Suboptimal Choices and the Need for Experienced Individual Well-Being in Economic Analysis

Standard economic analysis assumes that people make choices that maximize their utility. Yet both popular discourse and other fields assume that people sometimes fail to make optimal choices and thus adversely affect their own happiness. Most social sciences thus frequently describe some patterns of decision as suboptimal. We review evidence of suboptimal choices that arise for two reasons. First, people err in predicting the utility they may accrue from available choice options due to the evaluation mode. Second, people choose on the basis of salient rules that are unlikely to maximize utility. Our review is meant to highlight the possibility of a research program that combines economic analysis with measures of experienced individual well-being to improve people's happiness.suboptimal choice, individual well-being, experienced utility, evaluation mode, salient rule, utility misprediction

Evaluating a dual-proces model of risk: Affect and cognition as determinants of risky choice

In three studies we addressed the impact of perceived risk and negative affect on risky choice. In Study 1, we tested a model that included both perceived risk and negative affect as predictors of risky choice. Study 2 and Study 3 replicated these findings and examined the impact of affective versus cognitive processing modes. In all the three studies, both perceived risk and negative affect were shown to be significant predictors of risky choice. Furthermore, Study 2 and Study 3 showed that an affective processing mode strengthened the relation between negative affect and risky choice and that a cognitive processing mode strengthened the relation between perceived risk and risky choice. Together, these findings show support for the idea of a dual-process model of risky choice

Relativity, rank and the utility of income

This is the accepted version of the following article: Rablen, M. D. (2008), Relativity, Rank and the Utility of Income. The Economic Journal, 118: 801–821, which has been published in final form at http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0297.2008.02143.x/abstract.Relative utility has become an important concept in several disjoint areas of economics. I present a cardinal model of income utility based on the supposition that agents care about their rank in the income distribution and that utility is subject to adaptation over time. Utility levels correspond to the Leyden Individual Welfare Function while utility differences yield a version of the prospect theory value function, thereby providing a new and shared derivation of each. I offer an explanation of some long-standing paradoxes in the wellbeing literature and an insight into the links between relative comparisons and loss aversion.ESR

A framing effect in the judgment of discrimination

Discrimination is not only an objective fact but also a subjective judgment. While extensive research has studied discrimination as an objective fact, we study the judgment of discrimination and show that it is malleable while holding objective discrimination constant. We focus on a common situation in real life: the constituent groups in a candidate pool are unequal (e.g., fewer female candidates than male candidates for tech jobs), and observers (e.g., the public) see only one side of the decision outcome (e.g., only the hired applicants, not the rejected ones). Ten experiments reveal a framing effect: people judge the decision-maker (e.g., the tech firm) as more discriminatory against the minority in the candidate pool if people see the composition of the accepted candidates than if they see the composition of the rejected candidates, even though the information in the two frames is equivalent (i.e., knowing the information in one frame is sufficient to infer the information in the other). The framing effect occurs regardless of whether the decision-maker is objectively discriminatory, replicates across diverse samples (Americans, Asians, and Europeans) and types of discrimination (e.g., gender, race, political orientation), and has significant behavioral consequences. We theorize and show that the framing effect arises because, when judging discrimination, people overlook information that they could infer but is not explicitly given, and they expect equality in the composition of the constituent groups in their given frame. This research highlights the fallibility of judged discrimination and suggests interventions to reduce biases and increase accuracy

Enhancing feedback and improving feedback: subjective perceptions, psychological consequences and behavioral outcomes

Three experiments examined subjective perceptions, psychological consequences, and behavioral outcomes of enhancing versus improving feedback. Across experiments, feedback delivery and assessment were sequential (i.e., at each testing juncture) or cumulative (i.e., at the end of the testing session). Although enhancing feedback was seen as more satisfying than useful, and improving feedback was not seen as more useful than satisfying, perceptions differed as a function of short-term versus long-term feedback delivery and assessment. Overall, however, enhancing feedback was more impactful psychologically and behaviorally. Enhancing feedback engendered greater success consistency, overall satisfaction and usefulness, optimism, state self-esteem, perceived ability, and test persistence intentions; improving feedback, on the other hand, engendered greater state improvement. The findings provide the fodder for theory development and applications

Lay Rationalism and Inconsistency between Predicted Experience and Decision

Decision-makers are sometimes depicted as impulsive and overly influenced by ‘hot’, affective factors. The present research suggests that decision-makers may be too ‘cold’ and overly focus on rationalistic attributes, such as economic values, quantitative specifications, and functions. In support of this proposition, we find a systematic inconsistency between predicted experience and decision. That is, people are more likely to favor a rationalistically-superior option when they make a decision than when they predict experience. We discuss how this work contributes to research on predicted and decision utilities; we also discuss when decision-makers overweight hot factors and when they overweight cold factors. Copyright © 2003 John Wiley & Sons, Ltd

The Role of Hedonic Behavior in Reducing Perceived Risk

Understanding how human populations naturally respond to and cope with risk is important for fields ranging from psychology to public health. We used geophysical and individual-level mobile-phone data (mobile-apps, telecommunications, and Web usage) of 157,358 victims of the 2013 Ya’an earthquake to diagnose the effects of the disaster and investigate how experiencing real risk (at different levels of intensity) changes behavior. Rather than limiting human activity, higher earthquake intensity resulted in graded increases in usage of communications apps (e.g., social networking, messaging), functional apps (e.g., informational tools), and hedonic apps (e.g., music, videos, games). Combining mobile data with a field survey ( N = 2,000) completed 1 week after the earthquake, we use an instrumental-variable approach to show that only increases in hedonic behavior reduced perceived risk. Thus, hedonic behavior could potentially serve as a population-scale coping and recovery strategy that is often missing in risk management and policy considerations. </p

Accommodating stake effects under prospect theory

One of the stylized facts underlying prospect theory is a four-fold pattern of risk preferences. People have been shown to be risk seeking for small probability gains and large probability losses, while being risk averse for large probability gains and small probability losses. Another fourfold pattern of risk preferences over outcomes, postulated by Harry Markowitz in 1952, has received much less attention and is currently not integrated into prospect theory. In two experiments, we show that risk preferences may change over outcomes. While we find people to be risk seeking for small outcomes, this turns to risk neutrality and later risk aversion as stakes increase. We then show how a one-parameter logarithmic utility function fits such stake effects significantly better under prospect theory than the power or exponential functions mostly used when fitting prospect theory models. We further investigate the extent to which the use of ill-suited functional forms to represent utility may result in violations of prospect theory, and whether such violations disappear when using logarithmic utility

Future–present relationship insensitivity : a new perspective on psychological myopia and psychological hyperopia

How much joy versus pain people choose to experience for the present often inversely affects how much joy versus pain they will experience in the future. Do people make choices that maximize their overall happiness? Prior research suggests that people are generally myopic (i.e., over‐choosing joy for the present). We suggest that the prior research may have biasedly focused only on situations in which the future is more important than the present. Rather, people are generally insufficiently sensitive to the relative importance of the present versus the future. When the future is more important than the present, people over‐choose joy for the present, thus appearing myopic, but when the future is less important than the present, people under‐choose joy for the present, thus appearing hyperopic. Six experiments (along with a reason‐exploration study) demonstrate our propositions and show that forcing or nudging people to choose less (more) joy for the present when the future is more (less) important increases their overall happiness. This research challenges the popular view that people are generally myopic, and supports emerging research showing that people are generally situation‐insensitive and can exhibit seemingly opposite biases (e.g., myopia and hyperopia) in different situations

Risk preference and choice stochasticity during decisions for other people

In several contexts, such as finance and politics, people make choices that are relevant for others but irrelevant for oneself. Focusing on decision-making under risk, we compared monetary choices made for one’s own interest with choices made on behalf of an anonymous individual. Consistent with the previous literature, other-interest choices were characterized by an increased gambling propensity. We also investigated choice stochasticity, which captures how much decisions vary in similar conditions. An aspect related to choice stochasticity is how much decisions are tuned to the option values, and we found that this was higher during self-interest than during other-interest choices. This effect was observed only in individuals who reported a motivation to distribute rewards unequally, suggesting that it may (at least partially) depend on a motivation to make accurate decisions for others. Our results indicate that, during decision-making under risk, choices for other people are characterized by a decreased tuning to the values of the options, in addition to enhanced risk seeking