Starting points' effects on risk-taking behavior

Christian Schade, Martina Steul and Andreas Schröder

No 2002,15, SFB 373 Discussion Papers from Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes

Abstract: We formally represent the effects of prior gains and losses in a simple dynamic preference calculus based on prospect theory's value function and thoughts adapted from aspiration level theories. We investigate our predictions in questionnaire experiments. Since we document a strong effect of prior gains and losses in our main study on entrepreneurial decision making, findings are consistent with a difference between the actual status quo and temporarily invariant aspiration levels. However, the general level of willingness to pay (WTP), differences between gain and loss domains, and preference orders within the gain domain are inconsistent with prospect theory's prediction. In the loss domain, results are less straightforward but only interpretable on the joint basis of prospect theory, starting point formula, and an additional survival point. Altogether, results are a challenge to prescriptive as well as descriptive models of decision making relying on context-independent value functions. Implications for a further development of descriptive decision theoretic models based on aspiration levels to account for dynamic starting points effects are discussed.

Date: 2002
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