The impact of the certainty context on the process of choice
- John Dickhaut*,
- Kevin McCabe†,
- Jennifer C. Nagode‡,§,
- Aldo Rustichini¶,
- Kip Smith∥, and
- José V. Pardo‡,§,**
- *Department of Accounting, Carlson School of Management, and Departments of §Psychiatry and ¶Economics, University of Minnesota, Minneapolis, MN 55455;† Economics and Law, Krasnow Center, George Mason University, 4400 University Drive, MSN 5C7, Fairfax, VA 22030; ‡Cognitive Neuroimaging Unit, Veterans Affairs Medical Center, Minneapolis, MN 55417; and ∥Department of Psychology, Kansas State University, Manhattan, KS 66506
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Communicated by Vernon L. Smith, George Mason University, Arlington, VA (received for review November 15, 2002)
Abstract
In this study we examine how the introduction of a reference lottery with nonrandom outcomes alters the way in which choices among pairs of lotteries are made, even if it does not alter the choices. We use different domains (some of the lotteries produce gains, other losses) and different contexts (one member of the pair, the reference lottery, may be either risky or certain). In our experiment, the change from gain to loss domain affects choices: subjects are risk averse in the gain domain, but not in the loss domain. On the contrary, the context effect of the certain lottery does not affect choices. However, the introduction of the certainty reference lottery affects two behavioral variables, response time and brain activation, in a dramatic way. This result suggests that the certainty lottery promotes a different process through which preferences are revealed, even if the differences among lotteries may not be large enough to induce different choices.
Footnotes
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↵ ** To whom correspondence should be addressed. E-mail: jvpardo{at}james.psych.umn.edu.
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See commentary on page 3016.
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↵ †† This is a consequence of the Independence Assumption, which is part of the Expected Utility Theory. To clarify this point, consider the lottery E = (5M, 10/11; 1M, 0; 0, 1/11) and F = (5M, 0; 1M, 0; 0, 1). Then we can rewrite the lotteries A, B, C, D as combinations of the lotteries A, E and F with different weights. For example, the combination of the lottery E with probability 11/100 and the lottery A with probability 89/100 gives the same probability over three outcomes 5M, 1M, 0 outcomes as the lottery B. So we can write A as 11/100 A + 89/100 A;B as 11/100 E + 89/100 A;C as 11/100 A + 89/100 F;D as 11/100 E + 89/100 F. When comparing A and B, the subject knows that with probability 89/100 he gets the same outcome (the lottery A); and when comparing C and D he knows that with probability 89/100 he gets the same outcome F. The independence assumption requires that the order over A and E does not depend on the common outcome A, and the order over C and D should not depend on the common outcome F. So the subject who prefers A to B should also prefer C to D.
- Copyright © 2003, The National Academy of Sciences
