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An Invitation to Cognitive Science - 2nd Edition - Vol. 3.
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Chapter3
DecisionMaking
EldarShaftrandAmosTversky
3.1
Introduction
Decisionsabout what to buy, whom to vote for, or where to live, shape
many aspectsof our lives. The study of decision making is an interdisciplinary
, and psychology,
enterpriseinvolving economics, political science
as well as statistics and philosophy. One can distinguish two approaches
to the analysisof decisionmaking, the normative and the descriptive. The
normative approach, which underliesmuch of economicanalysis, assumes
a rational decision maker, who has well-defined preferencesthat do not
depend on the particular description of the options or on the specific
methods for eliciting preference. This conception, which has come to be
known as the rational theory of choice, is based primarily on a priori
considerationsrather than on experimentalobservation. As a consequence
,
it has a better claim as a normative accountof how decisionsought to be
madethan as a descriptive theory of how decisionsare actually made.
The descriptive approach to individual decision making is based on
of choice behavior. The
empirical observation and experimental studies
' s choices are often at odds
that
evidence
indicates
people
experimental
with the assumptionsof the rational theory, and suggestssome empirical
'
generalizationsthat characterizepeoples choices. In this chapter we describesome
selectedfindings and discussseveralpsychological principles
that underlie the decision-making process. In the next section we address
'
the psychological evaluation of gains and losses, and consider peoples
attitudes toward risk. Section 3.3 demonstratesthat alternative descriptions
of a decision problem can give rise to predictably different choices.
Section3.4 addresses the asymmetry between the Evaluationof gains and
. Section 3.5 demonstrateshow alternative
losses, known as lossaversion
of this chapterwassupportedby US PublicHealthServiceGrantNo. l -R29Preparation
MH4688Sfrom the NationalInstituteof MentalHealth, by GrantNo. SBR-9408684from
. It was
Foundation
the NationalScience
, andby a grant from the RussellSageFoundation
completedwhile the authorswereFellowsat the Institutefor AdvancedStudiesand the
Centerfor RationalityandInteractiveDecisionTheoryof The HebrewUniversity.
78
Shanrand Tversky
methods of eliciting people's preferencesgive rise to inconsistent decisions
. In section 3.6 we addressthe role of conflict and show how preference
among options is altered by the addition of new alternatives. The
tension between descriptive and normative conceptions of decision
making is addressedin the concluding section. (Further discussionof the
relation between normative and descriptive analyses is provided in
chapters2 and 6.)
3.2 Risk and Value
Many decisionsin the real world (suchas investment, gambling, insurance)
are risky in the sensethat their outcomesare not known with certainty. To
make such decisions, one has to consider two factors, the desirability of
the potential outcomesand their probability of occurrence
. Indeed, decision
theory is concernedwith the question of how these factors are, or
should be, combined.
Consider a choice between a risky prospect that offers a SO percent
chanceto win $200 (and a SOpercent chance to win nothing) and the
alternative of receiving $100 for sure. Most people prefer the sure gain
over the gamble, although the two prospects have the same expected
value. The expectedvalue of a gamble is a weighted averagewhere each
possible outcome is weighted by its probability of occurrence. The expected
value of the gamble above is .50 x $200 + .50 x 0 = $100. A
preferencefor a sure outcome over a risky prospect that has higher or
; a preferencefor a risky prospect
equal expectedvalue is called risk averse
over a sure outcome that has higher or equal expected value is called
risk seeking
.
As illustrated above, people tend to be risk aversewhen choosing between
prospectswith positive outcomes. This tendency toward risk aversion
can be explainedby appealingto the notion of diminishing sensitivity.
Just as the impact of a candle is greater when it is brought into a dark
room than into a room that is well lit , so the impact of an additional $100
is greater when it is added to a gain of $100 than when it is added to
a gain of $800. This principle was first formalized by Daniel Bernoulli
and Gabriel Cramer, who proposed early in the eighteenth century that
subjectivevalue, or utility , is a concavefunction of money, as illustrated in
figure 3.1. (A function is concaveif a line joining any two points on the
curve lies entirely below the curve.) Notice that according to such a
function the utility difference, u($200) - u($100), is greater than the utility
difference, u($900) - u($800), though the dollar differencesare the same.
Bernoulli and Cramerproposedthat a personhas a concaveutility function
that captureshis or her subjectivevalue for money, and that prefer-
Decision Making
79
Subjective
Value
100 200
800 900
$
Figure 3.1
Subjective
Value
100
200
$
Figure 3.2
encesshouldbe describedusing expectedutility insteadof expectedvalue.
According to expectedutility , the worth of a gambleoffering a SOpercent
chanceto win $200 (and a SOpercent chanceto win nothing) is .50 x
u($200), where u is the person's utility function. (Assume that u(O) = 0.)
As can be seen from Agure 3.2, it follows from such a function that the
subjectivevalue attachedto a gain of $100 is more than so percent of the
value attachedto a gain of $200, which entailspreferencefor the sure$100
gain and, hence, risk aversion. Expectedutility theory and the assumption
of risk aversion playa central role in the standard economic analysis of
choicebetweenrisky prospects.
Let us turn now to choice involving losses. Supposeyou are forced to
choosebetween a prospect that offers a SOpercent chanceto lose $200
(and a SOpercent chanceto lose nothing) and the alternative of losing
$100 for sure. In this problem, most people reject the sureloss of $100 and
prefer to take an even chanceat losing $200 or nothing. Notice that, as in
the choice above involving gains, the prospectshave the sameexpected
80
Sham and Tversky
$
-200
- 100
Subjective
Value
Figure 3.3
value. This preferencefor a risky prospect over a sure outcome that has
the same expected value is an instance of risk seeking. Evidently, risk
aversiondoesnot always hold, in contrast to traditional economicanalysis.
In fact, except for prospects that involve very small probabilities, risk
aversion is generally observed in choices involving gains, whereas risk
seekingtends to hold in choicesinvolving losses.
The combination of risk aversion for gains and risk seeking for losses
can be explainedby assumingthat diminishing sensitivity appliesto negative
as well as to positive outcomes. Consequently, the subjective value
function for losses is convex, as depicted in figure 3.3. (A function is
convex if a line joining any two points on the curve lies entirely above the
curve.) According to such a function, the worth of a gamble that offers a
SOpercent chanceto lose $200 is greater (that is, less negative) than that
of a sure loss of $100. That is, .50 x u( - $200) > u( - $100). This result
implies a risk-seekingpreferencefor the gamble over the sureloss.
By conjoining figures 3.2 and 3.3, we obtain an S-shapedvalue function
that is concavefor gains and convex for losses, as illustrated in figure 3.4.
This function forms part of a descriptive analysis of choice, known as
ProspectTheory, which accountsfor observed regularities in risky choice
(Kahnemanand Tversky 1979; Tversky and Kahneman1992). The value
function of Prospect Theory has three important properties: (1) it is defined
on gains and lossesrather than total wealth, (2) it is steeperfor losses
than for gains, and (3) it is concavefor gains and convex for losses. The
first property states that people normally treat outcomes as gains and
lossesdefined relative to a neutral referencepoint, rather than in terms of
total wealth, as we shall illustrate. The secondproperty, calledlossaversion
,
statesthat lossesgenerally loom larger than correspondinggains. Thus, a
loss of $X is more aversivethan a gain of $X is attractive, which is implied
by a function that is steeper for losses than for gains, that is, where
u($X) < - u( - $X), as in figure 3.4.
Value
Decision
Making 81
LossesGains
Figure 3.4
The third property of the value function implies the risk attitudes described
earlier: risk aversion in the domain of gains and risk seekingin the
domain of losses. Although there is a presumptionthat people are entitled
to their own valuesand eachof the attitudes above seemsunobjectionable
on its own, the combination of the two leads to unacceptableconsequences
, as we shall show.
3.3 FramingEffects
Consider the following problems (Tversky and Kahneman 1986). The
numbers in brackets indicate the percentageof respondentswho chose
eachoption . (The number of respondentsin eachproblem is denoted N.)
Problem1 (N = 126)
Assumeyourself richer by $300 than you are today.
You have to choosebetween
. a sure gain of $100
[72%]
. a 50% chanceto gain $200 and a 50% chanceto gain
[28%]
nothing
Problem2 (N = 128)
Assumeyourself richer by $500 than you are today.
You have to choosebetween
82
ShafirandTversky
. a sureloss of $100
. a 50% chanceto lose nothing and a 50% chanceto
lose $200
[36%]
[64%]
In accord with the value function above, most subjects presented with
problem 1, which is framed as a choice between gains, are risk averse,
whereasmost subjects presentedwith problem 2, which is framed as a
choice between losses, are risk seeking. However, the two problems are
essentiallyidentical: When the initial payment of $300 or $500 is addedto
the respectiveoutcomes, both problemsamount to a choicebetween $400
for sure and an even chanceat $300 or $500. The different responsesto
problems 1 and 2 show that subjectsdid not combine the initial payment
with the choice outcomesas required by normative analysis. As a consequence
, the samechoiceproblem framedin alternativeways led to systematically
different choices. This result is called a framing effect
.
The combination of risk aversion for gains and risk seeking for losses
implied by the value function of figure 3.4 can also lead to violations of
dominance, which is perhapsthe simplest and most compelling principle
nf rational choice. The dominance principle states that if option B is
better than option A on one attribute and at least as good as A on all
the rest, then B should be chosen over A . For example, given a choice
between
A : 25% chanceto win $240 and 75% chanceto lose $760
B: 25% chanceto win $250 and 75% chanceto lose $750
the dominanceprinciple requiresthat the decisionmakerprefer option B to
option A , becauseB offers the samechancesof winning more than A and
of losing less. Consider, in contrast, the following two choices, one involving
gains and the other involving losses (Tversky and Kahneman
1981):
Problem3 (N = 150)
Imagine that you face the following pair of concurrent decisions.
First examineboth decisions, then indicate the options you prefer.
Decision (i). Choosebetween
C: a suregain of $240.
D: 25% chanceto gain $1,000 and 75% chanceto gain
nothing
Decision (ii ). Choosebetween
E: a sureloss of $750
F: 75% chanceto lose $1,000 and 25% chanceto lose
nothing
[84%]
[16%]
[13%]
[87%]
Decision Making
83
Notice that the expected value of optionD is .25 x $1,000 = $250,
whereas the expected value of option F is .75 x - $1,000 = - $750.
Hence, as the data show, the majority choice in decision (i) is risk averse,
and the majority choice in decision (ii ) is risk seeking, as predicted by the
value function. As it turns out, 73 percentof the subjectschosea combination
of the two most popular options, C and F, and only 3 percent of the
subjectschosea combination of the two least popular prospects, D and E.
Simplecalculation, however, shows that the combinationof C and F yields
prospectA above, whereasthe combination of D and E yields prospect B
(see problem 3.1). Thus, a great majority of subjectsviolated dominance
and selectedan inferior combination of prospects. In contrast, when subjects
were presentedwith a direct choice between A and B, everybody
naturally chosethe dominant option B. Thus, the principle of dominanceis
obeyed when its application is transparent, but is often violated when it is
not. In particular, the demonstration above shows that the tendency to
evaluateprospectsin isolation, combined with the common risk attitudes
capturedby figure 3.4, can lead to the selectionof a dominatedoption .
The effects of &aming and the characteristicsof the value function are
not limited to monetary outcomes, as demonstrated by the following
choices between health policies involving human life (Tversky and
Kahneman1981):
Problem4 (N = 152)
Imagine that the United Statesis preparing for the outbreak of an
unusual Asian disease
, which is expected to kill 600 people. Two
alternative programs to combat the diseasehave been proposed.
Assumethat the exact scientificestimatesof the consequences
of the
are
as
follows:
programs
If ProgramA is adopted, 200 people will be saved.
[72%]
If Program B is adopted, there is 1/ 3 probability that 600
people will be saved, and 2/ 3 probability that no people will
be saved.
[28%]
Notice that both programs have the sameexpected value in terms of
"
"
human lives. Becausesaving people is perceivedas a gain, the majority
of subjectsmade the risk-aversechoiceof saving 200 people for sure over
the chanceof saving either 600 people or no one. A second group of
subjectswas given the same cover story with these descriptions of the
alternativeprograms:
Problem5 (N = 155)
If Program Cisadopted , 400 people will die.
[22%]
84
Shafirand Tversky
If ProgramD is adopted, there is 1/ 3 probability that
nobody will die, and 2/ 3 probability that 600 people will die. [78%]
Here the outcomesof the two programsare describedin terms of lives
lost. Accordingly, the majority of subjectsmade the risk-seeking choice,
avoiding the sure loss of 400 lives in favor of the chanceto saveeither all
600 or no one. Subjectsagain exhibited the familiar pattern of risk aversion
in the domain of gains and risk seekingin losses. However, problems4 and
5 present the sameoptions. In particular, programs A and B are identical,
respectively, to programsC and D. They differ only in that the former are
framed in terms of number of lives saved, whereasthe latter are framed in
terms of lives lost.
An essentialelementin the rational theory of choiceis the requirement,
known as descriptioninvariance
, that equivalent representationsof a choice
should
the
same
. That is, an individual' s preference
yield
problem
preferences
betweenoptions should not dependon the mannerin which they are
described, provided the descriptions convey the same information. The
majority preferencesexpressedin problems 4 and 5, however, violate
the principle of description invariance and show that framing the same
problem in terms of gains or in terms of lossesgives rise to predictably
different choices.
Framing effects are pervasive and are often observed even when the
samerelpondents answer both versions of a problem. Furthermore, they
are found in the choicesof both naive and sophisticatedrespondents. For
example, experiencedphysiciansmademarkedly different choicesbetween
two alternative treatmentsfor lung cancer- surgery and radiation therapy
dependingon whether the outcomesof thesetreatmentswere described
in terms of mortality rates or in terms of survival rates (seeproblem 3.2).
Surprisingly, the physicianswere just as susceptibleto the effect of framing
as were graduatestudentsor clinic patients (McNeil , Pauker, Sox, and
Tversky 1982).
The effectivenessof framing manipulationssuggeststhat people tend to
adopt the frame presented in a problem and evaluate the outcomes in
terms of that frame. Thus, depending on whether a problem is described
in terms of gains or losses, people are likely to exhibit risk-averse or
risk-seekingbehaviors. An interesting classof framing effectsarisesin the
evaluationsof economictransactionsthat occur in times of inflation.
In one study (Sham, Diamond, and Tversky 1994), subjectswere asked
to imagine that they worked for a company that produced computers in
Singapore, and had to sign a contract for the local sale of new computers
in that country. The computers, currently selling for $1,000 apiece, were to
be delivered and paid for a year later. By that time, due to inflation, all
prices, including production costs and computer prices, were expected to
Decision
Making 85
increaseby about 20 percent. Subjectshad to choosebetween contract A :
selling the computers a year later for the predeterminedprice of $1,200
(that is, 20 percent higher than the current price), and contract B: selling
the computersa year later for the going price at that time. For one group
of subjectsthe options were describedrelative to the predeterminedprice
of $1,200. In this frame, contract A appearsrisklessbecausethe computers
are guaranteed to sell for $1,200 no matter what, whereas contract B
'
appearsrisky becausethe computers future price will be less than $1,200
if inflation is low , and more than $1,200 if inflation is high. A second
with the same alternatives described
group of subjects were presented
relative to the computers' expectedfuture price. Here, contract B appears
risklessbecausethe computerswill be sold next year for their actual price
then, regardlessof the rate of inflation. Contract A, on the other hand,
appearsrisky: the computersare to be sold for $1,200, which may be more
than they are worth if inflation is lower than the anticipated 20 percent,
and lessthan they are worth if inflation exceeds20 percent. Becauseof loss
aversion, the contract that appearedrisklessin each frame was relatively
more attractive than the one that appearedrisky. Thus, contract A was
chosenmore often in the former case, when it was framed as riskless, than
in the latter, when it was framed as risky.
3.4
Loss Aversion
'
One of the basic observations regarding people s reaction to outcomes is
that losses appear larger than corresponding gains . This asymmetry in the
evaluation of positive and negative outcomes is called loss aversion. Loss
aversion gives rise to a value function that is steeper in the negative than
in the positive domain , as in figure 3.4. An immediate implication of loss
aversion is that people will not accept an even chance to win or lose $X,
because the loss of $X is more aversive than the gain of $X is attractive .
Indeed, people are generally willing to accept an even -chance prospect
only when the gain is substantially greater than the loss. Many people , for
example , reject a so so chance to win $200 or lose $ 100, even though the
gain is twice as large as the loss (Tversky and Shafir 1992a).
The example above illustrates loss aversion in decisions involving risky
prospects . The principle of loss aversion applies with equal force to riskless
choice, between options that can be obtained for certain (T versky and
Kahneman 1991 ). It entails that the loss of utility associated with giving up
a good that is in our possession is generally greater than the utility gain
associated with obtaining that good . An instructive demonstration of this
effect is provided in an experiment involving the selling of mugs (Kahneman, Knetsch , and Thaler 1990). A class is divided into two groups . Some
86
Shafir and Tversky
, are given a decoratedmug that they can keep,
participants, called sellers
and are askedto indicate the lowest price for which they would be willing
to sell the mug. A secondgroup, called choosers
, are askedto indicate the
amount of money that they would find as attractive as the mug. Subjects
in both groups are told that, after they state their price, an official market
price $X will be revealedand that eachsubject will end up with a mug if
his or her asking price exceeds$X, or with $X if it is more than the
'
subjects askingprice.
Notice that the choosersand the sellers are facing precisely the same
decisionproblem: they will all end up with either some money or a mug,
and in effect need to decidehow much money they will be willing to take
in place of the mug. Hence, standardeconomicanalysispredicts identical
asking prices for the two groups. The two groups, however, evaluatethe
mug from different perspectives:the chooserscomparereceiving a mug to
receiving a sum of money, whereasthe sellerscompareretaining the mug
to giving up the mug in exchangefor money. Thus, the mug is evaluated
as a potential gain by the choosersand as a loss by the sellers. Consequently
, loss aversion, the notion that lossesloom larger than corresponding
gains, predicts that the sellers will price the mug higher than the
choosers. This prediction was confirmed by the data: the median price of
the sellers($7.12) was more than twice as large as the medianprice for the
choosers($3.12). The differencebetween these prices reflects an endowment
effect, which was produced, instantaneouslyit seems
, by endowing
individuals with a mug.
A closely related manifestationof loss aversion is a general reluctance
to trade, which is illustrated in the following study ( Knetsch1989). Subjects
were divided into two groups: half the subjectswere given a decorated
mug, and the others were given a large bar of Swisschocolate. Later,
eachsubjectwas shown the alternativegift , and offered the opportunity to
trade the gift they had receivedfor the other. Becausethe initial allocation
of gifts was arbitrary and the transaction was costless, economic theory
predicts that about half the subjectsshould exchangetheir gifts. On the
other hand, if lossesloom larger than gains, then most participantswill be
reluctant to give up the gift in their possession(a loss) in order to obtain
the other (a gain). Indeed, only 10 percent of the participants chose to
trade their gifts. This result contrastssharply with the so percentpredicted
by the standardeconomicanalysis, in which the value of a good does not
'
changewhen it becomespart of one s endowment.
More generally, loss aversion entails a strong tendency to maintain the
status quo, becausethe disadvantagesof departing from it loom larger
than the advantagesof its alternative. This phenomenonhas been demonstrated
in severalexperiments(Samuelson and Zeckhauser1988). For example
"
, subjectswere given this problem: You have inherited a large sum
Decision Making
87
of money from your great uncle. You are consideringdifferent portfolios.
Your choicesare to invest in (1) a moderate-risk company, (2) a high-risk
"
company, (3) treasury bills, (4) municipal bonds. Four groups of subjects
were presentedwith the sameproblem, but with one of the four options
designated" as the status quo. One version, for example, included the
statement: A significantportion of the portfolio you inherited is invested
"
in a moderate-risk company. The data show that designatinga particular
option as the status quo greatly increasedthe tendency to chooseit (even
though transactioncosts were said to be insignificant). Although all four
groups chose among the sameoptions, subjectstended to stick with the
option in which they were already invested.
'
A striking framing effect that relies on peoples tendency to maintain
the status quo has been observed in the context of real-world insurance
decisions. New Jerseyand Pennsylvaniahave recently introduced the option
of a limited right to sue, which entitles automobile drivers to lower
insurancerates. The two statesdiffer, however, in what they offer consumers
as the default option. New Jerseymotorists have to acquire the full
right to sue(transactioncostsare minimal: one need only sign), whereasin
Pennsylvaniathe full right to sue is the default. When offered the choice,
only about 20 percentof New Jerseydrivers choseto acquirethe full right
to sue, but approximately 7S percent of Pennsylvaniadrivers chose to
retain it. The differencein adoption rates due to the different frameshad
financialrepercussionsthat are estimatedat around $200 million (Johnson,
Hershey, Meszaros, and Kunreuther 1993).
Recall that loss aversion gives rise to a value function with a steeper
slope in the negative than in the positive domain. Beyond the reluctance
to depart from the status quo, this result implies that the samedifference
between two options will be given greater weight when it is viewed as a
difference between two disadvantages
, or losses (relative to a reference
, or
point) than when it is viewed as a differencebetween two advantages
gains. This prediction is demonstratedin a study in which subjectscompare
a combination of a small gain and a small loss with a combination of
a larger gain and a larger loss ( Tverskyand Kahneman1991). Subjectsare
askedto supposethat they are looking for employmentwhile their present
training job is ending. They are askedto considertwo alternativejobs that
are like their present job in all respectsexcept for the amount of social
contact and the daily commuting time. The relevant information is summarized
in the table below. Subjectsare divided into two groups: one group
is told that they presently hold job A , the second group is told they
presentlyhold job B. Both groups are then askedto choosebetweenjob X
and job Y. Becausetheir current jobs are said to be ending, maintaining the
statusquo is not an option.
88
Shafirand Tversky
PresentJobA
JobX
JobY
PresentJobB
SocialContact
Daily TmvelTime
isolated for long stretches
limited contact with others
moderately sociable
much pleasantsocial interaction
10 min.
20 min.
6Omin.
SOmin.
Notice that both X and Y are better than A and worse than B with respect
to social contact, and both are worse than A and better than B in terms of
commuting time. According to standard economic analysis, the choice
between X and Y should not depend on the decision maker's current
referencepoint . On the other hand, if subjectstreat their presentjob as a
referencepoint and if disadvantagesrelative to this referencepoint loom
, then subjects are more likely to
larger than corresponding advantages
choosethe job with the smallerdisadvantagerelative to their current job .
Thus, subjects who currently hold job A are expected to favor job X,
whereassubjectswho currently hold job B are expected to favor job Y.
The data confirm this expectation: more than two -thirds of subjectsin each
group chosethe predicted option.
Loss aversion, or the asymmetry between the evaluation of gains and
losses, emergesas an important empirical generalizationthat has implications
for a wide range of decisions. It promotes stability rather than
change by inducing people to maintain their current position. A lossaverseindividual at position X would be reluctant to switch to positionY ,
even though, were she at positionY , she would be reluctant to switch
to X. Along theselines, the reluctanceto changeinducedby loss aversion
can hinder the negotiated resolution of disputes. If each side to a dispute
evaluatesthe opponent' s concessionsas gains and its own concessionsas
losses, then agreementwill be hard to reach becauseeach side will perceive
itself as relinquishingmore than it standsto gain. A skillful mediator
facilitate
may
agreementby framing concessionsasbargaining chips rather
than as losses.
3.5 Eliciting Preference
Preferencescan be elicited by different methods. People can be asked to
indicate which option they prefer; alternatively, they can be askedto price
eachoption by stating the amount of money that is as valuableto them as
that option. A standard assumption, known as procedureinvariance
, demands
that logically equivalent elicitation proceduresshould give rise to
the samepreferenceorder. Thus, if one option is chosenover another, it is
also expected to be priced higher. Procedureinvariance is essentialfor
. For example,
interpreting both psychological and physical measurement
Decision Making
89
the ordering of physical objects with respect to masscan be established
either by placing each object separatelyon a scale, or by placing both
objects on two sidesof a pan balance. Procedureinvariancerequiresthat
the two methodsyield the sameordering, within the limit of measurement
error. Analogously, the rational theory of choice assumesthat an individual
hasa well-deAnedpreferenceorder that can be elicited either by choice
or by pricing. Thesealternativemethods of elicitation, in turn, should give
rise to the sameordering of options.
3.5.1 Compatibility Effects
Despite its appealas an abstractprinciple, people sometimesviolate procedure
invariance. For example, people often chooseone bet over another,
but price the second bet above the first. In one study, subjects were
presentedwith two prospectsof similar expectedvalue. One prospect, the
H bet, offered a high probability to win a relatively small payoff (for
example, 8 chancesin 9 to win $4) whereasthe other prospect, the L bet,
offered a low probability to win a larger payoff (for example, a 1 in 9
chanceto win $40). When askedto choosebetween theseprospects, most
subjects chose the H bet over the L bet. Subjectswere also asked, on
another occasion, to price eachprospectby indicating the smallestamount
of money for which they would be willing to sell this prospect. Here, most
subjectsassigneda higher price to the L bet than to the H bet. One recent
study that used this pair of bets observedthat 71 percent of the subjects
chose the H bet, and 67 percent priced Labove H (Tversky, Slovic, and
reversal
Kahneman 1990). This phenomenon, called preference
, has been
observedin numerousexperimentsusing a variety of prospectsand incentive
. It has also been observedamong professionalgamblersin a
schemes
LasVegas casino(Slovic and Lichtenstein1983).
What is the causeof preferencereversal? Why do peopleassigna higher
monetary value to the low -probability bet, but choosethe high-probability
bet more often? It appearsthat the major causeof preferencereversalis a
differential weighting of probability and payoff in choice and pricing,
induced by the required response. In particular, experimental evidence
indicates that an attribute of an option is given more weight when it is
compatiblewith the responseformat than when it is not (Tversky, Sattath,
and Slovic 1988). This account suggeststhat becausethe price that the
subject assignsto a bet is expressedin dollars, the payoffs of the bet,
which are also expressedin dollars, will be weighted more heavily in
, the L bet (which has the higher
pricing than in choice. As a consequence
in
more
is
evaluated
favorably pricing than in choice, which can
payoff)
. This accounthas been supported by the
to
reversals
rise
give
preference
observationthat the incidenceof preferencereversalswas greatly reduced
90
Shafir and Tversky
for bets involving nonmonetary outcomes, suchas a free dinner at a local
restaurant, where the outcomes and the subjects' prices are no longer
expressedin the same units and are therefore less compatible (Slovic,
Griffin, and Tversky 1990).
The compatibility hypothesis does not depend on the presenceof risk.
Indeed, it predicts a similar discrepancybetween choice and pridng in the
context of risklessoptions that have a monetary component. Consider a
long-term prospect L, which pays $2,500 five years from now, and a
short-term prospectS, which pays $1,600 in one and a half years. Subjects
were invited to choosebetween L and S and to price both prospectsby
stating the smallest immediate cash payment for which they would be
willing to exchangeeachprospect ( Tversky, Slovic, and Kahneman1990).
Becausethe payoffs and the prices again are expressedin the sameunits,
compatibility suggests that the long-term prospect (offering the higher
payoff) will be overvaluedin pridng relative to choice. In accordwith this
hypothesis, subjectschosethe short-term prospect 74 percent of the time
but priced the long-term prospect above the short-term prospect 75 percent
of the time. These observations indicate that different methods of
elicitation (for example, choiceand pridng ) caninducedifferent weightings
of attributes that in turn give rise to preferencereversals.
3.5.2
Relative Prominence
Another psychological mechanismthat leads to violations of procedure
invariance involves the notion of relative prominence. In many cases
,
people agree that one attribute (for instance, safety) is more important
than another (such as cost). Although the interpretation of such claims is
not entirely clear, there is evidencethat the attribute that is judged more
important looms larger in choice than in pricing ( Tversky, Sattath, and
Slovic 1988). This is the prominencehypothesis
. To illustrate this notion,
considertwo programs designedto reducethe number of fatalities due to
traffic accidents, characterizedby the expectedreduction in the number of
casualtiesand an estimatedcost. Becausehumanlives are regardedas more
important than money, the prominencehypothesis predicts that this dimension
will be given more weight in choice than in pricing. When given
a choice between programsX and Y below, the great majority of respondents
favored X, the more expensiveprogram that savesmore lives.
ProgramX
ProgramY
&peded numberof casualties
Cost
500
570
SssmillionS
12million
However , when the cost of one of the programs is removed and subjects are asked to detennine the missing cost so as to make the two
Decision Making
91
programs equally attractive, nearly all subjectsassign values that imply
a preferencefor Y , the less expensive program that saves fewer lives.
For example, when the cost of program X is removed, the median estimate
of the missing cost that renders the two programs equally attractive
is $40 million. This choice implies that at $55 million, program X
should not be chosen overprogramY , contrary to the aforementioned
choice. Thus, the prominent attribute (saving lives) dominatesthe choice
but not the pricing. This discrepancysuggeststhat different public policies
will be supported depending on whether people are asked which
policy they prefer or how much, in their opinion, each policy ought to
cost.
Further applications of the prominencehypothesis were reported in a
'
study of peoples responseto environmental problems (Kahnemanand
Ritov 1993). Several pairs of issues were selected, where one issue involves
human health or safety and the other protection of the environment
. Each issue includes a brief statement of a problem, along with a
suggestedform of intervention, as illustrated.
Problem
: Skin cancer &om sun exposure is common among farm
workers.
Intervention
: Supportee medicalcheckupsfor threatenedgroups.
Problem
: SeveralAustralian mammalspeciesare nearly wiped out by
hunters.
Intervention
: Contribute to a fund to provide safebreeding areasfor
thesespecies.
One group of subjectswas askedto choosewhich of the two interventions
they would rather support; a secondgroup of subjectswas presented
with one issueat a time and askedto determine the largest amount they
would be willing to pay for the respectiveintervention. Becausethe treatment
of cancerin human beings is generally viewed as more important
than the protection of Australian mammals, the prominence hypothesis
predicts that the former will receive greater support in direct choice than
in independent evaluation. This prediction was confirmed. When asked
to evaluate each intervention separately, subjects, who might have been
moved by theseanimals' plight , were willing to pay more, on average, for
safe breeding of Australian mammals than for &ee checkups for skin
cancer. When facedwith a direct choice between these options, however,
most subjectsfavored &ee checkupsfor humans over safe breeding for
mammals. Thus, people may evaluateone alternativemore positively than
another when each is evaluated independently, but then reverse their
evaluation when the alternativesare directly compared, which accentuates
the prominent attribute.
92
3.5.3
ShaRf
andTversky
Weighing Pros and Cons
Considerhaving to chooseone of two options or, alternatively, having to
reject one of two options. Under the assumptionof procedureinvariance,
the two tasks are interchangeable
. In binary choice it should not matter
whether people are askedwhich option they prefer, or which they would
reject: if people prefer the first they should reject the second, and vice
versa. In line with the notion of compatibility, however, we may expect
that the positive features of options (their pros) will loom larger when
choosing, whereas the negative features of options (their cons) will be
weighted more heavily when rejecting. It is natural to select an option
becauseof its positive features, and to reject an option becauseof its
negative features.
This accountleadsto the following prediction: Imagine two options, an
" enriched"
, with many positive and many negative features, and an
option
"
"
impoverished option, with few positive and few negative features. If
positive features are weighed more heavily when choosing than when
rejecting and negative featuresare weighed more heavily when rejecting
than when choosing, then an enriched option could be both chosenand
rejectedmore &equently than an impoverishedoption. Consider, for example
, the following problem, which was presentedto subjectsin two versions
that differed only in the bracketedquestions(Shafir 1993). Half the
subjectsreceivedone version, the other half receivedthe other.
Problem6 (N = 170)
Imaginethat you serveon the jury of an only -child sole-custody case
following a relatively messy divorce. The facts of the case are
complicatedby ambiguouseconomic, social, and emotional considerations
, and you decide to base your decision entirely on the following
few observations. [ To which parent would you award sole
custody of the child? / To which parent would you deny sole custody
of the child?]
ParentA
averageincome
averagehealth
average
- working- hours
reasonablerapport with the child
relatively stable sodallife
ParentB above-averageincome
very close relationship with the child
extremely active sodallife
lots of work -related travel
minor health problems
Award
Deny
[36%]
[45%]
[64%]
[55%]
Decision Making
93
ParentA , the impoverishedoption, is quite plain- with no striking positive
or negative features. There are no particularly compelling reasonsto
award or deny this parent custody of the child. Parent 5, the enriched
option, on the other hand, has good reasons to be awarded custody
(a very closerelationshipwith the child and a good income), but also good
reasonsto be denied sole custody (health problemsand extensiveabsences
due to travel). To the right of the options are the percentagesof subjects
who choseto award and to deny custody to eachof the parents. Parent5
is the majority choice both for being awarded custody of the child and
for being denied it , presumablybecausethis parent provides more compelling reasonsboth to be awarded as well as denied child custody. As a
result, the child is significantly more likely to end up with parent 5 when
we ask whom to award custody to than when we contemplatewhom to
deny. This discrepancyrepresentsanother violation of procedure invarLance
, in which two logically equivalent tasks give rise to predictably
different choices.
3.6
Choice under Conflict
The rational theory of choice assumes that each alternative has a utility or
subjective value for the decision maker. Given a set of options , the decision
maker selects the alternative with the highest value. This principle of
value maximization is routinely assumed in analyzing consumer choice. It
implies that the preference between options cannot be reversed by the
addition of new alternatives . If you prefer salmon to steak, for example,
you should not select steak &om a larger menu that includes salmon,
unless, of course, other entrees provide some information about the quality
of the steak or the salmon. Thus , a non prefer red option cannot be made
"
by introducing new alternatives . Consequently , the market
preferred
"
share of an option (that is, the proportion of people who select it ) cannot
be increased when new options are added. In particular , the proportion of
people who choose the option to defer decision should not increase when
additional alternatives become available.
Despite the simplicity' and intuitive appeal of the principle above , there
is evidence that people s preference between two options can depend on
the presence or absence of a third alternative . The introduction of a third
option can make the decision easier or harder to resolve and thus can affect
preference and increase the tendency to defer choice. The making of decisions
often creates conflict : we are not sure how to trade off one attribute
relative to another or which option would benefit us most . When people
are offered a single attractive option , there is little conflict and choice is
easy; however , when two or more attractive options are available , each
94
Shafirand Tversky
with its advantagesand disadvantages
, people often experienceconflict,
which may compel them to delay decision, maintain the statusquo, or seek
additional information.
The economist Thomas Schelling tells of an occasionon which he had
decided to buy an encyclopediafor his children, and was presentedat a
bookstore with two attractive options. Finding it difficult to choose between
them, he endedup buying neither, although had only one encyclopedia
been available, he would have happily bought it. More generally,
there are situations in which people prefer each of the available alternatives
over the status quo but do not have a compelling reasonforchoosing
among the alternatives and, as a result, defer the decision, perhaps
indeAnitely.
This phenomenonis demonstratedby this pair of problems, which were
presentedto two groups of students( Tverskyand Shafir 1992b).
Problem7 (N = 121), Low Conflict
Supposeyou are consideringbuying a compactdisc (CD) player, and
have not yet decidedwhat model to buy. You passby a store that is
having a one- day clearancesale. They offer a popular SONY player
for just $99, well below the list price. Do you?
[66%]
y . buy the SONY player
z. wait until you learn more about the various models
[34%]
Problem8 (N = 124), High Conflict
Supposeyou are consideringbuying a compactdisc (CD) player, and
have not yet decidedwhat model to buy. You passby a store that is
having a one-day clearancesale. They offer a popular SONY player
for just $99, and a top-of-the-line AIWA player for just $169, both
well below the list price. Do you?
x. buy the AIWA player
y . buy the SONY player
z. wait until you learn more about the various models
[27%]
[27%]
[46%]
The results indicate that people are more likely to buy a CD player in
the former, low conflict, condition than in the latter, high conflict, situation.
Both products- the AIW A and the SONY- seem attractive, both are
well priced, and both are on a one-day sale. The decisionmaker needsto
determine whether she is better off with a cheaper, popular product, or
with a more expensiveand sophisticatedone. This conflict is not easy to
resolve, and compelsmany subjectsto put off the purchaseuntil they learn
more about the various products. On the other hand, when the SONY
alone is available, there are compelling argumentsfor its purchase: it is a
popular player, it is very well priced, and it is on salefor one day only . In
Decision Making
9S
this situation, a greater majority of subjects decide to opt for the CD
player rather than delay the purchase.
Adding a competing alternative in the precedingexampleincreasedthe
tendency to delay decision. Adding an option can also have the opposite
effect, as illustrated in this problem, in which the original AIW A player
was replacedby an inferior model.
Problem9 (N = 62), Dominance
Supposeyou are consideringbuying a compactdisc (CD) player, and
have not yet decidedwhat model to buy. You passby a store that is
having a one-day clearancesale. They offer a popular SONY player
for just $99, well below the list price, and an inferior AIW A player
for the regular list price of $105. Do you?
x' . buy the AIWA player
[.3%]
.
the
SONY
7.3
[ %]
y buy
player
z. wait until you learn more about the various models
[24%]
In this version, the AIW A player is dominatedby the SONY: it is inferior
in quality and costs more. Thus, the presenceof the AIWA does not
detract from the reasonsfor buying the SONY, it actually supplements
them: the SONY is well priced, it is on sale for one day only, and it is
clearly better than its competitor. As a result, in the presenceof the
inferior AIW A , the SONY is chosenmore often. More generally, adding a
dominatedalternativetends to increasethe market shareof the dominating
option (Huber, Payne, and Puto 1982), contrary to the prediction of value
maximization.
In the scenarioabove, the addedoptions (the superior CD player in one
caseand the inferior player in the other) may have conveyed some information
about the consumer's chancesof finding a better deal. This interpretation
does not apply to the following demonstrations, in which there
is no opportunity to learn about the options, and the decision cannot be
delayed. One group of subjects(N = 106) was offered a choice between
$6 and an elegant Cross pen. The pen was selectedby .36 percent of the
subjects, and the remaining 64 percent chose the cash. A second group
(N = 115) was given a choice among three options: $6 in cash, the same
Cross pen, and a second pen that was distinctly less attractive. Only
2 percent of the subjectschose the less attractive pen, but its presence
increasedthe percentageof subjectswho chose the Cross pen from .36
percent to 46 percent (Simonsonand Tversky 1992). Studentsof marketing
recount many instancesof the phenomenonabove in the marketplace.
A common tactic usedto induceconsumersto purchasea given product is
to introduce an inferior option that rendersthe product in question more
attractive. For example, Williams-Sonoma, a mail-order and retail business
96
Shafir and Tversky
located in San Francisco
, used to offer a bread-baking appliancepriced at
$275. They then added a secondbread-baking appliance, very similar to
the first except that it was larger but could not bake whole-wheat bread.
The new item was priced at $429, more than 50 percent higher than the
original appliance. Not surprisingly, Williams-Sonomadid not sell many
units of the new item, but the salesof the less-expensiveappliancealmost
doubled.
The effect of added alternatives is not limited to decisions made by
consumers. In one study (Redelmeierand Shafir 1995), 287 experienced
physicians were presented with a description of a hypothetical patient
suffering from chronic hip pain and about to be referred to orthopedics.
Half the physicians were presentedwith a choice of whether or not to
assign this patient a particular medication (Motrin ); the other half were
presented with two alternative medications (Motrin and Feldene). The
proportion of physicianswho refrained from assigning any new medication
was 53 percentin the former group and 72 percentin the latter. Thus,
the availability of a second medication reduced the tendency to assign
either. Evidently, the difficulty of deciding which of the two medications
was preferableled many physiciansto avoid medicationaltogether.
The experimental evidence shows that, contrary to the principle of
value maximization, the availability of additional alternativescan increase
conflict and lead the decisionmaker to maintain the status quo, avoid the
decision, or postpone it indefinitely. It is difficult to overestimate the
significanceof the tendency to delay decision. Many things never get
done, not becauseone has chosennot to do them, but becausethe person
has chosennot to do them now. The following demonstration illustrates
this point . Studentswere offered $5 for answering and returning an assigned
questionnaireby a given date. One group was given 5 days to
completethe questionnaire,a secondgroup was given 3 weeks, and a third
group was given no definite deadline. The correspondingrates of return
were 60 percent, 42 percent, and 25 percent. Thus, the more time students
had to complete the task, the less likely they were to do it. Just as adding
a seconddrug reducesthe tendency to administermedication, so too can
extending time reducethe likelihood of completing an assignment.
3.7
Discussion
In this chapterwe have applieda numberof psychologicalprinciplesto the
analysis of individual decision making. We have invoked the notion of
to derive the shapeof the value function, which
diminishing sensitivity
'
reflectspeoples evaluation of gains and losses. This function accountsfor
common observations of risk aversion in the domain of gains and risk
Decision Making
97
seeking in the domain of losses. Because the same outcomes can sometimes
be described either as gains or as losses, alternative framings of a
decision problem can give rise to predict ably different choices. We have
also considered the principle of loss aversion , according to which losses
have a greater impact than the corresponding gains . Loss aversion accounts
for a wide range of findings , notably the reluctance to depart from
the status quo .
Additional psychological principles were introduced to account for
elicitation effects. We suggested that different attributes of options are
weighted differently in choice and in pricing , and we invoked the notions
of compatibility and prominence to explain the discrepancy between these
procedures . Finally , we have appealed to considerations of conflict , or
choice difficulty , to explain some effects of the addition of options and the
tendency to defer decision .
The psychological principles discussed in this chapter do not form a
unified theory , comparable to the rational theory of choice. However , they
help explain a wide range of empirical findings that are incompatible with
the rational theory . Recall that this theory assumes consistent preferences
that satisfy description and procedure invariance . In contrast , the experimental
evidence suggests that preferences are actually constructed , not
merely revealed , in the elicitation process, and that these constructions
depend on the framing of the problem , the method of elicitation , and the
available set of options .
We have suggested that the rational theory of choice provides a better
'
account of people s normative intuitions than of their actual behavior .
When confronted with the fact that their choices violate dominance or
descript i Qninvariance , people typically wish to modify their behavior to
'
conform with these principles of rationality . Evidently , people s choices are
often at variance with their own normative intuitions . The tension between
normative and descriptive theories of choice is analogous to the
tension between normative and descriptive theories of ethics. A normative
ethical account is concerned with the principles that underlie moral judgments
. A descriptive ethical account , on the other hand, is concerned with
actual human conduct . Both enterprises are essentially empirical ; the first
'
addresses people s intuitions , whereas the second focuses on their actual
behavior . The two analyses, of course, are interrelated but they do not
coincide . For example , people generally agree that one should abstain from
lying and contribute to worthy causes, despite the fact they do not always
do so. Similarly , people tend to accept the normative force of dominance
and description invariance , even though these are often violated in their
actual choices. Although the distinction between the normative and descriptive
accounts is obvious in the study of ethics, it is somewhat controversial
in the study of decision making . This difference may be due to the
98
Shamand Tversky
fact that it is easier to understand violations of ethical norms that stem
from self-interest or lack of self- control , than violations of rational norms
that stem from the nature of cognitive operations .
Suggestions for Further Reading
Elementaryintroductionsto the field of behavioraldecisiontheory includeBazerman
(1992), Dawes(1988), Hogarth(1987), and Yates(1990). von Winterfeldtand Edwards
, coveringan areaknownas
(1986) is an introductionwith moreof an appliedperspective
. Thaler(1992) focuseson the role of behavioraltheory in interpreting
decisionanalysis
. Shafir
numerouseconomicanomalies
, Simonson
, andTversky(1993) considerthe role of
. For collectionsof primaryarticlesrelatingbehavioral
reasonsin the makingof decisions
decisiontheory to variousdomainsof inquiry, rangingfrom economicsand the law to
andphilosophy
, andTversky
, seeArkesandHammond(1986), andBell, Raiffa
engineering
, Bettman
, and
(1988). Recentreviewsof the field areprovidedby Camerer(1995), Payne
, andFischhoff(forthcoming
).
Johnson(1992), andSlovic, Lichtenstein
Problems
3.1 Show that the majority choice of options C and F in problem 3 is dominated by the
unpopular combination of options D and E.
3.2 Consider this statistical information about the outcomes of two treatments for lung
cancer- surgery and radiation therapy:
Surgery: Of 100 people having surgery, 90 live through the postoperative period,
68 are alive at the end of the first year, and 34 are alive at the end of five years.
Radiation therapy: Of 100 people having radiation therapy, all live through the
treatment, 77 are alive at the end of one year, and 22 are alive at the end of five
years.
Notice that the statistics above are presentedin terms of survival rates. Now frame the
statistical information about the outcomesabove in terms of mortality rates. ( Thus, if 68 of
100 are alive at the end of one year, that means32 die by the end of one year, and so on)
'
Do you have an intuition about whether people s preferencebetween the treatments may
differ between the survival and mortality frames, and in what direction?
Questions for Further Thought
3.1 It is suggestedin the chapterthat althoughthe distinctionbetweennormativeand
descriptiveaccountsis obviousin the studyof ethics, it remainscontroversialin the study
of decisionmaking.Why do you think that maybe?
3.2 Lossaversionis shownto generatea strongtendencyto maintainthestatusquo. This
leadspeopleto maintainthe statusquo
it sometimes
is calledthe "statusquobias," because
. Canyou think of situationsin
in situationswhereotherwiseit wouldnot havebeenchosen
your life, or in that of someonecloseto you, that mayhaveexhibiteda statusquobias?
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An Invitation to Cognitive Science - 2nd Edition - Vol. 3.
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