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Risk aversion and the sure gain preference: A test of three competing explanations
Abstract
It has long been acknowledged that decision makers prefer a sure gain to a gamble of equal expected value (EV). This risk avoidance may be explained as due to uncertainty avoidance, regret avoidance, or as self-image protection. When choosing between a gain and a gamble of equal EV, all of the above explanations lead to the same prediction; expectation of full feedback of the foregone gamble reduces risk aversion. When choosing between a loss and a gamble of equal EV, however, the uncertainty avoidance prediction diverges from that of regret aversion and self-image protection. Experiment 1 utilized a 2 (gain versus loss decision) $\times$ 2 (full versus partial feedback) within-subjects design to test these predictions. Given a loss decision, the uncertainty aversion explanation predicts less risk aversion under full rather than partial feedback. The regret aversion and self-image protection explanations predict increased risk aversion under full feedback conditions of a loss decision. The results of the experiment supported the uncertainty aversion explanation, but the regret aversion and self-image protection explanations were somewhat supported as well. Experiment 2 meant to replicate and clarify Experiment 1 and to disentangle the regret aversion and self-image protection explanations. This 2 (full versus partial feedback) $\times$ 2 (anticipated versus unanticipated justification) between-subjects $\times$ 2 (gain vs. loss decision) within-subject experiment utilized real monetary decisions rather than hypothetical decisions as in Experiment 1. Self-esteem correlated positively with risk seeking in gain decisions, supporting the self-image protection explanation. Intolerance of ambiguity correlated negatively with risk seeking in gain decisions, supporting the uncertainty aversion explanation. Manipulations of feedback and justification proved too weak to yield significant results. Analysis of decision makers' reactions to sub-optimal choices yielded support for the self-image protection explanation. High self-esteem subjects did not report regretting their choices while those with low self-esteem suspected the results were rigged. The regret aversion explanation was not supported; few reported a desire to undo their decision.
Subject Area
Occupational psychology|Cognitive therapy|Social psychology
Recommended Citation
Johanson, John Carl, "Risk aversion and the sure gain preference: A test of three competing explanations" (1998). ETD collection for University of Nebraska-Lincoln. AAI9902965.
https://digitalcommons.unl.edu/dissertations/AAI9902965