Risk Preferences for Gains and Losses in Multiple Objective Decision Making

Payne, Laughhunn, and Crum (Payne, J. W., D. J. Laughhunn, R. Crum. 1984. An experimental study of multiattribute risky choice. Management Sci. 30 1350--1361.) found that managers were multiattribute risk averse for gains, but multiattribute risk prone for losses, a pattern that is inconsistent with both the additive and the multiplicative multiattribute utility models. In this paper we develop the reference risk-value (RRV) model, which is simple in structure yet capable of representing the kinds of multiattribute reference effects observed by Payne et al. We also report the results of two experiments that compare the descriptive validity of the RRV model with that of the additive and multiplicative utility models. Experiment 1 involved choices between risky multiperiod cash flows; Experiment 2 choices between risky job alternatives described by change in salary and change in type of work. In Experiment 1, subjects were multiattribute risk averse for gains, but multiattribute risk neutral for losses. In Experiment 2, subjects were multiattribute risk averse for both gains and losses, but significantly more so for losses. Because both experiments produced significantly different multiattribute risk preferences for gains than losses, both favor the RRV model over the widely used additive and multiplicative models. However, because the patterns of multiattribute risk preferences for gains and losses were strikingly different in the two experiments, these results argue against any direct generalization of the "reflection effect" to a multiattribute context.