CAREER: The systematic instability of risk preferences in economic decision-making

University Of Southern California, Los Angeles CA

Investigators

Abstract

Decision-making under risk affects a wide array of phenomena from retirement savings decisions, to entrepreneurial start-up rates, to the pricing of financial assets. One well-known feature of existing data is that people shift from risk seeking in some situations (e.g., buying a lottery ticket), to risk aversion in others (e.g., purchasing insurance). To explain this basic instability of risk taking, economists have recently proposed new theories in which attention directly shapes risk-taking. However, empirical work that tests these new attention-based theories has lagged substantially due to constraints on data availability. In this CAREER proposal, this problem is addressed by collecting direct measures of attention in experiments using eye-tracking and neural data to inform the mathematical modeling of behavior and decision processes. The work will also use proprietary data from the field to test the generalizability of the main findings from the controlled laboratory experiments. Ultimately, the goal of this work is to integrate research on attention into standard economic analyses, which will dramatically increase explanatory power of current economic models and inform public policy. The educational component of this project will target several different levels of education from middle school students to PhD candidates. The PI will create a new undergraduate course in neuroeconomics, offer summer research internships to undergraduates, and train a business school PhD student in cutting edge methods in behavioral and neuroeconomics. There will also be a significant outreach component in which the PI will work with a STEM elementary school to broaden access to basic principles of behavioral economics. The overall objective of the proposed research is to develop novel experimental tests of attention-based theories of economic choice. There are three specific research goals. First, the PI will conduct an experimental test, using eye tracking data, to characterize the attention function that maps monetary payoffs into measures of attention. Under several of the theories to be tested, there is an assumption that attention to monetary payoffs is deployed in a manner similar to how attention is allocated to sensory stimuli (e.g., a visual photo). The experiment will be designed to test these properties, which will provide much needed guidance for a rapidly growing theoretical literature. Second, the PI will experimentally test for broader sources of attention allocation to payoffs -- including visual properties of the choice set. The PI will also test for feedback loops between attention and risk preferences. Third, the PI will test whether the attention mechanism that affects risk taking in a controlled laboratory setting can be generalized to high-stakes environments in the field. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.