Content-dependent Preferences in Choice under Risk: Heuristic of Relative Probability Comparisons

Blavatsky, P. (2003). Content-dependent Preferences in Choice under Risk: Heuristic of Relative Probability Comparisons. IIASA Interim Report. IIASA, Laxenburg, Austria: IR-03-031

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Abstract

Individual decision making under risk is the key component of any economic activity, especially in transition economies where people are confronted with various risks and uncertainties in situations of private and public choice, which have never been experienced before. Such choices are typically irreversible and taken under time constraints.

This paper provides experimental evidence of content-dependent preferences in individual choice under risk. The heuristic of relative probability comparisons suggests that individuals choose the lottery, which is most likely to outperform all other feasible lotteries. This heuristic is ordinal in outcomes, which makes it a simple and plausible decision procedure. However, the heuristic can lead not only to a significant bias when choosing between two yields of equal performance but also to intransitive preferences in their ranking of alternative decisions. The experimental results demonstrate the following prediction: in some choice situations the majority of decision making agents indeed uses the heuristic of relative probability comparisons, and in consequence, around 55% of them violate transitivity and 65% violate weak axiom of revealed preference (WARP).

The most important contribution of this paper is the experimental documentation of a very high incidence of asymmetric intransitive preferences. These preferences can be rationalized as the content-dependent preferences induced by the use of the heuristic of relative probability comparisons.

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