The role of information search and its influence on risk preferences

Kopsacheilis, Orestis (2017) The role of information search and its influence on risk preferences. Theory and Decision . ISSN 1573-7187

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Abstract

According to the ‘Description–Experience gap’ (DE gap), when people are provided with the descriptions of risky prospects they make choices as if they overweight the probability of rare events; but when making decisions from experience after exploring the prospects’ properties, they behave as if they underweight such probability. This study revisits this discrepancy while focusing on information-search in decisions from experience. We report findings from a lab-experiment with three treatments: a standard version of decisions from description and two versions of decisions from experience: with and without a ‘history table’ recording previously sampled events. We find that people sample more from lotteries with rarer events. The history table proved influential; in its absence search is more responsive to cues such as a lottery’s variance while in its presence the cue that stands out is the table’s maximum capacity. Our analysis of risky choices captures a significant DE gap which is mitigated by the presence of the history table. We elicit probability weighting functions at the individual level and report that subjects overweight rare events in experience but less so than in description. Finally, we report a measure that allows us to compare the type of DE gap found in studies using choice patterns with that inferred through valuation and find that the phenomenon is similar but not identical across the two methods.

Item Type: Article
Keywords: Decisions from experience; Decisions from description; Risk preferences; Cumulative prospect theory; Uncertainty; Source method; Information search
Schools/Departments: University of Nottingham, UK > Faculty of Social Sciences > School of Economics
Identification Number: 10.1007/s11238-017-9623-y
Depositing User: Eprints, Support
Date Deposited: 26 Mar 2018 13:05
Last Modified: 28 Mar 2018 01:38
URI: http://eprints.nottingham.ac.uk/id/eprint/50687

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