David A. Schkade - US grants

Guidelines for the design of information presentation formats in computer-based decision support systems (DSS) are developed. The contingent relationship between decision strategies and the structure of the decision environment provides a framework for analyzing the impact of DSS design alternatives on different decision strategies. The cognitive costs and benefits of different display formats are evaluated, particularly with respect to the cognitive effort required to implement various decision strategies and the accuracy of the resulting decision. Simulation techniques are used to provide specific predictions of how changes in DSS design will influence behavior. Experimental observations of decision behavior are used to validate the analysis. The significance of this line of research is two-fold: First, the results can provide guidance to researchers and practitioners interested in the design and implementation of computer- based decision aids, ultimately improving the effectiveness of those aids. Second, this research provides an extension of an area of basic research on the psychology of decision making into an important applied domain.

This project investigates loss aversion, which is one of the central concepts in the decision making and behavioral economics literatures. Loss aversion is said to occur when a loss of a given magnitude has more influence on choices than does a gain of the same magnitude (for example, most people will refuse a gamble with equal chances to gain or lose $100). Numerous studies have shown that loss aversion plays a key role in important real-world phenomena, such as the endowment effect, the status quo bias, the equity-premium puzzle in financial economics, the tendency to hold on to 'losing' stocks while selling 'winners', the discrepancy between valuations of public (especially environmental) goods by willingness-to-pay for them or by the compensation demanded to give them up, legal principles of compensation for damage, failures of negotiations, and many others.
This project investigates whether a positive-negative asymmetry analogous to loss aversion occurs in the experience of decision outcomes (i.e., is loss aversion a mistake?). Preliminary evidence reported in the project description suggests that experiences of decision outcomes do not always show the good-bad asymmetry that would be expected from loss aversion. If loss aversion turns out to be a mistake, this work would require a major rethinking of the nature of loss aversion, a concept that is currently taught to almost every business student in the United States, and which plays an important role in many other social science curricula, including economics, public policy, law, and psychology. In addition, the possibility that loss aversion in choices could in some cases be a mistake, in the sense that it does not reflect an asymmetry in experience, would require a wide-ranging reanalysis of the many practical decisions where loss aversion has been found to play a significant role.

ABSTRACT

Principal investigator: Schkade, David
Institution: University of Texas at Austin
Proposal ID : 0213481
Proposal Title: Collaborative Research: Understanding loss aversion

This project investigates loss aversion, which is one of the central concepts in the decision making and behavioral economics literatures. Loss aversion is said to occur when a loss of a given magnitude has more influence on choices than does a gain of the same magnitude (for example, most people will refuse a gamble with equal chances to gain or lose $100). Numerous studies have shown that loss aversion plays a key role in important real-world phenomena, such as the endowment effect, the status quo bias, the equity-premium puzzle in financial economics, the tendency to hold on to 'losing' stocks while selling 'winners', the discrepancy between valuations of public (especially environmental) goods by willingness-to-pay for them or by the compensation demanded to give them up, legal principles of compensation for damage, failures of negotiations, and many others.
This project investigates whether a positive-negative asymmetry analogous to loss aversion occurs in the experience of decision outcomes (i.e., is loss aversion a mistake?). Preliminary evidence reported in the project description suggests that experiences of decision outcomes do not always show the good-bad asymmetry that would be expected from loss aversion. If loss aversion turns out to be a mistake, this work would require a major rethinking of the nature of loss aversion, a concept that is currently taught to almost every business student in the United States, and which plays an important role in many other social science curricula, including economics, public policy, law, and psychology. In addition, the possibility that loss aversion in choices could in some cases be a mistake, in the sense that it does not reflect an asymmetry in experience, would require a wide-ranging reanalysis of the many practical decisions where loss aversion has been found to play a significant role.