Abstract

http://ssrn.com/abstract=929949
 
 

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Money, Kisses, and Electric Shocks: On the Affective Psychology of Risk


Yuval Rottenstreich


University of Chicago - Booth School of Business

Christopher K. Hsee


University of Chicago - Booth School of Business


Psychological Science, Vol. 12, pp. 185-190, 2001

Abstract:     
Prospect theory's S-shaped weighting function is often said to reflect the psychophysics of chance. We propose an affective rather than psychophysical deconstruction of the weighting function resting on two assumptions. First, preferences depend on the affective reactions associated with potential outcomes of a risky choice. Second, even with monetary values controlled, some outcomes are relatively affect-rich and others relatively affect-poor. Although the psychophysical and affective approaches are complementary, the affective approach has one novel implication: weighting functions will be more S-shaped for lotteries involving affect-rich than affect-poor outcomes. That is,people will be more sensitive to departures form impossibility and certainty but less sensitive to intermediate probability variations for affect-rich outcomes. We corroborated this prediction by observing probability -outcomes interactions: An affect-poor prize was preferred over an affect-rich prize under certainty, but the direction of preference reversed under low probability. We suggest that the assumption of probability-outcome independence, adopted by both expected-utility and prospect theory, may hold across outcomes of different monetary values, but not different affective values.

Number of Pages in PDF File: 6

Keywords: utility function, prospect theory, probability-weighting, evaluability, scope-insensitivity, experienced utility

JEL Classification: D81, D11, D12, D91

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Date posted: October 11, 2006  

Suggested Citation

Rottenstreich, Yuval and Hsee, Christopher K., Money, Kisses, and Electric Shocks: On the Affective Psychology of Risk. Psychological Science, Vol. 12, pp. 185-190, 2001. Available at SSRN: http://ssrn.com/abstract=929949

Contact Information

Yuval Rottenstreich
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
Christopher K. Hsee (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
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