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Rady School of Management
Yuval Rottenstreich studies the psychology of managerial decision making. He earned a Ph.D. in Psychology from Stanford University and an A.B. in Economics and Psychology from the University of Pennsylvania.
Risk Matters Less When Options Are Apples-to-Oranges: The Translate-and-Accommodate Model
Abstract: Risk aversion for moderate likelihood gains is perhaps the best-known stylized fact from decision research. Though studies documenting it have focused on decisions involving money, such behavior is presumed to prevail very generally, across diverse domains. We investigate the validity of this generalization by contrasting two types of decisions. In unimodal choices, outcomes differ on relatively few attributes, rendering inter-option comparisons “apples-to-apples.” Consider choices between guaranteed versus uncertain monetary payoffs or sure receipt of a product versus a chance at several units of it. In crossmodal choices, outcomes differ on relatively more attributes, renderingcomparisons “apples-to-oranges.” Consider sure receipt of one product versus uncertain receipt of a very different product. We observe two patterns by which risk matters less crossmodally, contrary to straightforward generalizations. First, relative to unimodal preferences involving actuarially fair risky options, corresponding crossmodal preferences exhibit less risk aversion. Second, crossmodal preferences vary less across risk levels: as the likelihood and subjective value of a risky option’s outcomes become increasingly unfavorable (favorable), people do not develop as much additional distaste (appetite) for it. These patterns of insensitivity engender an interaction: relative to unimodal settings, crossmodal settings yield less aversion to unfavorable and fair risk but more aversion to favorable risk. To explain this interaction, we present a mathematical model in which unimodal choices are constructed as in standard accounts, but crossmodal choices are constructed differently,via processes of deterministic between-options translation and risk accommodation. Beyond explaining why risk matters less crossmodally, the model also explains the uncertainty effect.