Preference Reversals During Risk Elicitation

Petko Kusev, Paul van Schaik, Rose Martin, Lars Hall, Petter Johansson

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

Understanding human behavior from the perspective of normative and descriptive theories depends on human agents having stable and coherent decision-making preferences. Both utility theory (expected rational behavior; von Neumann & Morgenstern, 1947) and prospect theory with its certainty equivalent (CE) method (expected irrational behavior; Tversky & Kahneman, 1992) assume stable behavioral patterns of risk preferences. In contrast, our research pursues the opposite proposal: human preferences (rational or irrational) are not stable; variations in the decision context during risk elicitation determine people’s preferences even when the utilities of choice options are available. Accordingly, we found evidence that decision-makers reverse their risk preferences between CE tasks with logarithmically spaced certainty (unequal number of risk-averse and risk-seeking sure options) and linearly spaced certainty (equal number of risk-averse and risk-seeking sure options). The results revealed that the effect of probability range (low and high) on preferences, predicted by prospect theory, is an artifact of the logarithmically spaced sure options. When the sure options were linearly spaced the probability range no longer influenced risk preferences, indicating a preference reversal between decision tasks. Our findings highlight a need to investigate how the predictions of descriptive decision-making theories are shaped by their risk elicitation methods.
Original languageEnglish
Number of pages5
JournalJournal of Experimental Psychology: General
Early online date18 Jul 2019
DOIs
Publication statusE-pub ahead of print - 18 Jul 2019

Fingerprint

Decision Making
Decision Theory
Artifacts
Economics
Research

Cite this

Kusev, Petko ; van Schaik, Paul ; Martin, Rose ; Hall, Lars ; Johansson, Petter. / Preference Reversals During Risk Elicitation. In: Journal of Experimental Psychology: General. 2019.
@article{73751b48f6394655aaa5bedcc4f5b092,
title = "Preference Reversals During Risk Elicitation",
abstract = "Understanding human behavior from the perspective of normative and descriptive theories depends on human agents having stable and coherent decision-making preferences. Both utility theory (expected rational behavior; von Neumann & Morgenstern, 1947) and prospect theory with its certainty equivalent (CE) method (expected irrational behavior; Tversky & Kahneman, 1992) assume stable behavioral patterns of risk preferences. In contrast, our research pursues the opposite proposal: human preferences (rational or irrational) are not stable; variations in the decision context during risk elicitation determine people’s preferences even when the utilities of choice options are available. Accordingly, we found evidence that decision-makers reverse their risk preferences between CE tasks with logarithmically spaced certainty (unequal number of risk-averse and risk-seeking sure options) and linearly spaced certainty (equal number of risk-averse and risk-seeking sure options). The results revealed that the effect of probability range (low and high) on preferences, predicted by prospect theory, is an artifact of the logarithmically spaced sure options. When the sure options were linearly spaced the probability range no longer influenced risk preferences, indicating a preference reversal between decision tasks. Our findings highlight a need to investigate how the predictions of descriptive decision-making theories are shaped by their risk elicitation methods.",
keywords = "Probability, Risk preferences, Preference reversals, Prospect theory, Decision context",
author = "Petko Kusev and {van Schaik}, Paul and Rose Martin and Lars Hall and Petter Johansson",
year = "2019",
month = "7",
day = "18",
doi = "10.1037/xge0000655",
language = "English",
journal = "Journal of Experimental Psychology: General",
issn = "0096-3445",
publisher = "American Psychological Association Inc.",

}

Preference Reversals During Risk Elicitation. / Kusev, Petko; van Schaik, Paul; Martin, Rose; Hall, Lars; Johansson, Petter.

In: Journal of Experimental Psychology: General, 18.07.2019.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Preference Reversals During Risk Elicitation

AU - Kusev, Petko

AU - van Schaik, Paul

AU - Martin, Rose

AU - Hall, Lars

AU - Johansson, Petter

PY - 2019/7/18

Y1 - 2019/7/18

N2 - Understanding human behavior from the perspective of normative and descriptive theories depends on human agents having stable and coherent decision-making preferences. Both utility theory (expected rational behavior; von Neumann & Morgenstern, 1947) and prospect theory with its certainty equivalent (CE) method (expected irrational behavior; Tversky & Kahneman, 1992) assume stable behavioral patterns of risk preferences. In contrast, our research pursues the opposite proposal: human preferences (rational or irrational) are not stable; variations in the decision context during risk elicitation determine people’s preferences even when the utilities of choice options are available. Accordingly, we found evidence that decision-makers reverse their risk preferences between CE tasks with logarithmically spaced certainty (unequal number of risk-averse and risk-seeking sure options) and linearly spaced certainty (equal number of risk-averse and risk-seeking sure options). The results revealed that the effect of probability range (low and high) on preferences, predicted by prospect theory, is an artifact of the logarithmically spaced sure options. When the sure options were linearly spaced the probability range no longer influenced risk preferences, indicating a preference reversal between decision tasks. Our findings highlight a need to investigate how the predictions of descriptive decision-making theories are shaped by their risk elicitation methods.

AB - Understanding human behavior from the perspective of normative and descriptive theories depends on human agents having stable and coherent decision-making preferences. Both utility theory (expected rational behavior; von Neumann & Morgenstern, 1947) and prospect theory with its certainty equivalent (CE) method (expected irrational behavior; Tversky & Kahneman, 1992) assume stable behavioral patterns of risk preferences. In contrast, our research pursues the opposite proposal: human preferences (rational or irrational) are not stable; variations in the decision context during risk elicitation determine people’s preferences even when the utilities of choice options are available. Accordingly, we found evidence that decision-makers reverse their risk preferences between CE tasks with logarithmically spaced certainty (unequal number of risk-averse and risk-seeking sure options) and linearly spaced certainty (equal number of risk-averse and risk-seeking sure options). The results revealed that the effect of probability range (low and high) on preferences, predicted by prospect theory, is an artifact of the logarithmically spaced sure options. When the sure options were linearly spaced the probability range no longer influenced risk preferences, indicating a preference reversal between decision tasks. Our findings highlight a need to investigate how the predictions of descriptive decision-making theories are shaped by their risk elicitation methods.

KW - Probability

KW - Risk preferences

KW - Preference reversals

KW - Prospect theory

KW - Decision context

UR - http://www.scopus.com/inward/record.url?scp=85069735409&partnerID=8YFLogxK

U2 - 10.1037/xge0000655

DO - 10.1037/xge0000655

M3 - Article

JO - Journal of Experimental Psychology: General

JF - Journal of Experimental Psychology: General

SN - 0096-3445

ER -