Reversal of Risky Choice in a Good versus a Bad World

Einav Hart, Yaakov Kareev and Judith Avrahami

Discussion Paper Series from The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem

Abstract: In many situations one has to choose between risky alternatives, knowing only one's past experience with those alternatives. Such decisions can be made in more – or less – benevolent settings or 'worlds'. In a 'good world', high payoffs are more frequent than low payoffs, and vice versa in a 'bad world'. In two studies, we explored whether the world influences choice behavior: Whether people behave differently in a 'good' versus a 'bad' world. Subjects made repeated, incentivized choices between two gambles, one riskier than the other, neither offering a sure amount. The gambles were held equivalent in terms of their expected value, differing only in variance. Worlds were manipulated both between- and within-subject: In Study 1, each subject experienced one world – good, bad or mediocre; in Study 2, each subject experienced both a good and a bad world. We examine the aggregate pattern of behavior (average choice frequencies), and the dynamics of behavior across time. We observed significant differences in the aggregate pattern: In a good world, subjects tended to choose the riskier alternative, and vice versa in a bad world. The pattern of the dynamics, i.e., the transitions from round to round, were best explained by a reaction to the counterfactual reward: When the unchosen alternative yielded a better payoff, the tendency to subsequently choose it was higher. We compared these two patterns to the predictions of three types of models: Reinforcement learning, regret-based and disappointment-based models. Behavior was in line only with the predictions of regret-based models.

Pages: 27 pages
Date: 2012-08
New Economics Papers: this item is included in nep-evo and nep-exp
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Citations: View citations in EconPapers (1)

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