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The role of forgone opportunities in decision making under risk

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  • Ivan Barreda-Tarrazona
  • Ainhoa Jaramillo-Gutierrez
  • Daniel Navarro-Martinez
  • Gerardo Sabater-Grande

Abstract

We present two experiments designed to study the role of forgone opportunities in decision making under risk. In the first one, we face individuals with a dynamic environment in which their decisions, together with chance, determine their future options. We find that previously faced opportunities influence subsequent choices in predictable ways. Having faced worse options in the past significantly increases individuals’ risk aversion and having faced better options reduces it. These patterns are at odds with most existing decision theories, including Expected Utility Theory and standard implementations of Prospect Theory, the dominant models of economic decision making. In our second experiment, we present participants with a similar decision environment, but in which the opportunities they face do not depend on their past choices. The effect of previously faced options on decision behavior in this environment is considerably reduced. This shows that being responsible for forgoing opportunities is an important factor in their influence on behavior, which underscores the relevance of emotions linked to counterfactual thinking, like regret or satisfaction. These results highlight that theories formulated in cognitive terms are not enough to provide an adequate account of the role of forgone opportunities in decision making under risk and uncertainty. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Ivan Barreda-Tarrazona & Ainhoa Jaramillo-Gutierrez & Daniel Navarro-Martinez & Gerardo Sabater-Grande, 2014. "The role of forgone opportunities in decision making under risk," Journal of Risk and Uncertainty, Springer, vol. 49(2), pages 167-188, October.
    • Handle: RePEc:kap:jrisku:v:49:y:2014:i:2:p:167-188
    DOI: 10.1007/s11166-014-9201-4
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    More about this item

    Keywords

    Decision making under risk; Path-dependence; Reference-dependence; Counterfactual thinking; Emotions; C91; D03; D81;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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