The Context-Dependence of the Process of Risky Choice

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Virginia Tech

The evaluation of risk is a fundamental aspect of decision-making and influences important outcomes, such as in the domain of financial and health behavior. In many economic applications, risk attitudes are assumed to be inherently stable. Nonetheless, behavioral tasks that elicit risk preferences have shown temporal inconsistencies. The instability of risk preferences can be attributed to several factors such as the way information is presented (framing effects), personal past experiences, and experienced emotions. We conduct four studies in this dissertation to shed light on the state dependency of risk attitudes and on the decision process of risky choice.

Chapter 2 examines, using a laboratory experiment, how high stakes in risky choices influence physiological arousal, as measured via skin conductance, pulse rate and pupil size, and attention, as measured via gaze bias and saccades. We link the changes in arousal and attention accompanying high stakes to changes in risk aversion. Moreover, we develop and test a Sequential Sampling Model (SSM), the arousal-modulated Attentional Drift Diffusion Model (aADDM), linking reaction time and choice while allowing attention and its interaction with arousal to modulate the evaluation process of risky alternatives. High stakes caused changes in attention toward the safe option's attributes, heightened physiological arousal, and increased risk aversion. Results from the aADDM, demonstrate that the values of the high attributes are discounted when participants attend to the low attributes, with arousal amplifying this process further.

Chapter 3, using a laboratory experiment, investigates how incentives and emotional experiences influence the adaptation process across high and low volatility contexts in risky choice. Due to the brain's computational capacity limitations, perception is optimized to detect differences within a narrow range of stimuli. We show that this adaptation process is itself context-dependent, with stronger incentives, heightened arousal, or more unpleasant feelings increasing payoff responsivity under high volatility.

Chapter 4, using survey data, focuses on fear responses during the COVID-19 pandemic and risk perception of the health- and financial-related consequences of the crisis. We show that women report higher fear of the COVID-19 pandemic compared to men, modulating the gender differences in preventative health behaviors. Women also perceive the health risks of COVID-19, and not financial risks, to be greater than men.

Chapter 5, using vignette experiments, demonstrates that betrayal aversion, or hesitancy regarding the risk of being betrayed in an environment involving trust, is an important preference construct in the decision to become vaccinated and is not accounted for by widely used vaccine hesitancy measures. We show that people are significantly less willing to get vaccinated when the associated risk involved the vaccine actively contributing to the cause of death. We also find that betrayal aversion is amplified with an active role of government or scientists. Moreover, we test an exogenous intervention that increases willingness to vaccinate without mitigating betrayal aversion.

JEL codes: D81, D83, D87, D91, I12, J16

Risk, Uncertainty, Incentives, Context-Dependence, Attention, Choice Mechanisms, Arousal, Emotions