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

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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Notes

  1. 1.

    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).

  2. 2.

    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).

  3. 3.

    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.

  4. 4.

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

  5. 5.

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

  6. 6.

    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.

  7. 7.

    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.

  8. 8.

    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.

  9. 9.

    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.

  10. 10.

    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).

  11. 11.

    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.)

  12. 12.

    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.

  13. 13.

    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.

  14. 14.

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

  15. 15.

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

  16. 16.

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

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Acknowledgements

We are grateful to Elisa Cavatorta, Luc Meunier, Daniel Navarro, participants at the FUR 2018 conference in York (UK), the IMEBESS 2019 conference in Utrecht (Netherlands), the research seminar at Birkbeck College (UK) and two anonymous referees for helpful comments and discussions. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. Any remaining errors are ours.

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Appendices

Appendix 1: Economic preferences

This appendix presents the economic preference measures, the two incentivized decision tasks and the three self-assessment questions.

Before each choice task, subjects were presented examples of the choice tasks to familiarize themselves with the design. In addition, subjects were asked several control questions before the risk task to ensure that they understood the tasks. Only after correctly answering these questions, the actual tasks started. The control questions are presented below the risk task.

Risk task: This task is taken from decision sheet B of Chakravarty and Roy (2009).

In this task you need to fill in the decision table shown below. The decision table consists of 10 different situations, listed 1 to 10. Each situation offers you a choice between drawing a ball from two different urns, urn A or urn B. Both urns contain 10 balls, either white or black.

  • The composition of urn A is identical in all 10 situations. There are 5 white balls and 5 black balls.

  • The composition of urn B changes from one situation to the next. The number of white balls increases incrementally from 0 white balls in situation 1 to 9 white balls in situation 10, while the number of black balls decreases accordingly.

At the end of the session, the computer will randomly select one out of the 10 situations. Then, depending on whether you have chosen urn A or urn B in that situation, the computer will randomly draw one ball from that urn. Depending on the color of the ball, you earn the points indicated in the table. Notice that even though you will make 10 decisions, only one of these will determine the points you earn, but you will not know in advance which situation will be selected (they are equally likely to be selected).

In each situation, from which urn do you prefer to draw a ball, urn A or urn B?

SituationURN A:URN B:Your choices
If a white ball is drawn you earn 6 pointsIf a white ball is drawn you earn 10 points 
If a black ball is drawn you earn 4 pointsIf a black ball is drawn you earn 0 points 
15 white balls, 5 black balls0 white balls, 10 black ballsUrn A \(\bigcirc\)\(\bigcirc\) Urn B
25 white balls, 5 black balls1 white ball, 9 black ballsUrn A \(\bigcirc\)\(\bigcirc\) Urn B
35 white balls, 5 black balls2 white balls, 8 black ballsUrn A \(\bigcirc\)\(\bigcirc\) Urn B
45 white balls, 5 black balls3 white balls, 7 black ballsUrn A \(\bigcirc\)\(\bigcirc\) Urn B
55 white balls, 5 black balls4 white balls, 6 black ballsUrn A \(\bigcirc\)\(\bigcirc\) Urn B
65 white balls, 5 black balls5 white balls, 5 black ballsUrn A \(\bigcirc\)\(\bigcirc\) Urn B
75 white balls, 5 black balls6 white balls, 4 black ballsUrn A \(\bigcirc\)\(\bigcirc\) Urn B
85 white balls, 5 black balls7 white balls, 3 black ballsUrn A \(\bigcirc\)\(\bigcirc\) Urn B
95 white balls, 5 black balls8 white balls, 2 black ballsUrn A \(\bigcirc\)\(\bigcirc\) Urn B
105 white balls, 5 black balls9 white balls, 1 black ballUrn A \(\bigcirc\)\(\bigcirc\) Urn B

Participants had to correctly answer three control questions before starting the risk task:

  1. 1.

    What is the probability of winning six points when drawing a ball from urn A, in each situation (in %)? [Correct answer: 50%]

  2. 2.

    In situation 4, what is the probability of winning ten points when drawing a ball from urn B (in %)? [Correct answer: 30%]

  3. 3.

    In situation 5, which urn should you choose if you prefer a 50% chance to win six points and a 50% chance to win four points over a 40% chance to win ten points? [Correct answer: urn A]

Ambiguity task: The task extends the Ellsberg (1961) thought experiment to different situations, similar to Lauriola and Levin (2001) and Butler et al. (2014).

In this task, we present you a decision table with 11 situations. Each situation offers you a choice between drawing a ball from two different urns, urn 1 or urn 2. Both urns contain 10 balls, either white or black.

  • Urn 1: The composition of urn 1 changes from one situation to the next. While the number of balls in one color (e.g., white) increases incrementally from 0 to 10, the number of balls of the other color (e.g., black) decreases accordingly.

  • Urn 2: The composition of urn 2 is identical in each situation. However, you don’t know how many balls are white and how many balls are black. Any combination is possible. There might be from 0 to 10 white balls, with the remaining balls being black.

One ball will be drawn from the urn you choose. The points you can earn depend on the color of the ball drawn. Only one color yields some points. You can choose whether the color that yields points is white or black. Please choose the color of the ball that provides you points:

  • white

  • black

Please look at the decision table below.Footnote 12In each of the 11 situations, we would like you to indicate from which urn (urn 1 or urn 2) you prefer drawing a ball. As explained before, both urns contain 10 balls, either white or black.

  • Urn 1: The composition of urn 1 changes from one situation to the next. The number of white balls increases incrementally from 0 white balls in situation 0 to 10 white balls in situation 10, while the number of black balls decreases accordingly.

  • Urn 2: The composition of urn 2 is identical in all situations. However, the exact composition of urn 2 is unknown. Any combination of white and black balls is possible: there might be 10 white balls, or 10 black balls, or any other possible combination of white and black balls.

If a white ball is drawn, you earn 10 points. If a black ball is drawn, you earn no points.

At the end of the session, the computer will randomly select one out of the 11 situations. Then, depending on whether you have chosen urn 1 or urn 2 in that situation, the computer will randomly draw one ball from that urn. Depending on the color of the ball, you earn the points indicated in the table.Footnote 13Notice that even though you will make 11 decisions, only one of these will determine the points you earn, but you will not know in advance which situation will be selected (they are equally likely to be selected).

In each situation, from which urn do you prefer to draw a ball, urn 1 or urn 2?

SituationURN 1:URN 2:Your choices
If a white ball is drawn you earn 10 pointsIf a white ball is drawn you earn 10 points 
00 white balls, 10 black ballsUnknown compositionUrn 1 \(\bigcirc\)\(\bigcirc\) Urn 2
11 white ball, 9 black ballsUnknown compositionUrn 1 \(\bigcirc\)\(\bigcirc\) Urn 2
22 white balls, 8 black ballsUnknown compositionUrn 1 \(\bigcirc\)\(\bigcirc\) Urn 2
33 white balls, 7 black ballsUnknown compositionUrn 1 \(\bigcirc\)\(\bigcirc\) Urn 2
44 white balls, 6 black ballsUnknown compositionUrn 1 \(\bigcirc\)\(\bigcirc\) Urn 2
55 white balls, 5 black ballsUnknown compositionUrn 1 \(\bigcirc\)\(\bigcirc\) Urn 2
66 white balls, 4 black ballsUnknown compositionUrn 1 \(\bigcirc\)\(\bigcirc\) Urn 2
77 white balls, 3 black ballsUnknown compositionUrn 1 \(\bigcirc\)\(\bigcirc\) Urn 2
88 white balls, 2 black ballsUnknown compositionUrn 1 \(\bigcirc\)\(\bigcirc\) Urn 2
99 white balls, 1 black ballUnknown compositionUrn 1 \(\bigcirc\)\(\bigcirc\) Urn 2
1010 white balls, 0 black ballsUnknown compositionUrn 1 \(\bigcirc\)\(\bigcirc\) Urn 2

In addition to incentivized choice tasks, we also assess risk and ambiguity preferences using non-incentivized self-assessment questionnaires based on Likert scales.

Risk question: The self-assessment question to measure risk preferences is taken from Dohmen et al. (2011).

How do you see yourself? Are you generally a person who is fully prepared to take risks or do you try to avoid taking risks? Please select your answer on the scale, where the value 0 means “not at all willing to take risks” and the value 10 means “very willing to take risks.”

Ambiguity questions: The two self-assessment questions to measure ambiguity preferences are taken from McLain (2009).

Please respond to the following two statements by indicating the extent to which you agree or disagree with them on a scale from 1 (I strongly agree) to 7 (I strongly disagree).

  1. 1.

    I try to avoid situations that are ambiguous.

  2. 2.

    I find it hard to make a choice when the outcome is uncertain.

Appendix 2: Personality traits

This appendix presents the survey or self-assessment questions used to measure the subjects’ personality traits. They are taken from self-reporting scales of the psychology literature.

In this part, we present you a list of statements. Please indicate the extent to which you agree or disagree with them. Please do not spend too much time on each statement. There are no right or wrong answers and therefore your first response is important. Nevertheless, try to be as honest as you can be. Answer according to your own feelings, rather than how you think most people would answer. Don’t worry about being consistent in your responses. Be sure to answer every statement.

Please respond to the following statements by indicating the extent to which you agree or disagree with them on a scale from 1 (I strongly agree) to 7 (I strongly disagree).Footnote 14

Intolerance of Ambiguity Scale by Kirton (1981). Items based on Mac Donald Jr (1970) and Rydell and Rosen (1966):

  1. 1

    There is a right way and a wrong way to do almost everything.

  2. 2

    Practically every problem has a solution.

  3. 3

    I have always felt that there is a clear difference between right and wrong.

  4. 4

    Nothing gets accomplished in this world unless you stick to some basic rules.

  5. 5

    If I were a doctor, I would prefer the uncertainties of a psychiatrist to the clear and definite work of someone like a surgeon or an X-ray specialist.

  6. 6

    Vague and impressionistic pictures really have little appeal for me.

  7. 7

    Before an examination, I feel much less anxious if I know how many questions there will be.

  8. 8

    The best part of a jigsaw puzzle is putting in that last piece.

  9. 9

    I do not like to work on a problem unless there is a possibility of coming out with a clear-cut and unambiguous answer.

  10. 10

    I like to fool around with new ideas, even if they turn out later to be a total waste of time.

  11. 11

    Perfect balance is the essence of all good composition.

Items based on Budner (1962):

  1. 12

    An expert who does not come up with a definite answer probably does not know too much.

  2. 13

    There is really no such thing as a problem that cannot be solved.

  3. 14

    A good job is one where what is to be done and how it is to be done are always clear.

  4. 15

    In the long run it is possible to get more done by tackling small, simple problems rather than lange and complicated ones.

  5. 16

    What we are used to is always preferable to what is unfamiliar.

  6. 17

    A person who leads an even, regular life, in which few surprises or unexpected happenings arise, really has a lot to be grateful for.

  7. 18

    I like parties where I know most of the people more than the ones where all or most of the people are complete strangers.

Optimism/pessimism (own wording)Footnote 15:

  • Do you consider yourself as a pessimist or an optimist?

Single-item measure of self-esteem by Robins et al. (2001)Footnote 16:

  • I have high self-esteem.

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Schröder, D., Gilboa Freedman, G. Decision making under uncertainty: the relation between economic preferences and psychological personality traits. Theory Decis 89, 61–83 (2020). https://doi.org/10.1007/s11238-019-09742-3

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Keywords

  • Decision making
  • Uncertainty
  • Preferences
  • Personality traits
  • Ambiguity intolerance
  • Ambiguity aversion
  • Risk aversion