violate its basic tenets. Many alternative models have been proposed in response to this empirical challenge (for reviews, see Camerer, 1989; Fishburn, 1988; Machina, 1987). Some time ago we presented a model of choice, called prospect theory, which explained the major violations of expected utility theory in choices between risky prospects with a small number of outcomes (Kahneman and Tversky, 1979; Tversky and Kahneman, 1986). The key elements of this theory are 1) a value function that is concave for gains, convex for losses, and steeper for losses than for gains,
13,433 citations
"Behavior in Risky Decisions: Focus ..." refers background or result in this paper
...From the behavioral point of view, these results oppose not only the SEU model, but also all other models that have their conceptual roots in the SEU model, for example, prospect theory (Kahneman and Tversky, 1979) and cumulative prospect theory ( Tversky and Kahneman, 1992 ), securitypotential/aspiration theory (Lopes, 1995), but also regret theory (e.g., Loomes and Sugden, 1982)....
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...The most prominent among these theories are subjectively expected utility (SEU) theory (Edwards, 1961) and prospect theory (Kahneman and Tversky, 1979; Tversky and Kahneman, 1992 )....
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TL;DR: The art and science of cause and effect have been studied in the social sciences for a long time as mentioned in this paper, see, e.g., the theory of inferred causation, causal diagrams and the identification of causal effects.
Abstract: 1. Introduction to probabilities, graphs, and causal models 2. A theory of inferred causation 3. Causal diagrams and the identification of causal effects 4. Actions, plans, and direct effects 5. Causality and structural models in the social sciences 6. Simpson's paradox, confounding, and collapsibility 7. Structural and counterfactual models 8. Imperfect experiments: bounds and counterfactuals 9. Probability of causation: interpretation and identification Epilogue: the art and science of cause and effect.
12,606 citations
"Behavior in Risky Decisions: Focus ..." refers background in this paper
...In his theory of causality, Pearl (2000) explicitly includes interventions in a causal system....
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4,957 citations