Behavioral research has revealed how normal human cognitive processes can tend to lead us astray. But do these affect economic researchers, ourselves? This article explores the consequences of stereotyping and confirmation bias using a sample of published articles from the economics literature on gender and risk aversion. The results demonstrate that the supposedly ‘robust’ claim that ‘women are more risk averse than men’ is far less empirically supported than has been claimed. The questions of how these cognitive biases arise and (...) why they have such power are discussed, and methodological practices that may help to attenuate these biases are outlined. (shrink)

This article presents the results of an experiment that completely measures the utility function and probability weighting function for different positive and negative monetary outcomes, using a representative sample of N = 1,935 from the general public. The results confirm earlier findings in the lab, suggesting that utility is less pronounced than what is found in classical measurements where expected utility is assumed. Utility for losses is found to be convex, consistent with diminishing sensitivity, and the obtained loss-aversion coefficient of (...) 1.6 is moderate but in agreement with contemporary evidence. The estimated probability weighting functions have an inverse-S shape and they imply pessimism in both domains. These results show that probability weighting is also an important phenomenon in the general population. Women and lower educated individuals are found to be more risk averse, in agreement with common findings. In contrast to previous studies that ascribed gender differences in risk attitudes solely to differences in the degree utility curvature, however, our results show that this finding is primarily driven by loss aversion and, for women, also by a more pessimistic psychological response toward the probability of obtaining the best possible outcome. (shrink)

This article presents the results of an experiment that completely measures the utility function and probability weighting function for different positive and negative monetary outcomes, using a representative sample of N = 1,935 from the general public. The results confirm earlier findings in the lab, suggesting that utility is less pronounced than what is found in classical measurements where expected utility is assumed. Utility for losses is found to be convex, consistent with diminishing sensitivity, and the obtained loss-aversion coefficient of (...) 1.6 is moderate but in agreement with contemporary evidence. The estimated probability weighting functions have an inverse-S shape and they imply pessimism in both domains. These results show that probability weighting is also an important phenomenon in the general population. Women and lower educated individuals are found to be more risk averse, in agreement with common findings. In contrast to previous studies that ascribed gender differences in risk attitudes solely to differences in the degree utility curvature, however, our results show that this finding is primarily driven by loss aversion and, for women, also by a more pessimistic psychological response toward the probability of obtaining the best possible outcome. (shrink)

This paper examines whether bank capital ratios and default risk are associated with the gender of the bank’s Chief Executive Officer and Chairperson of the board. Given the documented gender-based differences in conservatism and risk tolerance, we postulate that female CEOs and board Chairs should assess risks more conservatively, and thereby hold higher levels of equity capital and reduce the likelihood of bank failure during periods of market stress. Using a large panel of U.S. commercial banks, we document that banks (...) with female CEOs hold more conservative levels of capital after controlling for the bank’s asset risk and other attributes. Furthermore, while neither CEO nor Chair gender is related to bank failure in general, we find strong evidence that smaller banks with female CEOs and board Chairs were less likely to fail during the financial crisis. Overall, our findings are consistent with the view that gender-based behavioral differences may affect corporate decisions. (shrink)

This study examines whether truth-telling in the form of honest reporting is associated with cognitive moral development. Conventional agency theory assumes that people are self-interested and willing to tell a lie to increase their personal payoffs, while recent empirical evidence shows that some people give up monetary rewards to tell the truth. The social psychology literature suggests that cognitive moral development influences individuals’ ethical decisions. We carried out an experiment whereby participants submitted managerial reports in which truth-telling decreased their monetary (...) payoff. Despite the fact that their decisions were not subject to monitoring, auditing, or reputation effects, some participants reported honestly or partially honestly. We find the relationship between honest reporting and cognitive moral development to be both positive and linear. Compared with those at lower stages of cognitive moral development, participants at higher stages of cognitive moral development were more likely to submit an honest report and give up potential monetary gains from lying. We further examine the economic impact of honest reporting on the firm’s profit. With the assumption of self-interest and profit maximization, Antle and Eppen suggest that a contract with a hurdle-rate feature reduces managers’ information rent. We find that in comparison with the expected outcome of a hurdle contract, the firm can yield higher profits with a trust contract by hiring managers with a P-score higher than 16.67. (shrink)

Psychologists and philosophers who pose moral dilemmas to understand moral judgment typically specify outcomes as certain to occur in them. This contrasts with real-life moral decision-making, which is almost always infused with probabilities (e.g., the probability of a given outcome if an action is or is not taken). Seven studies examine sensitivity to the size and location of shifts in probabilities of outcomes that would result from action in moral dilemmas. We find that moral judgments differ between actions that result (...) in an equal increase in probability of harm (equal size), but have different end-states (e.g., an increase in harm probability from 25% to 50% or from 50% to 75%). This deviation from expected value is robust under separate evaluation, and increases when the comparison between shifts is made explicit under simultaneous evaluation. Consistent with the centrality of perceived harm in some models of moral judgment, perceived harm partially mediates sensitivity to location of harm probability shift. Unlike for shifts in harm probabilities, participants are insensitive to the location of shifts in probability of beneficial outcomes. They are also insensitive to the location of shifts in probability of analogous monetary losses and gains, suggesting an asymmetry between harm and benefit in moral reasoning, as well as an asymmetry between moral and monetary decision-making more broadly. Implications for normative philosophical theory and moral psychological theory, as well as practical applications, are discussed. (shrink)

In comparing different risk elicitation methods under the assumptions of expected utility theory, previous studies have found significant differences in the elicited risk attitudes. This paper extends this line of research to consider cumulative prospect theory by comparing risk attitudes and probability weightings determined using two elicitation methods: the method by Tanaka et al. :557–571, 2010; TCN method) and the method by Wakker and Deneffe :1131–1150, 1996; WD method). We demonstrate that the two methods reveal significantly different mean values for (...) the measured risk attitudes. Participants are classified on average as moderately risk-averse using the TCN method, whereas the same individuals are classified as nearly risk-neutral using the WD method. Moreover, we find that on average, participants overweight low probabilities and underweight high probabilities to a greater extent with the WD method than with the TCN method. Therefore, the different elicitation methods, that both consider probability weighting, can lead to different measured values of risk attitude and probability weighting. (shrink)

Economic discourse—or the lack of it—about fear is gendered on at least three fronts. First, while masculine-associated notions of reason and mind have historically been prioritized in mainstream economics, fear—along with other emotions and embodiment—has tended to be culturally associated with femininity. Research on cognitive “gender schema,” then, may at least partly explain the near absence of discussions of fear within economic research. Second, in the extremely rare cases where fear and emotion are alluded to within the contemporary economics literature (...) on risk aversion, there is a tendency to strongly associate them with women. Finally, historians and philosophers of science have suggested that the failure to consider the full range of human emotions and experience may be itself rooted in fear: a fear of the feminine. This aversion to discussing fear—especially fear as experienced by men—contributes to serious problems, especially in regard to financial market instability and ecological threats. (shrink)

In the theoretical description of prospect theory, distinct sets of parameters can control the curvature of the value function and the shape of the probability weighting function. There is one for the gain domain and one for the loss domain. However, in most estimations, behaviour over losses is assumed to perfectly reflect behaviour over gains, through a unique set of parameters. We examine the consequences of relaxing this simplifying assumption in the context of Tanaka et al.’s (Am Econ Rev 100(1):557–571, (...) 2010) risk-elicitation procedure based on multiple price lists. We show that subjects’ behaviour for gains is mostly reflected for losses at the aggregate and individual levels, and is consistent with the distinctive prospect theory fourfold pattern. Reflection is only partial as the mean curvature of the value function is slightly less convex for losses than it is concave for gains. These results are robust to a high-stake context. However, we demonstrate that assuming reflection can have huge consequences on loss-aversion measures. Incidentally, we also highlight the existence of a strong, negative and persistent pure loss-frame effect on elicited loss aversion. We recommend that future practitioners and modellers are particularly cautious about the loss-aversion values they obtain or use because these are especially sensitive to parametric assumptions and framing. (shrink)

We find suggestive evidence that emotional balance has an impact on probability weighting incremental to demographic controls. Specifically, low negative affectivity (implying high emotional balance) tends to be a characteristic of those whose probability weighting functions exhibit lower curvature and more neutral elevation. In other words, emotional balance seems to push people in the direction of normative expected utility theory.

Original and cumulative prospect theory differ in the composition rule used to combine the probability weighting function and the value function. We test the predictive power of these composition rules by performing a novel out-of-sample prediction test. We apply estimates of prospect theory’s weighting and value function obtained from two-outcome cash equivalents, a domain where original and cumulative prospect theory coincide, to three-outcome cash equivalents, a domain where the composition rules of the two theories differ. Although both forms of prospect (...) theory predict three-outcome cash equivalents very well, at the aggregate level, we find small but systematic under-prediction of cash equivalents for cumulative prospect theory and small but systematic over-prediction of cash equivalents for original prospect theory. We also observe substantial heterogeneity across subjects and types of gambles, some of which is accounted for by differences in the curvature and elevation of the weighting function across individuals. We also find differences in prediction related to whether the worst outcome is zero or non-zero. (shrink)

This paper investigates the behavior of contestants in the game show “Quiz Taxi” when faced with the decision whether to bet the winnings they have acquired on a final “double or nothing” question. The decision in this natural experiment is made by groups of two or three persons. This setup enables the decision-making process to be studied with regard to group and communication characteristics. The contestants show fairly risk averse behavior. There is also a significant heterogeneity in attitude to risk. (...) In particular, all-female groups are much less likely to go for the risky option. Furthermore, decision-making behavior appears to vary across differently composed groups and prior performance. The study also documents the importance of discussions: The propensity to gamble increases with discussion length, and the correlation between communication content and the final choice is strong, indicating that time and subjective context are important features of decisions made under risk. (shrink)

In this paper, we analyse higher-order risky choices by the representative cumulative prospect theory (CPT) decision maker from three alternative reference points. These are the status quo, average payout and maxmin. The choice tasks we consider in our analysis include binary risks, and are the ones employed in the experimental literature on higher order risk preferences. We demonstrate that the choices made by the representative subject depend on the reference point. If the reference point is the status quo and the (...) lottery choices exhibit symmetric risk, we demonstrate that there is no third order reflection effect of lottery choices but there is a fourth order reflection effect. When the average payout is the reference point, we demonstrate that any third or fourth order lottery choice is possible dependent upon the lottery payoffs. However, under the assumption of maxmin reference point, the risky choices are prudent and temperate. In addition to these results, our analysis reveals that the representative CPT subject can choose combinations of second with third and fourth order risky options that differ from those in other major models of decision under risk. We contrast our theoretical predictions with the empirical results reported in the literature on higher order risk preferences and are able to reconcile some conflicting experimental evidence. (shrink)

Cocaine use disorder is associated with maladaptive decision-making behavior, which strongly contributes to the harmful consequences of chronic drug use. Prior research has shown that cocaine users exhibit impaired neuropsychological test performances, particularly with regard to attention, learning, and memory but also in executive functions such as decision-making and impulse control. However, to what extent cocaine users show impaired decision-making under risk without feedback has not yet been investigated systematically. Therefore, to examine risk-taking behavior, 31 chronic cocaine users and 26 (...) stimulant-naïve healthy controls who were part of the Zurich Cocaine Cognition Study, performed the Randomized Lottery Task (RALT) with winning lotteries consisting of an uncertain and a certain prospect. Results revealed that risky decisions were associated with male sex, increased cocaine use in the past year, higher cocaine concentrations in the hair, and younger age. In addition, higher levels of cocaine in the hair and cumulative lifetime consumption were associated with risky decisions, whereas potentially confounding factors including cognition and psychiatric symptoms had no significant effect. Taken together, our results indicate that cocaine users who increased their consumption over a period of 1 year show deficits in the processing of risky information accompanied with increased risk-taking. Future research should analyse whether risky decisions could potentially serve as a prognostic marker for cocaine use disorder. (shrink)

In this article, we elicit both individuals’ and couples’ preferences assuming prospect theory (PT) as a general theoretical framework for decision under risk. Our experimental method, based on certainty equivalents, allows to infer measurements of utility and probability weighting at the individual level and at the couple level. Our main results are twofold. First, risk attitude for couples is compatible with PT and incorporates deviations from expected utility similar to those found in individual decision making. Second, couples’ attitudes towards risk (...) are found to be consistent with a mix of individual attitudes, women being more influent on couples’ preferences at low probability levels. (shrink)

This study uses the television show Cash Cab as a natural experiment to investigate gender differences in decision making under uncertainty. As expected, men are much more likely to accept the end-of-game gamble than are women, but men and women appear to weigh performance variables differently when relying on subjective probabilities. At best men base their risky decisions on general aspects of their previous “good” play (not all of which is relevant at the time the decision is made) and at (...) worst fail to condition their risky decisions on any of the relevant information available to them. In sharp contrast, women appear to consider all of the information available to them, including previous “poor” play as well as their most recent confident “good” play, which, by design, is likely the most relevant information to consider. (shrink)