Probabilistic Outcomes Are Valued Less in Expectation, Even Conditional on Their Realization

Gabriele Paolacci () and Quentin André ()
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Gabriele Paolacci: Marketing, Rotterdam School of Management, Erasmus University, 3062 PA Rotterdam, Netherlands
Quentin André: Marketing, Leeds School of Business, University of Colorado Boulder, Boulder, Colorado 80309

Management Science, 2024, vol. 70, issue 11, 7524-7536

Abstract: Most theories of decision making under risk assume that payoffs and probabilities are separable. In the context of a lottery, the subjective value of a prospective outcome (the payoff) is assumed to be independent of the likelihood that the outcome will occur (the probability). In violation of this assumption, we present eight experiments showing that people anticipate less utility from uncertain outcomes than from certain outcomes, even conditional on their realization. The devaluation of uncertain outcomes is observed across different measures of utility (willingness to spend money or time; choice between different options), different populations (student and online samples), and different manipulations of uncertainty. We show that this result does not simply reflect a misunderstanding of the instructions or people’s aversion toward a “weird” transaction with unexplained features. We highlight the implications of this phenomenon for empirical investigations of risk preferences and conclude with a discussion of the psychological mechanisms that might drive the devaluation of probabilistic outcomes.

Keywords: decision analysis; risk; economics; behavior and behavioral decision making; microeconomic behavior; utility preference; estimation; value theory (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:11:p:7524-7536

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