Behavioral and Social Science 50 Years of Discovery (1986) / Chapter Skim
Currently Skimming:
Choices, Values, and Frames
Choices, Values, and Frames
Pages 153-172
The Chapter Skim interface presents what we've algorithmically identified as the most significant single chunk of text within every page in the chapter.
Select key terms on the right to highlight them within pages of the chapter.
From page 153... ...
The paradigmatic example of decision under risk is the acceptability of a gamble that yields monetary outcomes with specified probabilities. A typical riskless decision concerns the acceptability of a transaction in which a good or a service is exchanged for money or labor.
|
From page 154... ...
The preference for the sure gain is an instance of risk aversion. In general, a preference for a sure outcome over a gamble that has higher or equal expectation is called risk averse, and the rejection of a sure thing in favor of a gamble of lower or equal expectation is called risk seeking.
|
From page 155... ...
This assumption plays a central role in a treatment or risky choice that we called prospect theory (Kahneman and Tversky, 19791. Introspection as well as psychophysical measurements suggest that subjective value is a concave function of the size of a gain.
|
From page 156... ...
The assumption of risk aversion has played a central role in economic theory. However, just as the concavity of the value of gains entails risk aversion, the convexity of the value of losses entails risk seeking.
|
From page 157... ...
The same option, however, can be framed or described in different ways (Tversky and Kahneman, 19811. For example, the possible outcomes of a gamble can be framed either as gains and losses relative to the status quo or as asset positions that incorporate initial wealth.
|
From page 158... ...
In their stubborn appeal, framing effects resemble perceptual illusions more than computational errors. The following pair of problems elicits preferences that violate the dominance requirement of rational choice.
|
From page 159... ...
The first is to adopt a procedure that will transform equivalent versions of any problem into the same canonical representation. This is the rationale for the standard admonition to students of business, that they should consider each decision problem in terms of total assets rather than in terms of gains or losses (Schlaifer, 19591.
|
From page 160... ...
In Figure 2, decision weights are lower than the corresponding probabilities over most of the range. Underweighting of moderate and high probabilities relative to sure things contributes to risk aversion in gains by reducing the attractiveness of positive gambles.
|
From page 161... ...
Consequently, people are often risk seeking in dealing with improbable gains and risk averse in dealing with unlikely losses. Thus, the characteristics of decision weights contribute to the attractiveness of both lottery tickets and insurance policies.
|
From page 162... ...
This violation of invariance has been confirmed with both real and hypothetical monetary payoffs (the present results are with real money) , with human lives as outcomes, and with a Consequential representation of the chance process.
|
From page 163... ...
We now turn attention to the processes that control the framing of outcomes and events. The public health problem illustrates a formulation effect in which a change of wording from "lives saved" to "lives lost" induced a marked shift in preference from risk aversion to risk seeking.
|
From page 164... ...
The evaluation of outcomes is susceptible to formulation effects because of the nonlinearity of the value function and the tendency of people to evaluate options in relation to the reference point that is suggested or implied by the statement of the problem. It is worthy of note that in other contexts people automatically transform equivalent messages into the same representation.
|
From page 165... ...
were willing to drive to the other branch to save $5 on a $15 calculator, but only 29 percent of 93 respondents were willing to make the same trip to save $5 on a $125 calculator. This finding supports the notion of topical organization of accounts, since the two versions are identical both in terms of a minimal and a comprehensive account.
|
From page 166... ...
Most consumers will find it easier to buy a car stereo system or a Persian rug, respectively, in the context of buying a car or a house than separately. These observations, of course, run counter to the standard rational theory of consumer behavior, which assumes invariance and does not recognize the effects of mental accounting.
|
From page 167... ...
We propose, however, that systematic examination of alternative framings offers a useful reflective device that can help decisionmakers assess the values that should be attached to the primary and secondary consequences of their choices. Losses and Costs Many decision problems take the form of a choice between retaining the status quo and accepting an alternative to it, which is advantageous in some respects and disadvantageous in others.
|
From page 168... ...
Loss aversion and the consequent endowment effect are unlikely to play a significant role in routine economic exchanges. The owner of a store, for example, does not experience money paid to suppliers as losses and money received from customers as gains.
|
From page 169... ...
discussed the example of a man who develops tennis elbow soon after paying the membership fee in a tennis club and continues to play in agony to avoid wasting his investment. Assuming that the individual would not play if he had not paid the membership fee, the question arises: How can playing in agony improve the individual's lot?
|
From page 170... ...
This assumption is part of the conception of an idealized decisionmaker who is able to predict future experiences with perfect accuracy and evaluate options accordingly. For ordinary decisionmakers, however, the correspondence of decision values between experience values is far from perfect (March, 19781.
|
From page 171... ...
Fishburn, P.C., and Kochenberger, G.A. 1979 Two-piece van Neumann-Morgenstern utility functions.
|
From page 172... ...
Journal of Economic Behavior and Organization 1:39-60. In press Using mental accounting in a theory of consumer behavior.
|
Key Terms
This material may be derived from roughly machine-read images, and so is provided only to facilitate research.
More
information on Chapter Skim is available.