Vivid Outcomes

VIVID OUTCOMES

Prospect theory differs from utility theory in the relationship it suggests between probability and decision weight. In utility theory, decision weights and probabilities are the same. The decision weight of a sure thing is 100, and the weight that corresponds to a 90% chance is exactly 90, which is 9 times more than the decision weight for a 10% chance. In prospect theory, variations of probability have less effect on decision weights. One reported experiment found that the decision weight for a 90% chance was 71.2 and the decision weight for a 10% chance was 18.6. The ratio of the probabilities was 9.0, but the ratio of the decision weights was only 3.83, indicating insufficient sensitivity to probability in that range. In both theories, the decision weights depend only on probability, not on the outcome. Both theories predict that the decision weight for a 90% chance is the same for winning $100, receiving a dozen roses, or getting an electric shock. This theoretical prediction turns out to be wrong.

Psychologists at the University of Chicago published an article with the attractive title “Money, Kisses, and Electric Shocks: On the Affective Psychology of Risk.” Their finding was that the valuation of gambles was much less sensitive to probability when the (fictitious) outcomes were emotional (“meeting and kissing your favorite movie star” or “getting a painful, but not dangerous, electric shock”) than when the outcomes were gains or losses of cash. This was not an isolated finding. Other researchers had found, using physiological measures such as heart rate, that the fear of an impending electric shock was essentially uncorrelated with the probability of receiving the shock. The mere possibility of a shock triggered the full-blown fear response. The Chicago team proposed that “affect-laden imagery” overwhelmed the response to probability. Ten years later, a team of psychologists at Princeton challenged that conclusion.

The Princeton team argued that the low sensitivity to probability that had been observed for emotional outcomes is normal. Gambles on money are the exception. The sensitivity to probability is relatively high for these gambles, because they have a definite expected value.

What amount of cash is as attractive as each of these gambles?

A. 84% chance to win $59

B. 84% chance to receive one dozen red roses in a glass vase

What do you notice? The salient difference is that question A is much easier than question B. You did not stop to compute the expected value of the bet, but you probably knew quickly that it is not far from $50 (in fact it is $49.56), and the vague estimate was sufficient to provide a helpful anchor as you searched for an equally attractive cash gift. No such anchor is available for question B, which is therefore much harder to answer. Respondents also assessed the cash equivalent of gambles with a 21% chance to win the two outcomes. As expected, the difference between the high-probability and low-probability gambles was much more pronounced for the money than for the roses.

To bolster their argument that insensitivity to probability is not caused by emotion, the Princeton team compared willingness to pay to avoid gambles:

21% chance (or 84% chance) to spend a weekend painting someone’s three-bedroom apartment

21% chance (or 84% chance) to clean three stalls in a dormitory bathroom after a weekend of use

The second outcome is surely much more emotional than the first, but the decision weights for the two outcomes did not differ. Evidently, the intensity of emotion is not the answer.

Another experiment yielded a surprising result. The participants received explicit price information along with the verbal description of the prize. An example could be:

84% chance to win: A dozen red roses in a glass vase. Value $59.

21% chance to win: A dozen red roses in a glass vase. Value $59.

It is easy to assess the expected monetary value of these gambles, but adding a specific monetary value did not alter the results: evaluations remained insensitive to probability even in that condition. People who thought of the gift as a chance to get roses did not use price information as an anchor in evaluating the gamble. As scientists sometimes say, this is a surprising finding that is trying to tell us something. What story is it trying to tell us?

The story, I believe, is that a rich and vivid representation of the outcome, whether or not it is emotional, reduces the role of probability in the evaluation of an uncertain prospect. This hypothesis suggests a prediction, in which I have reasonably high confidence: adding irrelevant but vivid details to a monetary outcome also disrupts calculation. Compare your cash equivalents for the following outcomes:

21% (or 84%) chance to receive $59 next Monday

21% (or 84%) chance to receive a large blue cardboard envelope containing $59 next Monday morning

The new hypothesis is that there will be less sensitivity to probability in the second case, because the blue envelope evokes a richer and more fluent representation than the abstract notion of a sum of money. You constructed the event in your mind, and the vivid image of the outcome exists there even if you know that its probability is low. Cognitive ease contributes to the certainty effect as well: when you hold a vivid image of an event, the possibility of its not occurring is also represented vividly, and overweighted. The combination of an enhanced possibility effect with an enhanced certainty effect leaves little room for decision weights to change between chances of 21% and 84%.