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

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.

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

JEL Classification: D81, D11, D12, D91