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Affect, Empathy, and Regressive Mispredictions of Others' Preferences Under Risk

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  • David Faro

    () (Graduate School of Business, University of Chicago, 5807 South Woodlawn Avenue, Chicago, Illinois 60637)

  • Yuval Rottenstreich

    () (Fuqua School of Business, Duke University, 1 Towerview Drive, Durham, North Carolina 27708-0120)

Abstract

Making effective decisions under risk often requires making accurate predictions of other people's decisions under risk. We experimentally assess the accuracy of people's predictions of others' risky choices. In four studies, we find evidence of systematic inaccuracy: predictions of others' choices are too regressive. That is, people predict that others' choices will be closer to risk neutrality than those choices actually are. Where people are risk seeking, they predict that others will be risk seeking but substantially less so; likewise, where people are risk averse, they predict that others will be risk averse but substantially less so. Put differently, people predict that others' choices will reveal a more muted form of prospect theory's fourfold pattern of risk preferences than actually prevails. Two psychological concepts, the notion of risk-as-feelings and of an empathy gap, help account for regressive mispredictions. We explore several debiasing techniques suggested by these notions and also find that self-reported ratings of empathy moderate the magnitude of regressive mispredictions.

Suggested Citation

  • David Faro & Yuval Rottenstreich, 2006. "Affect, Empathy, and Regressive Mispredictions of Others' Preferences Under Risk," Management Science, INFORMS, vol. 52(4), pages 529-541, April.
  • Handle: RePEc:inm:ormnsc:v:52:y:2006:i:4:p:529-541
    DOI: 10.1287/mnsc.1050.0490
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    File URL: http://dx.doi.org/10.1287/mnsc.1050.0490
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Natalia Montinari & Michela Rancan, 2018. "Risk taking on behalf of others: The role of social distance," Journal of Risk and Uncertainty, Springer, vol. 57(1), pages 81-109, August.
    2. Daniels, David P. & Zlatev, Julian J., 2019. "Choice architects reveal a bias toward positivity and certainty," Organizational Behavior and Human Decision Processes, Elsevier, vol. 151(C), pages 132-149.
    3. Polman, Evan, 2012. "Self–other decision making and loss aversion," Organizational Behavior and Human Decision Processes, Elsevier, vol. 119(2), pages 141-150.
    4. Sandro Casal & Matteo Ploner & Alec N. Sproten, 2019. "Fostering The Best Execution Regime: An Experiment About Pecuniary Sanctions And Accountability In Fiduciary Money Management," Economic Inquiry, Western Economic Association International, vol. 57(1), pages 600-616, January.
    5. Burson, Katherine A. & Faro, David & Rottenstreich, Yuval, 2010. "ABCs of principal-agent interactions: Accurate predictions, biased processes, and contrasts between working and delegating," Organizational Behavior and Human Decision Processes, Elsevier, vol. 113(1), pages 1-12, September.
    6. Sebastian Olschewski & Marius Dietsch & Elliot A. Ludvig, 2019. "Anti-social motives explain increased risk aversion for others in decisions from experience," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 14(1), pages 58-71, January.
    7. Kocher, Martin G. & Pahlke, Julius & Trautmann, Stefan T., 2015. "An experimental study of precautionary bidding," European Economic Review, Elsevier, vol. 78(C), pages 27-38.
    8. Tobias Thomas Prietzel, 0. "The effect of emotion on risky decision making in the context of prospect theory: a comprehensive literature review," Management Review Quarterly, Springer, vol. 0, pages 1-41.
    9. Leiser, David & Azar, Ofer H. & Hadar, Liat, 2008. "Psychological construal of economic behavior," Journal of Economic Psychology, Elsevier, vol. 29(5), pages 762-776, November.
    10. Hsee, Christopher K. & Yang, Yang & Li, Xilin, 2019. "Relevance insensitivity: A new look at some old biases," Organizational Behavior and Human Decision Processes, Elsevier, vol. 153(C), pages 13-26.
    11. Egan, Daniel & Merkle, Christoph & Weber, Martin, 2014. "Second-order beliefs and the individual investor," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 652-666.
    12. Eric R. Stone & YoonSun Choi & Wandi Bruine de Bruin & David R. Mandel, 2013. "I can take the risk, but you should be safe: Self-other differences in situations involving physical safety," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 8(3), pages 250-267, May.
    13. Robin Chark & Vincent Mak & A. V. Muthukrishnan, 2020. "The premium as informational cue in insurance decision making," Theory and Decision, Springer, vol. 88(3), pages 369-404, April.
    14. Zhihua Li & Kirsten I. M. Rohde & Peter P. Wakker, 2017. "Improving one’s choices by putting oneself in others’ shoes – An experimental analysis," Journal of Risk and Uncertainty, Springer, vol. 54(1), pages 1-13, February.
    15. Hadar, Liat & Fischer, Ilan, 2008. "Giving advice under uncertainty: What you do, what you should do, and what others think you do," Journal of Economic Psychology, Elsevier, vol. 29(5), pages 667-683, November.
    16. Brenner, Lyle & Bilgin, Baler, 2011. "Preference, projection, and packing: Support theory models of judgments of others' preferences," Organizational Behavior and Human Decision Processes, Elsevier, vol. 115(1), pages 121-132, May.
    17. Jana Freundt & Andreas Lange, 2019. "On the Impact of Risky Private and Public Returns in the Private Provision of Public Goods - The Case of Social Investments," CESifo Working Paper Series 7458, CESifo.
    18. Roth, Benjamin & Voskort, Andrea, 2014. "Stereotypes and false consensus: How financial professionals predict risk preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 553-565.
    19. Freundt, Jana & Lange, Andreas, 2017. "On the determinants of giving under risk," Journal of Economic Behavior & Organization, Elsevier, vol. 142(C), pages 24-31.

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    Keywords

    risk; uncertainty; affect;

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