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Theory and Decision

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18-01-2020

Decision making under uncertainty: the relation between economic preferences and psychological personality traits

Authors: David Schröder, Gail Gilboa Freedman

Published in: Theory and Decision | Issue 1/2020

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Abstract

Both economists and psychologists are interested in understanding decision making under uncertainty. Yet, they rely on different concepts to analyse human behaviour: economists use economic preference parameters rooted in utility theory, while psychologists use personality traits to describe responses to uncertain situations. Using a large sample of university students, this study examines and contrasts five economic preference parameters and six psychological personality traits that are commonly used to study individuals’ attitudes towards uncertainty. A novelty of this paper is including both the economic concept of ambiguity aversion as well as the personality trait of ambiguity intolerance. We find that standard economic preference measures based on incentivized choice tasks seem to capture rather different characteristics than psychological personality traits. In contrast, economic preference measures obtained from self-assessment questions appear more related to personality traits, especially ambiguity intolerance.

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While Dimmock et al. (2015) are the first to show this in the context of ambiguity preferences, the idea goes back to Smith (1961). It has subsequently been used by Roth and Malouf (1979) and generalized in Berg et al. (1986).

Kirton (1981) is widely used in empirical work in social psychology. For a review, see Furnham and Ribchester (1995). Another important Ambiguity Tolerance scale is by Norton (1975).

Before proceeding to the actual choice lists to measure risk and ambiguity preferences, subjects were asked to find the right answers to some control questions. They are presented in Appendix 1.

Since the sessions lasted for about 60 min, the payoffs are substantial. The lowest payment was GBP 4, the highest payment GBP 21.

The average scores of the two ambiguity questions are also significantly different from each other (t test, p value \(< 0.01\)).

It should be noted, however, that Heath and Tversky (1991) measure perceived competence and ambiguity premia for the very same specific question, whereas our measure of self-esteem is not related to the task measuring ambiguity preferences.

In addition to the correlation analysis, we also use kernel-weighted linear polynomial regressions to explore any non-linear relation between economic preferences and personality traits. A few outliers aside, the results suggest a monotonic relation between economic preferences and personality traits. In most cases the relation is even linear.

Regression tests of the psychological personality traits on the various risk and ambiguity preference measures give similar results as the pairwise Pearson linear correlation statistics of Table 3, panel A.

The economic concept of ambiguity was first introduced by Knight (1921). Ambiguity is therefore sometimes known as ‘Knightian uncertainty’. Knight, however, did not use the term ‘ambiguity’ to describe this type of uncertainty.

An alterative view is that both concepts are based on the same fundamental roots, but have been increasingly overstretched across the two disciplines, leading to the empirical differences documented in this study. The debate whether some concepts become too overstretched across subfields is well known in other disciplines of social sciences; see Sartori (1970).

This is especially important as previous studies are inconclusive on the relationship between ambiguity aversion, ambiguity intolerance and real-life behaviour. The recent survey by Trautmann and van de Kuilen (2016), e.g. finds little evidence for external validity of economic ambiguity preferences (i.e. their predictive power for real-life behaviour.)

The actual decision table presented to the subjects depends on the color chosen. In this appendix, we assume that the selected color is white. If the selected color is black, the word “white” has to be replaced with “black”, and vice versa.

In practice, the ambiguous urn was filled with 10 balls of the winning colour. Of course, this was unknown to participants. While this is deception, this type of deception is not harmful to subjects. Since the computer randomly drew a ball from the chosen urn only at the end of the session, there was no possibility for subjects to update their belief about the composition of the ambiguous urn for subsequent decisions.

The instructions are taken from the psychology literature, see, e.g. Mac Donald Jr (1970).

This single-item measure is highly correlated (0.68) with the selected items of the Extended Life Orientation test by Chang et al. (1997).

Similar to Robins et al. (2001), this item uses a five-point answer scale.

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Title: Decision making under uncertainty: the relation between economic preferences and psychological personality traits
Authors: David Schröder
Gail Gilboa Freedman
Publication date: 18-01-2020
Publisher: Springer US
Published in: Theory and Decision / Issue 1/2020
Print ISSN: 0040-5833
Electronic ISSN: 1573-7187
DOI: https://doi.org/10.1007/s11238-019-09742-3

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