Reference Points and Risk Preferences

University Of South Florida, Tampa FL

Investigators

Abstract

How people feel about taking a risk can change based on how the risk is described. In their famous Asian disease demonstration, Amos Tversky and Daniel Kahneman showed that people tend to prefer a sure thing when treatment options are described in terms of the number of people whose lives will be saved, but that people tend to prefer to take a risk when those same people are described in terms of the number who will die from the disease. This powerful demonstration has had an enormous impact on the field of decision making, prompting literally hundreds of studies that confirm the importance of gain/loss reference points as pivotal variables influencing risky choice. Despite the ubiquitous nature of these effects, there has been relatively little serious attention to the question of why gain/loss reference points exert the influence that they do. The goal of this project is to evaluate three reasons why these reference points may be so influential in risky decision making. 1) Do reference points imply different underlying situations? One way that reference points might affect risk preferences is by causing people to make different assumptions about the underlying situation. The empirical studies in this portion of the project explore the extent to which positive and negative frames typically lead to differences in what people assume about the risky decision context. 2) Do reference points indicate implicit goals? Reference points may selectively highlight fundamentally different motivations by focusing on approaching positive outcomes as contrasted with avoiding negative outcomes. In a novel Ticket Transfer paradigm, a series of hypotheses are tested to determine whether and to what extent people are differentially sensitive to approach/avoidance goals in their responses to multi-outcome lotteries with variations in salient reference points. 3) Do reference points capture motivational predispositions? A growing body of evidence continues to reveal individual differences in the adoption of reference points, with different types of people (e.g., optimists versus pessimists) varying from one another in their typical approach to interpreting risky or uncertain situations. In this portion of the project, a measure will be developed to capture these intrinsic reference point differences both as a function of risky options and as a variable reflecting individual differences in risk attitude. The intellectual merit of this project is reflected in the innovative approach to understanding potential sources of reference dependence, with consideration of critical cognitive and motivational variables that are frequently overlooked. In addition, the work may contribute to improved risky decision making. The broader impacts of this project include intensive research training of graduate and undergraduate students, interdisciplinary publications and graduate seminars, and novel class demonstrations. Publications will be targeted to diverse audiences, and diversity among participants will be encouraged.