In this paper, I argue for a new normative theory of rational choice under risk, namely expected comparative utility (ECU) theory. I first show that for any choice option, a, and for any state of the world, G, the measure of the choiceworthiness of a in G is the comparative utility (CU) of a in G—that is, the difference in utility, in G, between a and whichever alternative to a carries the greatest utility in G. On the basis of this (...) principle, I then argue that for any agent, S, faced with any decision under risk, S should rank his or her decision options (in terms of how choiceworthy they are) according to their comparative expected comparative utility (CECU) and should choose whichever option carries the greatest CECU. For any option, a, a’s CECU is the difference between its ECU and that of whichever alternative to a carries the greatest ECU, where a’s ECU is a probability‐weighted sum of a’s CUs across the various possible states of the world. I lastly demonstrate that in some ordinary decisions under risk, ECU theory delivers different verdicts from those of standard decision theory. (shrink)

In the recent literature on episodic memory, there has been increasing recognition of the need to provide an account of its adaptive function. In this context, it is sometimes argued that episodic memory is critical for certain forms of decision making about the future. We criticize existing accounts that try to give episodic memory a role in decision making, before giving a novel such account of our own. This turns on the thought of a link between episodic memory and the (...) emotion of regret. We discuss how both experienced and anticipated regret can have a distinctive influence on decision making, and argue that the ability to recollect past events in episodic memory underpins the capacity to engage in the sophisticated types of mental time travel recruited in experiencing and anticipating regret. (shrink)

Incorporation of the behavioral issues of the decision maker (DM) is among the aspects that each Multicriteria Decision Making (MCDM) method implicitly or explicitly takes into account. As postulated by regret theory, the feelings of regret and rejoice are among the behavioral issues associated with the entire decision making process. Within the context of MCDM, the DM may feel regret, when the chosen alternative is compared with another one having at least one better criterion value. PROMETHEE II is a widely (...) known MCDM method that makes no explicit incorporation of regret attitude of the DM. In this paper, we elaborate on the applicability of regret theory to MCDM context. In particular, we investigate the findings of regret theory and explore the parallel between regret theory and PROMETHEE II method. Relying on the concepts of regret theory, we demonstrate how a decision that is made using a PROMETHEE II based outranking method conforms to the regret attitude of the DM. (shrink)

Regret and disappointment have in common the fact that they are experienced when the outcome of a decision is unfavourable: They both concern “what might have been”, had things been different. However, some regret and disappointment theorists regard the differences between these emotions as important, arguing that they differ with respect to the conditions under which they are felt, and how they affect decision making. The goal of the present research was to examine whether and how these emotions also differ (...) with respect to the way in which they are experienced. Participants were asked torecall aninstance of intense regret or disappointment andto indicate what they felt, thought, felt like doing, did, and were motivated to do during this experience (cf. Roseman, Wiest, & Swartz, 1994). Significant differences between regret and disappointment were found in every category. These differences were most pronounced for “action tendencies” (what participants felt like doing) and “emotivations” (what they were motivated to do). These results suggest that the two emotions have differential implications for future behaviour. (shrink)

In many real-world gambles, a non-trivial amount of time passes before the uncertainty is resolved but after a choice is made. An individual may have a preference between gambles with identical probability distributions over final outcomes if they differ in the timing of resolution of uncertainty. In this domain, utility consists not only of the consumption of outcomes, but also the psychological utility induced by an unresolved gamble. We term this utility anxiety. Since a reflective decision maker may want to (...) include anxiety explicitly in analysis of unresolved lotteries, a multiple-outcome model for evaluating lotteries with delayed resolution of uncertainty is developed. The result is a rank-dependent utility representation (e.g., Quiggin, 1982), in which period weighting functions are related iteratively. Substitution rules are proposed for evaluating compound temporal lotteries. The representation is appealing for a number of reasons. First, probability weights can be interpreted as the cognitive attention allocated to certain outcomes. Second, the model disaggregates strength of preference from temporal risk aversion and thus provides some insight into the old debate about the relationship between von Neumann–Morgenstern utility functions and strength of preference value functions. (shrink)

The rule to maximize expected utility is intended for decisions where options involve risk. In those decisions the decision maker's attitude toward risk is important, and the rule ought to take it into account. Allais's and Ellsberg's paradoxes, however, suggest that the rule ignores attitudes toward risk. This suggestion is supported by recent psychological studies of decisions. These studies present a great variety of cases where apparently rational people violate the rule because of aversion or attraction to risk. Here I (...) attempt to resolve the issue concerning expected utility and risk. I distinguish two versions of the rule to maximize expected utility. One adopts a broad interpretation of the consequences of an option and has great intuitive appeal. The other adopts a narrow interpretation of the consequences of an option and seems to have certain technical and practical advantages. I contend that the version of the rule that interprets consequences narrowly does indeed neglect attitudes toward risk. That version of the rule excludes the risk involved in an option from the consequences of the option and, contrary to what is usually claimed, cannot make up for this exclusion through adjustments in probability and utility assignments. I construct a new, general argument that establishes this in a rigorous way. On the other hand, I contend that the version of the rule that interprets consequences broadly takes account of attitudes toward risk by counting the risk involved in an option among the consequences of the option. I rebut some objections to this version of the rules, in particular, the objection that the rule lacks practical interest. Drawing upon the literature on 'mean-risk' decision rules, I show that this version of the rule can be used to solve some realistic decision problems. (shrink)

It is natural for humans to judge the outcome of a decision under uncertainty as a percentage of an ex-post optimal performance. We propose a robust decision-making framework based on a relative performance index. It is shown that if the decision maker’s preferences satisfy quasisupermodularity, single-crossing, and a nondecreasing log-differences property, the worst-case relative performance index can be represented as the lower envelope of two extremal performance ratios. The latter is used to characterize the agent’s optimal robust decision, which has (...) implications both computationally and for obtaining closed-form solutions. We illustrate our results in an application which compares the performance of relative robustness to solutions that optimize worst-case payoffs, maximum absolute regret, and expected payoffs under a Laplacian prior. (shrink)

A decision under ‘complete uncertainty’ is one where the decision maker knows the set of possible outcomes for each decision, but cannot assign probabilities to those outcomes. This way, the problem of ranking decisions is reduced to a problem of ranking sets of outcomes. All rankings that have emerged in the literature in this domain imply transitivity. In the current study, transitivity is subjected to an empirical evaluation in two experiments, where subjects are asked to choose between sets of monetary (...) consequences. After analysis with a Bayes Factor, very few violations of transitivity were found. It can be concluded that transitivity seems a plausible condition for the ranking of sets of monetary consequences. (shrink)

It is a familiar argument that advocates accommodating the so-called paradoxes of decision theory by abandoning the “independence” postulate. After all, if we grant that choice reveals preference, the anomalous choice patterns of the Allais and Ellsberg problems violate postulate P2 of Savage's system. The strategy of making room for new preference patterns by relaxing independence is adopted in each of the following works: Samuelson, Kahneman and Tversky's “Prospect Theory”, Allais and Hagen, Fishburn, Chew and MacCrimmon, McClennen, and in closely (...) argued essays by Machina. (shrink)

The devices with which experimental economists account for and justify their own and their opponents’ views are investigated by examining transcripts of interviews with two participants in experimental economics. The earlier investigations of natural scientists’ discourse provide material for comparisons. The results suggest that in assessing an opponent’s deviating view experimentalists in economics can be more cautious than natural scientists to characterize their opponents as influenced by personal and social factors. Indeed, they seem to admit that to some extent both (...) their own and their opponents’ behavior involves these influences. Regarding the development of disputes, the respondents constructed accounts where general optimism concerning the ability of empirical arguments to resolve disputes was linked with an idea of dialogues between theorists and experimentalists as vehicles of progress. (shrink)

(2013). Why humans are (sometimes) less rational than other animals: Cognitive complexity and the axioms of rational choice. Thinking & Reasoning: Vol. 19, No. 1, pp. 1-26. doi: 10.1080/13546783.2012.713178.

The article presents an Internet experiment where subjects sequentially bid for basic gifts and binary-lotteries on these gifts in incentive compatible Vickrey auctions. Subjects exhibit uniformly pessimistic prize-weighting in spite of precautions to reduce suspicion and prohibit collusion. The bids for lotteries are close to the minimal payable value, even when the probability of obtaining a better prize is larger than 50%. Prize-weighting becomes even more conservative as the distance in value of payable prizes increases. The twofold aversive affect appears (...) for three distinct groups of students; we demonstrate, however, that the same subjects overweight small win-probabilities in standard binary-choice. (shrink)

An unprocessed risk is a collection of simple lotteries with a reduction-rule that describes the actual-payoff to the decision-maker as a function of realized lottery outcomes. Experiments reveal that the willingness to pay for unprocessed risks is consistently biased toward the payoff-level in the unprocessed representation. The anchoring-to-frame bias in cases of positive framing is significantly weaker than in cases of negative framing suggesting that rational negativity bias may reflect in asymmetric violations of rationality.

By the late 1990s, several converging trends in economics, psychology, and neuroscience had set the stage for the birth of a new scientific field known as “neuroeconomics”. Without the availability of an extensive variety of experimental designs for dealing with individual and social decision-making provided by experimental economics and psychology, many neuroeconomics studies could not have been developed. At the same time, without the significant progress made in neuroscience for grasping and understanding brain functioning, neuroeconomics would have never seen the (...) light of day. The paper is an overview of the main significant advances in the knowledge of brain functioning by neuroscience that have contributed to the emergence of neuroeconomics and its rise over the past two decades. These advances are grouped over three non-independent topics referred to as the “emo-rational” brain, “social” brain, and “computational” brain. For each topic, it emphasizes findings considered as critical to the birth and development of neuroeconomics while highlighting some of prominent questions about which knowledge should be improved by future research. In parallel, it shows that the boundaries between neuroeconomics and several recent sub-fields of cognitive neuroscience, such as affective, social, and more generally, decision neuroscience, are rather porous. (shrink)

People often face preferential decisions under risk. To further our understanding of the cognitive processes underlying these preferential choices, two prominent cognitive models, decision field theory (DFT; Busemeyer & Townsend, 1993) and the proportional difference model (PD; González‐Vallejo, 2002), were rigorously tested against each other. In two consecutive experiments, the participants repeatedly had to choose between monetary gambles. The first experiment provided the reference to estimate the models’ free parameters. From these estimations, new gamble pairs were generated for the second (...) experiment such that the two models made maximally divergent predictions. In the first experiment, both models explained the data equally well. However, in the second generalization experiment, the participants’ choices were much closer to the predictions of DFT. The results indicate that the stochastic process assumed by DFT, in which evidence in favor of or against each option accumulates over time, described people’s choice behavior better than the trade‐offs between proportional differences assumed by PD. (shrink)

In this paper we experimentally investigate the disparity between willingness-to-accept (WTA) and willingness-to-pay (WTP) for risky lotteries. The direction of the income effect is reversed by endowing subjects with the highest price of a lottery when asking the WTP question. Our results show that the income effect is too small to be the only source of the disparity. Since the disparity concentrates on a subsample of subjects, parametric and nonparametric tests of the WTA-WTP ratio may lead to contradictory results. The (...) disparity is significantly reduced when background risk is introduced. That is, putting subjects always into a risky position could improve the contingent valuation method, which is often concerned with the assessment of risky situations such as health risks, automobile safety, etc. (shrink)

In most forms of evaluation the benefits of preventive health care are narrowly defined in terms of reductions in future morbidity and mortality. Thus it is normally assumed that it is the final health gains alone which bear utility. This discounts the possibility that individuals may derive utility from the process of health care and other outcomes as well as the end health states. Attributes such as anxiety, reassurance, autonomy, regret and hope provide potential benefits or disbenefits in addition to (...) health gains. This paper explores the concept of process utility in the specific context of preventive goods. Characteristics such as information, awareness and autonomy are examined for two preventive goods—hip protectors and mammographic screening. If individuals trade off process attributes for final health outcomes, then to ignore process utility may lead to a sub-optimal allocation of resources. (shrink)

The understanding of decision-making systems has come together in recent years to form a unified theory of decision-making in the mammalian brain as arising from multiple, interacting systems (a planning system, a habit system, and a situation-recognition system). This unified decision-making system has multiple potential access points through which it can be driven to make maladaptive choices, particularly choices that entail seeking of certain drugs or behaviors. We identify 10 key vulnerabilities in the system: (1) moving away from homeostasis, (2) (...) changing allostatic set points, (3) euphorigenic signals, (4) overvaluation in the planning system, (5) incorrect search of situation-action-outcome relationships, (6) misclassification of situations, (7) overvaluation in the habit system, (8) a mismatch in the balance of the two decision systems, (9) over-fast discounting processes, and (10) changed learning rates. These vulnerabilities provide a taxonomy of potential problems with decision-making systems. Although each vulnerability can drive an agent to return to the addictive choice, each vulnerability also implies a characteristic symptomology. Different drugs, different behaviors, and different individuals are likely to access different vulnerabilities. This has implications for an individual's susceptibility to addiction and the transition to addiction, for the potential for relapse, and for the potential for treatment. (shrink)

In our target article, we proposed that addiction could be envisioned as misperformance of a decision-making machinery described by two systems (deliberative and habit systems). Several commentators have argued that Pavlovian learning also produces actions. We agree and note that Pavlovian action-selection will provide several additional vulnerabilities. Several commentators have suggested that addiction arises from sociological parameters. We note in our response how sociological effects can change decision-making variables to provide additional vulnerabilities. Commentators generally have agreed that our theory provides (...) a framework within which to site addiction and treatment, but additional work will be needed to determine whether our taxonomy will help identify and treat subpopulations within the addicted community. (shrink)

Three experiments investigated the contrasting predictions of the evolutionary and decision-theoretic approaches to deontic reasoning. Two experiments embedded a hazard management (HM) rule in a social contract scenario that should lead to competition between innate modules. A 3rd experiment used a pure HM task. Threatening material was also introduced into the antecedent, p, of a deontic rule, if p then must q. According to the evolutionary approach, more HM responses (Cosmides & Tooby, 2000) are predicted when p is threatening, whereas (...) decision theory predicts fewer. All 3 experiments were consistent with decision theory. Other theories are discussed, and it is concluded that they cannot account for the behavior observed in these experiments. (shrink)

The increasing availability of passively observed data has yielded a growing interest in “data fusion” methods, which involve merging data from observational and experimental sources to draw causal conclusions. Such methods often require a precarious tradeoff between the unknown bias in the observational dataset and the often-large variance in the experimental dataset. We propose an alternative approach, which avoids this tradeoff: rather than using observational data for inference, we use it to design a more efficient experiment. We consider the case (...) of a stratified experiment with a binary outcome and suppose pilot estimates for the stratum potential outcome variances can be obtained from the observational study. We extend existing results to generate confidence sets for these variances, while accounting for the possibility of unmeasured confounding. Then, we pose the experimental design problem as a regret minimization problem subject to the constraints imposed by our confidence sets. We show that this problem can be converted into a concave maximization and solved using conventional methods. Finally, we demonstrate the practical utility of our methods using data from the Women’s Health Initiative. (shrink)

In Richard Bradley’s book, Decision Theory with a Human Face, we have selected two themes for discussion. The first is the Bolker-Jeffrey theory of decision, which the book uses throughout as a tool to reorganize the whole field of decision theory, and in particular to evaluate the extent to which expected utility theories may be normatively too demanding. The second theme is the redefinition strategy that can be used to defend EU theories against the Allais and Ellsberg paradoxes, a strategy (...) that the book by and large endorses, and even develops in an original way concerning the Ellsberg paradox. We argue that the BJ theory is too specific to fulfil Bradley’s foundational project and that the redefinition strategy fails in both the Allais and Ellsberg cases. Although we share Bradley’s conclusion that EU theories do not state universal rationality requirements, we reach it not by a comparison with BJ theory, but by a comparison with the non-EU theories that the paradoxes have heuristically suggested. (shrink)

This article explores how experienced regret and relief evoked in a risky gambling task influence subsequent intertemporal pro-social behavior. We apply a dictator game experiment with delayed rewards to investigate the effect on donating behavior by simultaneously the time delay when the recipient accepts the donation and the emotions experienced by the participant. We examine this effect using a choice titration procedure. The results reveal that independent of the prior experienced emotions, participants’ donations decrease as the time delay rises; the (...) hyperbolic model provides a better explanation of this finding. Significantly, experienced regret impacts the shape of the social discount function with delayed rewards, which is reflected in notably different discount rates. Participants who experienced regret exhibit a lower discount rate than those in the relief condition. Note that this distinct type of generosity differs significantly at the 14-day delay but not at the shortest and longest. It follows that regret can promote future altruism and intertemporal pro-social behavior, depending on the delay. (shrink)

Informed consent to medical procedures tends to be construed in terms of principle-based ethics and one or other form of expected utility theory. These constructions leave problems created by imperfect communication; subjective distress and other emotions; imperfect knowledge and incomplete understanding; complexity, and previous experience or the lack of it. There is evidence that people giving consent to therapy or to research participation act intuitively and assess consequences holistically, being influenced more by the magnitude of outcomes than their probability. People (...) avoid decisions they may regret, but modern regret theory has received little attention in discussions of informed consent. This essay suggests ways in which regret may be acknowledged in the consent process and in the assessment of the information that is an intrinsic part of it. (shrink)

A central question in many debates on paternalism is whether a decision analyst can ever go against the stated preference of a client, even if merely intending to improve the decisions for the client. Using four gedanken-experiments, this paper shows that this central question, so cleverly and aptly avoided by libertarian paternalism (nudge), cannot always be avoided. The four thought experiments, while purely hypothetical, serve to raise and specify the critical arguments in a maximally clear and pure manner. The first (...) purpose of the paper is, accordingly, to provide a litmus test on the readers’ stance on paternalism. We thus also survey and organize the various stances in the literature. The secondary purpose of this paper is to argue that paternalism cannot always be avoided and consumer sovereignty cannot always be respected. However, this argument will remain controversial. (shrink)

Why does performing certain tasks cause the aversive experience of mental effort and concomitant deterioration in task performance? One explanation posits a physical resource that is depleted over time. We propose an alternative explanation that centers on mental representations of the costs and benefits associated with task performance. Specifically, certain computational mechanisms, especially those associated with executive function, can be deployed for only a limited number of simultaneous tasks at any given moment. Consequently, the deployment of these computational mechanisms carries (...) an opportunity cost – that is, the next-best use to which these systems might be put. We argue that the phenomenology of effort can be understood as the felt output of these cost/benefit computations. In turn, the subjective experience of effort motivates reduced deployment of these computational mechanisms in the service of the present task. These opportunity cost representations, then, together with other cost/benefit calculations, determine effort expended and, everything else equal, result in performance reductions. In making our case for this position, we review alternative explanations for both the phenomenology of effort associated with these tasks and for performance reductions over time. Likewise, we review the broad range of relevant empirical results from across sub-disciplines, especially psychology and neuroscience. We hope that our proposal will help to build links among the diverse fields that have been addressing similar questions from different perspectives, and we emphasize ways in which alternative models might be empirically distinguished. (shrink)

The model proposed by Redish et al. considers vulnerabilities within decision systems based on expectancy-value assumptions. Further understanding of processes leading to addiction can be gained by considering other inputs to decision-making, particularly affective associations with behaviors. This consideration suggests additional decision-making vulnerabilities that might explain addictive behaviors.

Research in recent years suggests that fairness concerns could mitigate hold-up problems. In this study, we report theoretical analysis and experimental evidence on an opposite possibility: that fairness concerns could also induce hold-up problems. In our setup, hold-up problems will not occur with purely self-interested agents, but theoretically could be induced by demand for distributional fairness among agents without sufficiently strong counteracting factors such as intention-based reciprocity. We observe a widespread occurrence of hold-up in our experiment. Relationship-specific investments occurred less (...) than half of the time, resulting in significant inefficiencies. Moreover, whenever a relationship-specific investment was made: (a) it was typically not reciprocated by the partner; (b) nor did the investor’s offers at the bargaining stage exhibit expectations for reciprocity. Consequently, the partner extracted all the additional expected payoff from relationship-specific investments. Further experimentation suggested that our results were driven by a fundamental lack of intention-based reciprocity in fairness concerns, rather than self-serving bias. (shrink)

In the WebSurf task, humans forage for videos paying costs in terms of wait times on a time-limited task. A variant of the task in which demands during the wait time were manipulated revealed the role of attention in susceptibility to sunk costs. Consistent with parallel tasks in rodents, previous studies have found that humans preferred shorter delays, but waited longer for more preferred videos, suggesting that they were treating the delays economically. In an Amazon Mechanical Turk sample, we replicated (...) these predicted economic behaviors for a majority of participants. In the lab, participants showed susceptibility to sunk costs in this task, basing their decisions in part on time they have already waited, which we also observed in the subset of the mTurk sample that behaved economically. In another version of the task, we added an attention check to the wait phase of the delay. While that attention check further increased the proportion of subjects with predicted economic behaviors, it also removed the susceptibility to sunk costs. These findings have important implications for understanding how cognitive processes, such as the deployment of attention, are key to driving re-evaluation and susceptibility to sunk costs. (shrink)

This paper reports an experiment which investigates a possible cognitive antecedent of event-splitting effects (ESEs) experimentally observed by Starmer and Sugden (1993) and Humphrey (1995) – the learning of absolute frequency of event category impacting on the learning of probability of event category – and reveals some evidence that it is responsible for observed ESEs. It is also suggested and empirically substantiated that stripped-down prospect theory will accurately predict ESEs in some decision making tasks, but will not perform well in (...) others. This contention, it is argued, is indicative of fundamental descriptive shortcomings in the economic conception of choice under uncertainty and may entail implications beyond the direct concerns of this paper. (shrink)

From the viewpoint of the independence axiom of expected utility theory, an interesting empirical dynamic choice problem involves the presence of a “global risk,” that is, a chance of losing everything whichever safe or risky option is chosen. In this experimental study, participants have to allocate real money between a safe and a risky project. Treatment variable is the particular decision stage at which a global risk is resolved: (i) before the investment decision; (ii) after the investment decision, but before (...) the resolution of the decision risk; (iii) after the resolution of the decision risk. The baseline treatment is without global risk. Our goal is to investigate the isolation effect and the principle of timing independence under the different timing options of the global risk. In addition, we examine the role played by anticipated and experienced emotions in the choice problem. Main findings are a violation of the isolation effect, and support for the principle of timing independence. Although behavior across the different global risk cases shows similarities, we observe clear differences in people’s affective responses. This may be responsible for the conflicting results observed in earlier experiments. Dependent on the timing of the global risk different combinations of anticipated and experienced emotions influence decision making. (shrink)