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Strength of preference and decision making under risk


Alós-Ferrer, Carlos; Garagnani, Michele (2019). Strength of preference and decision making under risk. Working paper series / Department of Economics 330, University of Zurich.

Abstract

Overwhelming evidence from the cognitive sciences shows that, in simple discrimination tasks (determining what is louder, longer, brighter, or even which number is larger) humans make more mistakes and decide more slowly when the stimuli are closer along the relevant scale. We investigate to what extent these effects are relevant for economic decisions. Strikingly, we find that even when there is an objectively correct answer independently of attitudes toward risk, the same effects obtain as expected values become closer. Contrary to pure discrimination tasks, however, differences in payoff-independent numerical magnitudes play a minor role. When correct answers depend on subjective attitudes toward risk, differences in expected values fail to explain error rates. The gradual effects on error rates and response times subsist but are instead explained by cardinal differences in independently-estimated subjective utilities (“strength of preference”). This is in agreement with assumptions typically made (but seldom validated) in random utility models. We conclude that the gradual effects on choice found in cognitive discrimination paradigms are very much present in economic choices, but depend on purely economic variables. An implication is that even if correct economic choices can be seen as ordinal, actual economic choices carry a cardinal component.

Abstract

Overwhelming evidence from the cognitive sciences shows that, in simple discrimination tasks (determining what is louder, longer, brighter, or even which number is larger) humans make more mistakes and decide more slowly when the stimuli are closer along the relevant scale. We investigate to what extent these effects are relevant for economic decisions. Strikingly, we find that even when there is an objectively correct answer independently of attitudes toward risk, the same effects obtain as expected values become closer. Contrary to pure discrimination tasks, however, differences in payoff-independent numerical magnitudes play a minor role. When correct answers depend on subjective attitudes toward risk, differences in expected values fail to explain error rates. The gradual effects on error rates and response times subsist but are instead explained by cardinal differences in independently-estimated subjective utilities (“strength of preference”). This is in agreement with assumptions typically made (but seldom validated) in random utility models. We conclude that the gradual effects on choice found in cognitive discrimination paradigms are very much present in economic choices, but depend on purely economic variables. An implication is that even if correct economic choices can be seen as ordinal, actual economic choices carry a cardinal component.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:D9, D01, D81
Uncontrolled Keywords:Strength of preference, choice difficulty, stochastic choice, risk attitude
Language:English
Date:July 2019
Deposited On:29 Jul 2019 15:29
Last Modified:25 Mar 2020 15:35
Series Name:Working paper series / Department of Economics
Number of Pages:38
ISSN:1664-705X
OA Status:Green
Official URL:https://www.econ.uzh.ch/static/release/workingpapers.php?id=1009

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