Risk attitude in decision making: A clash of three approaches

Abstract

We evaluate the consistency of different constructs affecting risk attitude in individuals’ experiential decisions across different levels of risk. Three major views concerning the psychological constructs that underlie risk attitude are contrasted. The first is the classical economic approach which views risk as the sensitivity to differences in variance. The second is the latent components approach suggesting the importance of sensitivity to losses and diminishing sensitivity to marginal increases in payoffs. The third approach, risk acceptance, relates to the willingness to accept probable outcomes over certainty. The results of three studies indicate that: (1) Individuals do not exhibit consistency in their sensitivity to variance (2) Across domains individuals are consistent when deciding between constant versus probable outcomes, refuting the prediction based on diminishing sensitivity. (3) Risk acceptance entails different psychological constructs when the decision involves co-occurring gains and losses. The results are modeled with a quantitative index of subjective risk.


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