Schedule - Parallel Session 2 - Risk Attitudes 2

IDL Auditorium - 14:00 - 15:30

On the Development of Risk Aversion and Prudence: An Experimental Study With Chinese Children and Adolescents

Timo Heinrich; Jason Shachat


This study tests risk preferences of children and adolescents in a Field experiment in China. We employ a simple binary choice task that measures not only risk aversion but also prudence. We observe that the share of risk-averse and prudent choices increases from grade 3 through grade 11. This effect is driven by changes in behavior that appear mainly between grades 3 and 5 for boys and between grades 5 and 7 for girls. The correlation between the participants’ financially incentivized choices and their parents’ hypothetical choices in the same tasks is consistent with the transmission of preferences.

Timo Heinrich

Post Doc, Universitaet Duisburg-Essen

Regret Theory and Risk Attitudes

Enrico Diecidue; Jeeva Somasundaram


Regret theory (Loomes and Sugden 1982, Bell 1982) is one of the most popular descriptive theories for decision-making under uncertainty. It is an intuitive theory that captures the psychological content of anticipated regret (or rejoice) associated with decisions and naturally accommodates several violations of expected utility. Regret theory’s intuitive content and explanatory power make it suitable for real world applications (Barberis and Huang 2006, Muermann et al. 2006, Perakis and Roels 2008, Filiz-Ozbay and Ozbay 2007). Although regret theory is widely applied, the risk attitudes under that theory are not well understood. To understand risk attitudes under regret theory, the risk premium under regret should be analyzed. Bell (1983) formalized the risk premium under regret theory and showed that it consists of two distinct components: a resolution premium and a regret premium. However, Bell (1982, 1983) did not suggest an empirical method suitable for measuring these two components of the risk premium (Anand 1985). In this paper, we provide an analytical expression for both the resolution premium and the regret premium. These expressions enable”for the first time”a precise characterization of risk attitudes under regret theory and thus rigorous predictions about the risk attitudes of a regret-averse decision maker. We predict that regret-averse DMs will be risk seeking for low probabilities of gains and risk averse for high probabilities; we also postulate that risk attitudes are reinforced by feedback. We introduce a method, based on Bleichrodt et al. (2010), to measure the risk premium under regret theory empirically. This method allows to compute both the resolution and regret premiums and thereby to understand the effect of feedback on regret attitudes. Finally, we design an experiment to estimate empirically the risk premium’s components and to test our predictions about risk attitudes. The experiment serves also as a descriptive test of regret theory. The data support regret aversion as a robust empirical phenomenon. By measuring risk premium components empirically, we confirm that immediate feedback increases the regret aversion of regret-averse subjects but discover that it actually reduces regret aversion within the entire subject pool. However, we find no statistically significant support for the risk attitude predictions of regret theory. By modeling the risk attitudes and measuring resolution and regret premium empirically, we show that regret theory is a simple yet powerful framework to describe the pervasive emotion of regret and the risk attitudes associated. However the experimental results suggest that regret theory provides a partial account of risk attitudes as it captures the regret-rejoice trade-offs on the outcome scale only. Decision theorists should target their efforts in developing new models (like PRAM) to capture the regret-rejoice trade-offs also on the probability scale.

Enrico Diecidue

Professor, INSEAD

The Challenges to Measuring Risk Attitudes: Talk May Be Cheap, but Consistent

Renato Frey; Andreas Pedroni; Rui Mata; Jörg Rieskamp; Ralph Hertwig


Two different traditions of measuring people’s risk attitudes have emerged over the last decades: On the one hand, self-report measures have capitalized on people’s introspective abilities and were widely used in practice and research. On the other hand, the revealed-preference approach stipulates that only incentivized behavior elicited by means of behavioral measures is indicative of a person’s true risk attitudes. To what extent do these two traditions share their conception of the construct “risk attitudes” that they claim to measure? Moreover, numerous measures have been developed within each of these two traditions, but the typical assessment of a person’s risk attitudes merely involves a single measure. Does this imply that all of these measures capture the identical underlying construct, within but also across the two traditions? We tackled these questions by collecting a battery of risk-attitude measures (self-reports and behavioral measures) from each of 1,000 participants. The evidence suggests a clear gap between self-report and behavioral measures: The former correlated more strongly between each other as compared to the latter, and correlations between measures across traditions were weak. A general “risk factor” only emerged across self-report measures. Moreover, self-reports proved to be relatively stable across time as they may allow people to integrate across similar past experiences when they provide their ratings. In contrast, behavioral measures had lower test-retest reliability, as they may be more susceptible to the influence of situational factors. This interpretation is in line with the view that risk attitudes are constructed preferences that fluctuate across time.

Is an Uncertain Loss Always Better than a Sure Loss?

Serge Mace


Consider an individual who has just suffered from a major financial setback or from a serious health loss like a handicap or the beginning of a long-term disease. In a normal context, he should give value to any small positive probability p of getting its money back or of healing. However, various psychological studies suggest that when the individual is uncertain about the durability of the loss, it can also impede successful psychological adaptation to the loss. Is it then possible that, in some cases, an individual prefers the certainty of a health or wealth loss, to which she can adapt, rather than a small positive probability p of getting it back? We examined this question theoretically through a modified version of the Koszegi and Rabin’s (2006) model. The result depends firstly on how uncertainty affects the weights that the individual ascribes to the two possible outcomes, temporary or permanent loss, used as reference points. In the simplest case in which these weights correspond to the probabilities of these two outcomes, we show that the possibility that the loss is only temporary can reduce the expected utility of the individual i) if loss aversion is strong enough (because the individual anticipates that he will be more disappointed if her loss becomes permanent than he will be satisfied if it disappears) and ii) if is low enough and below a probability threshold that depends on the number of future periods (Intuitively, nobody will refuse a significant probability to return to her initial level of health or wealth, in particular when she can benefit from it over many future periods). The model finds some empirical support in observations showing that the beneficial effects, in terms of adaptation, of the certainty of the loss are often explicitly incorporated in the cost-benefit calculus made by people who decide to stop their efforts to regain past health, wealth, wage or fame. By isolating the necessary conditions under which an individual may turn down a small positive probability of returning to her initial better situation, it also helps explain why this paradox is limited in practice to some specific circumstances.

Serge Mace

Associate Professor, Edhec Business School