Relative Theory of Choice: Preference Change for Risky Choices

In three experiments we studied the extent to which theories of decision-making and memory can predict people's preferences. Studying risky decisions, we aimed to answer questions about human preferences, prompted by similarities between the leading economic theory Expected Utility Theory (EUT) and the leading psychological theory of human choice under risk - Prospect Theory (PT). People’s behaviour in the face of risk implies that they judge and weight the probability of risky events in characteristic ways that deviate from EUT. Nonetheless, both EUT and PT frameworks share a common assumption: people’s risk preferences and decisions under risk and uncertainty are independent of task. Accordingly, we studied (i) the lability of human preferences and their relation to choice justifications given in risky decision-making scenarios, (ii) the dynamics of preference formation for choice with monetary gambles and (iii) the limits of existing theoretical accounts (e.g., UT and PT) by contrasting them with a new theory of risky choice based on the impact of context, complexity and prior choices. The results of all three experiments are not anticipated by EUT, PT or experience-based decision research (Hertwig, Barron, Weber, & Erev, 2004).We found evidence that people do not have underlying preferences for risk; instead, context, complexity and prior choices determine preferences even when the utilities (risk and reward) of alternative options are known.