Why Study Risk?

Humans are not the cool calculators that classical behavior theories assumed we were.  Research demonstrates that we are susceptible to systematic errors in information processing that lead us to behave irrationally when making decisions.  A risk-decision framework helps researches to witness and measure where bias creeps into the process.  Despite explicit information regarding option value and probability, we edit choices causing us to subjectively weight both outcome value and probability. Changing option forms and not the outcomes therefore led to reversals of preference in subjects.  This result and the subsequent behavioral model of decision under risk called Prospect Theory, earned Daniel Kahneman the Nobel Prize in Economics (Kahneman’s co-author, Amos Tversky passed away before the prize was awarded).

The subjective weighting discovered by Kahneman and Tversky was measured using predominately financial prospecting scenarios.  Subjects chose between two financial outcomes involving gains, losses or a mix or gains and losses with either certainty or some explicit probability.  The researches expected that the individual subjective weighting they discovered and therefore risk-preference was stable across all contexts.  What was reported in subsequent experiments however, was that risk preference varied across contexts.  Research into context variation has provided a number of good leads into the source of the variation, but to date no complete explanation exists.

I decided to investigate the source of context-specific risk-variance because all decisions we make involve some level of risk evaluation.  Identifying the source of the variance will help us to account for errors in the processing of all decisions.  Despite our best intentions to make good decisions for ourselves, our families, at our jobs and even public policy, we are still subject to forces that we do not completely understand and cannot entirely explain.  My research has pointed me to a potential source of risk-preference variance.
Borrowing from the Theory of Human Evolution, Optimal Foraging Theory posits that a risk strategy that responds to environmental cues would be advantageous and therefore “selected for” as a trait to be passed on.  For instance, if an individual was predominately risk-seeking, s/he would select an unknown environment over one that provides sustainability, potentially leading to death; a risk-averse individual would avoid an unknown environment even when the current one is inadequate to survive leading to certain demise.  However the best-adapted individual will be risk-seeking when the current environment is scarce and risk-adverse when the current environment is abundant.

My hypothesis is that the perceived scarcity or abundance of resources available in a given context should explain context-specific risk-variance. Individuals that report a perceived scarcity of resources will likely report higher levels of risk taking in that context.  I plan to test my theory with a measure I developed to identify a subject’s perceived level or scarcity of resources available in each of four context.  The contexts I chose came from a literature review and have demonstrated the greatest amount of variance within subjects.  They are financial, health/safety, social and ethical contexts.  Additionally subjects will then rate the level of risk, the value of the outcome and the likelihood of taking the risk as provided in risk scenario.  Each context will have four risk scenarios.

Joe Cacciotolo

2013 Business Psychology Doctoral Candidate