Agata MichalaszekWarsaw School of Social

Psychology

Information search patterns in risk judgment and in risky choices

Expectation Models

• 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

i

n

iivpEV

1

)(1

i

n

ii vupEU

Expectation Models – nonlinear functions of value and p

• 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)

)()( 11

1 pxvVn

i

Expectation Models – the same rule

• 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?

Two approaches

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)

Information searching due to EV

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)

Pattern of information searching due to EV

• Situation 1

payoff1

p1

payoff2

p2

………payoffi

pi

• Situation 2

payoff1

p1

payoff2

p2

………payoffi

pi

Each alternative is evaluated separately.

Pattern of information searchingdue to DIM

• 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

Two patterns of information searching

• Situation 1

payoff1

p1

payoff2

p2

………payoffi

pi

• Situation 2

payoff1

p1

payoff2

p2

………payoffi

pi EV

DIM

Main research question

Do people use:

the multiplicative or the dimensional pattern

of information acquisition,

while making risky choices ?

Risk judgement and choice: the same or not

• 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

Theories of risk judgement

risk seeking for losses

risk aversion for gains

R–V Models – Markowitz:

• 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)}

Risk judgement ≠ Choice

• developed by Coombs

• no clear answer

Research Questions

Risk judgment

• Do people use the multiplicative or the dimensional pattern of information acquisition

• Relative importance of positive and negative dimensions

• Relative importance of values and probabilities

Choice• Do people use the

multiplicative or the dimensional pattern of information acquisition

• Relative importance of positive and negative dimensions

• Relative importance of values and probabilities

Experiment – Design

• 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

Experiment – Design: scenarios

• respondents were presented with 7 different risky situations related to financial risk, health hazards, gambling, etc.

• every situation 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

Experiment – Design: MouseLabWEB

• 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

A B Cmax gain

pmax gain

gain

pgain

loss

ploss

max loss

Pmax loss

http://www.mouselabweb.org/

Results

• number of box• average – 12 information• after 6th information less

systematic patterns• checked first 6 steps

A B Cmax gain 1 9 17pmax gain 2 10 18gain 3 11 19pgain 4 12 20loss 5 13 21ploss 6 14 22max loss 7 15 23Pmax loss 8 16 24

Results: information search patterns – Risk judgement

• 69,9% - due to dimensional model

• 4,2% - due to multiplicative model

• 26% - without any model 0

50

100

150

200

250

300

nomodel

DIM EV

%

amount ofreactions

Results: information search patterns - Choice

• 67,5% - due to dimensional model

• 1,8% - due to multiplicative model

• 30,8% - without any model 0

50

100

150

200

250

300

nomodel

DIM EV

%

amount ofreactions

Results: information search patterns

Risk judgement

• 69,9% - due to dimensional model

• 4,2% - due to multiplicative model

• 26% - without any model

Choice

• 67,5% - due to dimensional model

• 1,8% - due to multiplicative model

• 30,8% - without any model

Results: positive/negative outcomes

• 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

Results: positive/negative outcomes

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

Results: value or p

Risk judgement• ratio value/p

M=1,30

Choice• ratio value/p

M=1,23

ratio =

valuep

value

p= 1 < 1 > 1

Results: value or 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

Results: value or p for different situations

• 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(1,56)=0.612; p=.437

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

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

Conclusions:

• 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 frequent for less precise information (‘natural setting’)