I don’t like uncertainty. Well, nobody does. There are pronounced individual differences in how much people dislike uncertainty, but I can’t think of a finding from any study that tells me that some people thrive on it. I can certainly tolerate a bit of it, but not too much. I feel much comfier if I know what my day has in store for me, where my next meal is coming from (etc.)
Along with uncertainty, there is the idea of “risk.” And there’s another strong finding from psychology here: People are risk averse. That is, people do not like risk and they will often pay a premium to avoid it. Psychologists thought they had a good handle on the degree of people’s risk aversion until somebody made a startling discovery: People’s risk aversion is driving them to a previously unimagined level of irrationality!
Let me set this up for you. First, you need to understand that a lot experiments in this area of psychology (let’s call it behavioral economics) use something called Willingness to Pay (or, WTP) as a measure. Basically, folks are presented some sort of scenario a
nd then they’re asked how willing they would be to pay for one option or another. So, here’s the scenario:
People are randomly assigned to one of two conditions. In the Certainty condition, people are asked their willingness to pay for a $50 for a bookstore. On average, folks in that condition said that they’d be willing to pay $26. Other people were assigned to the Uncertainty Condition. Those folks were asked how much they’d be willing to pay to enter a draw to win either a $50 or $100 gift certificate (even odds).
Before I share the results with you, let's take a step back. Clearly, the people in the Uncertainty condition should be willing to pay much more than the people in the Certainty condition. After all, the people in the Uncertainty condition have a chance to win a $100 gift certificate. An even chance in fact. So, the people in the Uncertainty condition should be willing to pay a premium for the opportunity to win more than a $50 gift certificate. The people in the Certainty condition are getting a $50 gift certificate. Period.
But, here’s the thing: Folks in the Uncertainty condition were only willing to pay $16! They wanted to pay $10 less! Now, this is truly stupefying. It would seem that people are so risk averse that they are devaluing an opportunity to make more money, just because they don’t know which outcome will occur.
Psychologists have long argued that our mental habits are ultimately adaptive. That is, we have the mental habits we do because they work well enough in most circumstances. Otherwise, we wouldn’t have the habits. I am sure that, in the months and years to follow, other researchers will find the limiting conditions of this effect and we will gain insight into why it is that people would ever be some uncertainty averse. But, in the meanwhile, just keep this in mind: Your risk aversion is so strong that you might be avoiding situations that could bring prosperity, economic or otherwise. Food for thought.
4 comments:
That was unexpected. I would've thought the outcome belonged to a 50/50 chance of getting the $100 one or nothing at all.
Unless I've misunderstood, isn't the uncertainty of entering the drawing for a $50 or $100 gift certificate the uncertainty that I would win the drawing? In that case, I would be willing to risk less if there is a chance I may end up with nothing.
To be clear: Everybody who goes for the gamble will win something. . . either $50 or $100. But you make a good point. In fact, some researchers were concerned that the instructions had been misunderstood. So, they ran a study to cover off that possibility. Even when participants were fully informed of the choice, they still opted for the sure-thing. Thanks for the great comment!
Hi Ian, Just checking out your blog. This is a very interesting finding. I had a couple of thoughts on the effect. Thought I’d give it a shot!
Mental habits may have been adaptive to humans in evolutionary history; however, in psychological experiments and with ‘gambling machines’ we can often reveal the supposed illogical nature of human thought by tricking our imperfect probability calculators. Steven Pinker, in How the Mind Works, discusses artifacts developed to fool our natural thought tendencies (he calls them gambling machines). His main point is that we are able to reveal people’s fallacious thinking by designing thought experiments and machines that trick our evolutionarily originating probability calculator—which developed for survival and reproductive purposes in a time and place vastly different from the modern world, and may never have had to deal with such trickery. Experiments may not reveal flaws in our thinking; rather they may reveal the types of things we were not programmed to process.
I wonder if the question given to the uncertainty group taps into a problem that we never would have had to deal with outside of such experiments and certain modern occurrences. Can you imagine an instance in which people would have to choose between two options, both of them being positive, for evolutionary benefit? My understanding is that if something is positive, in evolutionary terms, it should always be more or less beneficial. I would think that real adaptive challenges would be between positives and negatives. For example, survival or death (good vs. bad), reproduction or reproductive failure (good vs. bad), etc.
So, is it possible that this study fools participants’ brains by providing two options that we were never ‘programmed’ to deal with? I.e., uncertainty (associated with making a gamble) is triggered and overwhelms the positive nature of both options ($50 and $100). Anyway, a very cool finding. Cheers.
Darcy
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