|M.Sc Student||Lev-Ran Ido|
|Subject||Which Way Does the Four Fold? The Effect of Feedback on Risk|
Behavior in Small Decisions
|Department||Department of Industrial Engineering and Management||Supervisor||Professor Ido Erev|
Previous research shows an interesting difference between decisions from description and decisions from experience: When people make decisions based on a description of the possible outcomes they behave as if they overweight outcomes that occur with low probabilities. This robust regularity is captured in prospect theory (Kahneman & Tversky, 1979) with the assumption of a reversed-S-shaped weighting function. Later Tversky and Kahneman (1992) referred to this observation as a "four fold pattern of risk behavior".
When people make repeated decisions based on personal experience they behave as if they underweight outcomes that occur with low probabilities. Barron and Erev (2003) capture this regularity as a by-product of a tendency to rely on recent outcomes. Barron and Erev note that this effect implies a "reversed four fold risk attitude pattern".
The current research is designed to improve our understanding of the relationship between these contradicting regularities. Specifically, it explores the effect of experience in an environment in which each problem is presented once and the decision makers have to rely on the description of the possible outcomes.
The results demonstrate that risk attitude is highly sensitive to the availability of immediate feedback. A reverse four fold pattern emerges with feedback over time. Interestingly, prospect theory's four fold pattern intensifies over time when no feedback is given.