Empirical evidence on the determinants of economic decision-making

Abstract

The first three chapters of this thesis are dedicated to empirically examining factors beyond risk preferences that influence decision-making under risk: psychological states (Chapter 2), character traits (Chapter 3), and (stable) beliefs regarding the riskiness of situations (Chapter 4). Chapter 5 examines the relationship between measured preferences and beliefs in a setup where beliefs more traditionally are assumed to matter: social interactions.<br /> Chapter 2 deals with the impact different psychological states, in this case a state of low self-control, have on measured risk preferences. A core prediction of recent "dual-self" models is that risk attitudes depend on self-control. While these models have received a lot of attention, empirical evidence regarding their predictions is lacking. We derive hypotheses from three prominent models for choices between risky monetary payoffs under regular and reduced self-control. We test the hypotheses in a lab experiment, using a well-established ego depletion task to reduce self-control, and measuring risk attitudes via finely graduated choice lists. Manipulation checks document the effectiveness of the depletion task. We find no systematic evidence in favor of the theoretical predictions. In particular, ego depletion does not increase measured risk aversion.<br /> Chapter 3 examines a channel through which a stable aspect of personality, optimism, affects measured risk preferences. We show that the disposition to focus on favorable or unfavorable outcomes of risky situations affects willingness to take risk as measured by the general risk question. We demonstrate that this disposition, which we call risk conception, is strongly associated with optimism, a stable facet of personality and that it predicts real-life risk taking. The general risk question captures this disposition alongside pure risk preference. This also explains why the general risk question is a better predictor of behavior under risk across different domains than measures of pure risk preference. Next, we take a closer look at the interaction between preferences and the other building block of economic decision-making: beliefs. In standard economic theory, beliefs only depend on the available information and adjust immediately once new information becomes available. This means that under full rationality beliefs are the same for everyone when objective probabilities are explicitly stated.<br /> Chapter 4 shows that this is not necessarily true. Extending the idea of Chapter 3, we show that even in situations where the decision environment is fully specified, i.e., in a lottery with objective probabilities, the perception of the riskiness of a situation differs considerably between people. We present evidence from a longitudinal experiment introducing a novel task asking subjects to assess the likelihood of winning a 50-50 lottery. We find substantial and systematic heterogeneity in answers. Moreover, there are robust correlations with several different risk preference measures such as lottery choices and the general risk question. Testing several channels for this relationship, we find little evidence that our findings are driven by differential perceptions of probabilities or probability weighting. We hence conclude that belief-related factors akin to personality traits play a role in decision making under risk. <br /> Chapter 5 examines the relationship between measured preferences and beliefs in a setup where beliefs more traditionally are assumed to matter: social interactions. The assumption that beliefs only depend on available information also gives rise to the idea that the concepts of preferences and beliefs are distinct and unrelated in the sense that they don't influence on another. However, empirical evidence supports that own preferences influence beliefs about others. This phenomenon is known as the consensus effect. In this chapter we advance the hypothesis that the consensus effect may depend on the salience of own preferences when forming beliefs about others. We present two pieces of supportive evidence from a binary trust game experiment. First, the consensus effect is stronger when preferences elicitation precedes belief elicitation. Second, we observe a larger consensus effect when preferences and beliefs are elicited in the same session rather than two weeks apart. Although each of the following four chapters addresses a distinct research question they are connected by one overarching question: What influences measured preferences and beliefs?