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Agata Michalaszek Warsaw School of Social Psychology

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Information search patterns in risk judgment and in risky choices

Agata Michalaszek

Warsaw School of Social Psychology

- rational choice is based on max EV
- logarithmic function of utility (Bernoulli, 1738, 1954)
- objective value was replaced with subjectvie utility
- people violate EU theory (Allais, 1953)
and common ratio rule

- Prospect Theory – value of each outcome is weighted by a decision weight ╥(p) – nonlinear function of probability (Kahneman and Tversky, 1979)
- CPT - the separable decision weights was replaced with cumulative (rank-dependent) decision weights(Kahneman and Tversky, 1992)

- all those models (i.e. extensions of EV):
EV, EU, SEU, OPT, CPT contains the same rule – people choose ‘the best’ alternative by maximizing the expected value

Is this a single way to look for a solution to inconsistencies between the EV rule and actual behavior?

Extensions of EV rule

i.e. nonlinear v and p functions

Investigation of the way in which people think

- e.g., how they acquire information?
- Information board (Payne, 1976)

wl(pl) *l(loss)+wg(pg)*g(gain)

(e.g. Coombs and Lehner, 1984; Jia and Dyer, 1996; Jia, Dyer and Buttler, 1999; Luce and E.U. Weber, 1986; Sarin and M. Weber, 1993)

- probabilities and payoffs are combined multiplicatively
- each alternative is evaluated separately (global evaluation)

Situation 1

payoff1

p1

payoff2

p2

…

…

…

payoffi

pi

Situation 2

payoff1

p1

payoff2

p2

…

…

…

payoffi

pi

Each alternative is evaluated separately.

Situation 1

payoff1

p1

payoff2

p2

…

…

…

payoffi

pi

Situation 2

payoff1

p1

payoff2

p2

…

…

…

payoffi

pi

Each dimension is evaluated separately. Dmensional Model – Payne, 1976

Situation 1

payoff1

p1

payoff2

p2

…

…

…

payoffi

pi

Situation 2

payoff1

p1

payoff2

p2

…

…

…

payoffi

pi

DIM

EV

Do peopleuse:

the multiplicative or the dimensional pattern

of information acquisition,

while making risky choices ?

- another important issue: risk judgement and choice
- the same or not?
- no risk concept in EV models
- risk attitudes follow from v and p functions

risk aversion for gains

risk seeking for losses

- decisions are based on both expected return and its uncertainty or variability (related to risk)(Markowitz, 1959)
- risk is associated with the dispersion of the random variable
- risk as indepedent concept
WTP(x) = f {V(x), R(x)}

- developed by Coombs
- no clear answer

Risk judgment

Choice

Do peopleuse the multiplicative or the dimensional pattern of information acquisition

Relative importance of positive and negative dimensions

Relative importance of values and probabilities

- Do peopleuse the multiplicative or the dimensional pattern of information acquisition
- Relative importance of positive and negative dimensions
- Relative importance of values and probabilities

- Subjects:
- 120 respondents
- Measure of perceived risk
- subjects rated riskiness on an 11-point scale (from 0 ‘not risky at all’ to 10 ‘extremely risky’)
- Measure of decision making (choice)
- subjects chose one of three options

0

10

a) option A b) option B c) option C

- respondents were presented with 7 differentrisky situations related to financial risk, health hazards, gambling, etc.
- everysituation consisted of 3 alternative options (A, B, C)
- each option consisted of 4 possible outcomes - 2 losses and 2 gains and propabilities of those outcomes
- participants could disclose as much detailed information about the options as necessary to judge their riskiness and to choose one of them

- the MouseLabWEB idea was to monitor the information acquisition process of decision making
- information is hidden behind boxes – to access the information, the decision maker moves the mouse pointer over the box on the screen

http://www.mouselabweb.org/

number of box

average – 12 information

after 6th information less systematic patterns

checked first 6 steps

69,9%-due todimensional model

4,2%-due to multiplicative model

26% - without any model

- 67,5%-due todimensional model
- 1,8%-due to multiplicative model
- 30,8% - without any model

Risk judgement

69,9%-due todimensional model

4,2%-due to multiplicative model

26% - without any model

Choice

67,5%-due todimensional model

1,8%-due to multiplicative model

30,8% - without any model

- positive/negative on top – biased
- 2 display orders:
- control: the same amount of information
the same ratio pos/neg

pos payoff … … … neg payoff

neg payoff … … … pos payoff

vs

Risk judgement

ratio pos/neg

M=0,95

amount of positive information M=7,04

amount of negative information M=7,62

Choice

ratio pos/neg M=0,96

amount of positive information M=6,87

amount of negative information M=7,50

Risk judgement

ratio value/p

M=1,30

Choice

ratio value/p M=1,23

value

ratio =

p

value

= 1 < 1 > 1

p

Risk judgement

41% amount value=p

28,1% amount value>p

16,6% only value

11,2% amount value<p

3,1% only p

Choice

47% amount value=p

24,8% amount value>p

12% only value

12,8% amount value<p

3,5% only p

- ratio value/p different for different situations
- more p is considered for financial risk: investmenst and gambles
- more value is considered for health hazards and extreme sports

F(1,49)=0.117; p=.734

F(1,53)=5,475; p=.023

F(1,56)=0.612; p=.437

- the majority of information search pattern is due to DIM model (about 70%)
- no differences in amount of considered infrmation between positive and negative outcomes
- p more frequent for precise information (‘experiments’)
values more frequentfor less precise information (‘natural setting’)