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Waterfall illusion in risky choice – exposure to outcome-irrelevant gambles affects subsequent valuation of risky gambles

Julie Guo and Agnieszka Tymula

European Economic Review, 2021, vol. 139, issue C

Abstract: Based on recent discoveries in economics, neuroscience, and psychology, we hypothesize that pure exposure to high-payoff or low-payoff gambles can change people's subsequent reported valuations of gambles and confirm this hypothesis in a laboratory experiment. In particular, the same participants within the same experimental session provide higher valuations for the same gambles after they have been exposed to low-payoff gambles compared to after they have been exposed to high-payoff gambles. These results are consistent with the current understanding of how the nervous system encodes payoffs and imply that even brief experiences that do not change wealth can impact an individual's reported valuations of risky options.

Keywords: Decision-making; Risk attitude; Neuroeconomics; Normalization (search for similar items in EconPapers)
JEL-codes: D90 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.euroecorev.2021.103889

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European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

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