Risky Decision
How do you deal with risk? You could take a job that you know you will like, or risk a chance on a higher paying job that you are not sure that you will like as much. You could take the highway and get home quickly, but there is a risk of a traffic jam with a major delay, or you could take the backroad that is several miles longer but has little risk of a traffic jam. We are confronted with decisions like these throughout life. Cognitive psychologists have discovered some general patterns with how people deal with risk, which is what you will explore in this lab activity.
Scenario Choices
This lab activity consists of 12 trials each of which presents a scenario where you must choose one of two possible outcomes. You can begin a trial by pressing the spacebar. After you have read the scenario, make a choice that you are most comfortable with in each case.
Low- and High-Risk Gains and Losses
Although you may not have realized it when reading the scenarios and making choices, the results obtained from many participants have a lot to do with how things are worded and very little to do with logic. In each scenario presented, the expected outcome for each of the two choices was the same. If option A was 100% chance of gain of $100, then option B was a 50% chance at gaining $200, which had the same expected gain of $100. Expected gain is simply 0.5 (chance) times $200, which is the same $100 for option B as in option A. Alternatively, if option A was 100% chance of a loss of $50, then option B had a 50% chance of losing $100 with the same expected loss of $50. Expected loss is simply 0.5 (chance) times $100, which equals the same $50 loss for option B as in option A.
Framing Effects
How things are framed, as either a gain or loss, is a significant contributor to the pattern of findings across participants. Whether a participant chooses the risky option, which is the not “sure thing” option, depends on whether the question is worded as a gain or loss. When a choice involves a gain, with more money or lives saved, participants tend to be risk averse and choose the option that is the sure thing. But when there is a chance of loss, with loss of money or death, participants are much more willing to take a chance to avoid it; they exhibit risk-seeking when there is a chance of loss. Patterns of risk aversion and risk-seeking behavior have been replicated in many different scenarios. The scenarios in this activity can be broken down into four categories: 1) low-risk gain, 2) high-risk gain, 3) low-risk loss, and 4) high-risk loss. Do your and the other participants’ pattern of choices reflect risk aversion and risk-seeking under these different scenarios?