Reflection in Preferences Under Risk. Who and When May Suggest Why

Abstract

Conventional economic theory assumes that people are uniformly risk averse. Psychological studies, however, have shown that people are sometimes risk averse for gains but risk seeking for losses, a phenomenon termed the reflection effect. The robustness of the reflection effect was examined both within subjects and across subjects differing in risk style for a set of multi-outcome lotteries. Reflection was found to be weak and irregular for all choice pairs except those that included a lottery with a riskless component. The latter were generally preferred for gains but not for losses by both risk-averse and risk-seeking subjects. In all other choices, risk-averse and risk-seeking subjects differed systematically from one another, but in ways that are more complex than pure risk aversion or risk seeking would predict. The findings suggest a general inability of weighted value theories such as prospect theory (Kahneman & Tversky, 1979) to adequately describe the pattern of risk preferences over individuals and over the full range of lottery types. Such inadequacy suggests the need for an alternative approach to risk with emphasis on the goals and strategies that individuals bring to the risky choice process. © 1986 American Psychological Association.