July 24, 2017, by Suzanne
The role of information search and its influence on risk preferences
“People overweight the likelihood of rare events”.
This phrase distils the conclusions of most lab experiments studying risky behaviour. In these experiments subjects are asked to evaluate “lotteries” whose properties (i.e. the full list of outcomes and their associated likelihoods) are explicitly described. However, a criticism of this approach is that in everyday life, such “descriptions” are not often available. To explore more naturalistic situations, cognitive psychologists have recently come up with an alternative experimental paradigm that asks subjects to search information about risky prospects by themselves. Unlike the standard “decisions from description”, behaviour in “decisions from experience” is consistent with underweighting the likelihood of rare events.
Orestis revisited this `Description–Experience gap’ by conducting a lab-experiment where subjects received information about risky prospects in one of the following three conditions:
- from descriptions
- from experience with a ‘history table’ recording previous events
- from experience without a ‘history table’.
The history table proved influential during information search, drawing subjects’ attention away from elements such as a lottery’s variance or the time-period and steering it towards the table’s properties, such as its max capacity of recorded events.
The analysis of risky choices across treatments revealed a significant ‘Description-Experience gap’ which is mitigated by the presence of the history table. In this version of the “gap”, subjects overweight the likelihood of rare events when making decisions from experience but less so compared to when making choices from descriptions.
The paper is forthcoming in Theory and Decision and is available online.
Orestis Kopsacheilis is a CeDEx PhD student at the University of Nottingham, and received support from NIBS Professors, Robin Cubitt and Chris Starmer, as well as financial support from NIBS via its ‘small grants’ scheme, which was used to fund subject payments.