Aaltodoc publication archive (Aalto University institutional repository)
School of Business | Department of Economics | Economics | 2011
Thesis number: 12733
Reference comparison and decision making - effects of reference point salience on decision making under risk
|Title:||Reference comparison and decision making - effects of reference point salience on decision making under risk|
|Year:||2011 Language: eng|
|Department:||Department of Economics|
|Index terms:||kansantaloustiede; economics; päätöksenteko; decision making; epävarmuus; uncertainty; riski; risk; pelit; games; viihde; entertainment|
» hse_ethesis_12733.pdf size:2 MB (1303745)
|Key terms:||decision making; risk aversion; social preferences; prospect theory; social pressure; gambling; reference group; reference person|
Decision making theories were originally built around the assumption that individual’s decisions are mainly dependent on the monetary outcomes of the decider. This paper explores whether social comparison and controlling the salience of social comparison can change evaluation of choices and preference for risk. The hypothesis is that they can. Early expected utility models modeled risk aversion by assigning different shapes to an individual’s utility function. The relatively simple structure of the expected utility model provided a readily understandable tool for predicting decision making under risk. It also contained some problems related to the underlying assumptions which the model was based on. Later developments in economic decision making theory aimed to solve the observed problems and include more factors in to the models. Prospect theory and social preferences models are among these developments in decision making theory. Decision making, as described by these models, can also depend on results attained by other people. Psychological research on decision making has a longer line of research and can contribute more to reference person selection, effects of emotions and social pressure. This paper will present two economic decision making theories, relevant for the subject of social comparison and risk taking, and provide additional review of relevant psychological research. In addition to the literature review, a hypothetical experiment, plausible results and possible implications are discussed in the end.
Prospect theory and social preferences model include a reference person in the evaluation of an outcome and provide a modeling possibility for estimating how these reference persons could affect decision making. Both models predict that increasing the salience of a reference person’s outcomes and comparison will change risk taking in individuals. In prospect theory, salience is predicted to moderate the perceived distance to a reference point. Increasing salience of social comparison is expected to increase the perceived difference to reference point. In social preferences model, the outcome of a reference person is included in the utility function and the parameters are expected to react to changing salience conditions. Changing parameters would change marginal utility of the utility function altering predicted risk preferences.
Psychological research helps further understand how reference persons are selected, what effects emotions and social pressure can have. Reference people are selected mainly due to the fact that people have a need to evaluate their actions and in some fields finding a suitable measure is difficult. In subjective situations, other people provide a convenient way to measure ones abilities and success. Findings in research on social pressure support the hypothesis and include support on the moderating effect of salience on risk taking. Finally, previous research on emotions does not provide any conclusive evidence for or against the hypothesis. The prominent theories on emotions are presented and possible effects of each are accounted for when discussing possible results and implications.
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