Paper
Changing Risk Attitude Between Two Prospects (($Y, p) and ($X, 1)) in Gain and Loss Domains with Small p-Values and Y >>X Reflection Effects and Conditions for Reversal of Choice
- Authors:
- Atsuo MURATA
- Abstract
- This study investigated the irrationality in decision-making on risk attitude. More specifically, the readiness of reflection in decision-making was investigated and compared between two conditions (the reflection from the risk-seeking choice to the risk-aversion choice and that from the risk-aversion choice to the risk-seeking choice). Second, the condition (p-value (probability of gain or loss)) for the reversal of choice (change of risk attitude) was identified and compared to gain and loss domains. In such a way, the irrationality in decision-making on risk attitude was introduced. On the basis of such an approach, it was discussed how choosing one of the two prospects A ($Y, p) or B ($X, 1) should be systematically treated in order to generalize the change of risk attitude under the condition of a smaller value of p and Y >> X (Y is much larger than X). While the reflection effect from the risk-seeking choice to the risk-aversion choice readily occurred when the occurrence probability p of the larger gain was low, the reflection effect from the risk-aversion choice to the risk-seeking choice did not readily occur. The amount of change (increment or decrement) of p-value necessary for changing the risk attitude (from risk-aversion to risk-seeking, and vice versa) was identified for both the gain and loss domains. A simple demonstrative decision-making paradigm is insufficient for the generalization of characteristics of the weighting function π(p)>p.
- Keywords
- Behavioral Economics; Prospect Theory; Reflection Effect; Reversal of Choice; Irrationality; Change of Risk Attitude
- StartPage
- 42
- EndPage
- 51
- Doi