Experiential and Neurobiological Influences on Economic Preferences and Risky Decision Making

Economic preferences are fundamental to risky decision making and other economic decision- making. Unlike traditional economics, which routinely assumes that individuals are endowed with stable preferences and try to maximize the expected utility when facing risky decision-making problems, behavioral economics and neuroeconomics offer research strategies that help us explore the factors that influence economic preferences and risky decision-making process. This dissertation consists of three essays studying the underlying experiential influences on economic preferences and neurobiological effects on risky decision making.

Chapter 2 examines whether experiences during adolescence have a long-term effect on economic preferences. Between 1966 and 1976, China's Sent-Down Movement required seventeen million urban teenagers to spend several years living and working in rural areas. The program had a number of goals for participants, including learning empathy for rural laborers and developing collectivist values. The sent-down movement can be regarded as a natural experiment, which allows us to investigate whether this government policy was successful in effecting a lasting change to economic preferences. Using a modified Global Preference Survey and employing a regression discontinuity design, we find that the experience of being Sent-Down significantly changed participants' risk preferences, other-regarding preferences, and attitudes toward government.

Chapter 3 explores how the arousal system modulates attention and investment behavior. Experimental research shows that human decision making is shaped by emotions associated with an outcome's success or failure. Regret, for example, is a powerful predictor of future investment decisions in asset markets. Using a fictive learning model to capture regret, we examine changes in pupil diameter of participants performing a sequential investing task. By manipulating task uncertainty, we show that pupil dilation is positively correlated with both asset price variance and regret. In addition, pupil linked arousal is positively associated with the learning rate. We conclude that the pupil–linked arousal system helps regulate investment behavior in a dynamic market environment.

Chapter 4 explores the complex process by which people make risky choices. While traditional models, like expected utility theory, model choice as the selection of the outcome with the highest probability-weighted value, research shows that in some environments these models do a poor job of describing behavior. This study explores the role of attention, pupil-linked arousal, and salience in risky choice. First, we replicate earlier findings that those choices are consistent with expected utility theory when the calculation is easy, however, as the calculation becomes harder, they make decisions by comparing unweighted payoffs and are attend to the salient option. Further, we find that pupil-linked arousal is associated with the level of cognitive effort needed to calculate expected utility. Finally, we show that arousal reflects cognitive effort associated with resisted selecting a more salient option.