Direct Risk Aversion Evidence From Risky Prospects Valued Below Their Worst Outcome

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Operations, Information and Decisions Papers
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judgment
decision making
scientific communication
fake data
data sharing
data posting
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Other Psychology
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Simonsohn, Uri
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Why would people pay more for a $50 gift certificate than for the opportunity to receive a gift certificate worth either $50 or $100, with equal probability? This article examines three possible mechanisms for this recently documented uncertainty effect (UE): First, awareness of the better outcome may devalue the worse one. Second, the UE may have arisen in the original demonstration of this effect because participants misunderstood the instructions. Third, the UE may be due to direct risk aversion, that is, actual distaste for uncertainty. In Experiment 1, the UE was observed even though participants in the certainty condition were also aware of the better outcome; this result eliminates the first explanation. Experiment 2 shows that most participants understand the instructions used in the original study and that the UE is not caused by the few who do not. Overall, the experiments demonstrate that the UE is robust, large (prospects are valued at 65% of the value of the worse outcome), and widespread (at least 62% of participants exhibit it).

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2009-06-01
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Psychological Science
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