Differences in information searching in risk judgment between sophisticated and non sophisticated subjects. Agata Michalaszek Joanna Sokolowska

Perceived risk What is perceived risk? people do not need more explanation to judge riskiness risk rates are consistant no common definition of perceived risk 2

Perceived risk two major point of controversy: 1.the relative input of positive and negative information into risk judgment 2.the relative input of payoffs and probabilities into risk judgment 3

R–V Models – Markowitz: decisions are based on both expected return and its uncertainty or variability (related to risk) (Markowitz, 1959) risk is associated with the dispersion of the random variable risk as indepedent concept WTP(x) = f {V(x), R(x)} 4

Perceived risk as dispersion X 1 : [+10, 50%; -10, 50%] X 2 : [+20, 50%; -10, 50%] X 3 : [+10, 50%; -20, 50%] R(x 1 ) < R(x 2 )=R(x 3 ) Subjects’ rates: R(x 2 ) < R(x 1 ) < R(x 3 ) 5 Input of negative outcome into risk judgment is more important

Positive information In everyday language: – emphasise negative connotation to the possibility of outcomes – underline extra rewards that can be gained only at the price of uncertainty and possible loss Proverbs: – uncertainty (‘do not buy a pig in a poke’) – possible loss (‘gold may be bought to dear’) – necessary condition of success (‘nothing ventured, nothing gained’) 6

Payoffs vs. probabilities Risk jugdment: Probabilities are more important in experiments Values are more important in real life situations – difficult to asses probability in everyday activities Open questions – few about probabilities, much more about payoffs in different categories (Tyszka and Zaleskiewicz, 2006) 7

Payoffs vs. probabilities Methodology: different scales for payoffs and probabilities Resolution approach: provide with vague magnitude of payoffs and probabilities use process tracing method – Mouselab 8

Vague information in USA new virus of dangerous flu is spreading it is necessary to rate riskiness of a purchase of the various vaccines for employees both vaccines are safe in the same way and have the same price differences with: seriousness of negative effects probability of those effects 9

Vague information Precise information : 5% chances of negative effects $45 costs Imprecise information: Vaccine AVaccine B 3-7% chances of negative 5% chances of negative effects effects $75 costs $ costs (Kuhn and Budescu,1996) 10

Process tracing method investigating the process by investigating which information is used by people when judging risk Information: – type – amount – order – reaction time 11

Educational background Empirical findings: people in general use incorrect representation of random events gambler’s fallacy law of small numbers subaaditivity of probability for complementary events conjunction fallacy 12

Educational background people cannot get information about probability in real life ‘expert’s’ group: people who are trained to use probabilistic representation of reality greater knowlegde of mathematics and statistics more sensitive to probabilities 13

Research questions and hypothesis What is the relative input of information about payoffs and probabilities into risk judgment? Information about negative aspects of a risky situation impact risk judgment more than information about positive aspects. Training in statistics and mathematics enhanced the relative importance of information about probabilities in risk judgment (and has no impact on relative importance of information about positive and negative aspects). 14

Experiment - design respondents were presented with 6 different risky situations related to financial risk every situation consisted of 3 alternative options (A, B, C) each option consisted of 5 possible outcomes – 2 losses, break even, 2 gains – 2 losses, 3 gains payoffs were quantitative 15

Experiment - design information was presented in the table (Payne, 1976) MouseLabWEB (Willemsen and Johnson 2006) 16 max gain p max gain gainp gain gain/0 p (g or 0) lossp loss max loss p max loss A B C

Experiment - design information was hidden behind boxes – to access the information, the decision maker clicked the mouse pointer over the box on the screen participants could disclose as much detailed information about the options as necessary 17 max gain p max gain gainp gain gain/0 p (g or 0) lossp loss max loss p max loss A B C

Experiment - design ++p+++p++/0p+/0-p-- p- - A B C - p- --p-+/0p+/0+p+++p++ A B C two orders of location of gains and losses 18

Experiment - design Respondents’ taks – judge riskiness of each option Measure of perceived risk subjects rated riskiness on an 11-point scale (from 0 ‘not risky at all’ to 10 ‘extremely risky’) Respondents: NASA group – 75: Polish group – 67: female – 33 female – 35 male – 42 male –

Results ca 50% available information in NASA group more acquired information (M=19,29; SD=9,74) F (1, 125) =7,69; p<0,01 20

Results no effect of order ratio positive/negative NASA group:Polish group: from 1,13 to 0,91 from 1,02 to 0,91 21 F (1, 111) =0,24; p>0,05

Results no differences between groups the same amount of positive and negative – ratio close to 1 no correlation: – positive information and risk rates, r=0,07; p>0,05 – negtive informatin and risk rates, r=0,01; p>0,05 22

Results ratio value/probability NASA group:Polish group: from 0,93 to 0,78from 1,11 to 0,94 F (1, 104) =4,69; p<0,05 23

Results differences between groups – more payoffs – Polish group – more probabilities – NASA group NASA group:Polish group: from 0,93 to 0,78from 1,11 to 0,94 more probiabilites considered in NASA group, t(139)=2,76; p<0,01. 24

Results – risk rates no differences between groups (t(140)=0,28; p>0,05) positive correlations between risk rates and information about probabilities NASA group:Polish group: r=0,41; p<0,001r=0,36; p<,01 more probabilities – higher risk rates negative correlation for values 25

Conclusions: In NASA group acquired more information and more information about probabilities In both groups the same amount of positive and negative More probabilities – more risky Risk rates similar in both grups 26

Thank you. 27