Honors Project - Open Access
Prospect Theory (Tversky & Kahneman, 1992) asserts that people make decisions not on the basis of final states, but in relation to gains and losses experienced from a reference point. Furthermore, when making decisions under uncertainty, the weights assigned to outcomes and their associated utilities are not, as in expected utility theory, equal to the probabilities of those outcomes. Rather, the weights used in expected utility calculations have an “s-shaped” relationship with the underlying probabilities so that people have a tendency to overweight low probability events and underweight high probability events. Currently, there is no clear explanation for why this phenomenon occurs, although scholars suggest it may have something to do with the role that emotion plays in decision making. The goal of this study is to use neurological and psychological research to help create a plausible emotion-based explanation for the shape of the curve, as well as experimentally investigate the conditions under which the curve may change. Focusing on anxiety, I estimate decision weight functions for 62 participants, expose them to video clips which induce anxiety, reduce it, or are neutral (three treatment groups), and then experimentally estimate another decision weight curve for all participants. When controlling for self-reported and measured differences in anxiety levels, we find evidence that the decision weight function seems to shift down when anxiety is induced experimentally.
Caicedo, Nicole, "Emotion and Decision Making: Effects of Anxiety on the Shape of the Decision Weight Function" (2017). Economics Honors Projects. 77.
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