A new global study confirms one of the most influential frameworks in all of the behavioral sciences and behavioral economics: prospect theory, which was introduced in 1979 and resulted in a sea change in understanding the irrational and paradoxical ways people make decisions and interpret risk, with significant implications for science, policy, and industry. Led by a Columbia University Mailman School of Public Health researcher, the new study in 19 nations and 13 languages duplicates the original study that provides the empirical foundation for prospect theory.
Prospect theory, created by Nobel Prize winners Daniel Kahneman and Amos Tversky, has been dubbed the most important theoretical framework in all of the social sciences. It popularized the concept of loss aversion, which states that people choose modest guaranteed outcomes over bigger uncertain outcomes. The 1979 publication that introduced the theory is now the most cited in economics and one of the most cited in psychological science.
The new study, led by Kai Ruggeri, PhD, assistant professor of health policy and management, is a robust test of prospect theory on a scale commensurate with its impact — and the first to test the theory in so many countries, languages, and currencies, as well as to focus on the theory’s generalizability.
“Our study offers compelling evidence for continuing to consider prospect theory as a viable explanation of individual behavior, and therefore valuable for informing public policy around the world, in areas from financial decision-making to population well-being,”
said Ruggeri.
Doubling Your Money at Hlaf the Chance
Ruggeri and colleagues utilized virtually identical methodologies to those used in the original analysis, merely changing the currency values to be applicable for a 2019 sample within each country. Participants were given 17 hypothetical scenarios involving prospective financial gains and losses.
For example: If you were given $1,000 to play a game, would you accept a 50 percent chance to double your money or a 100 percent guarantee of gaining an additional $500? In all, 4,098 respondents who completed all the questions were included in the final analysis.
The findings of a 1979 study, now verified by the new global investigation, gave rise to prospect theory and upended orthodoxies about rational choices. According to the original study’s findings, people are risk-seeking when maximizing earnings but risk-averse while avoiding losses; our preferences can change based on how they are rendered sequentially; and we tend to overestimate tiny probabilities.
90 Percent Replication
The researchers found that Kahneman and Tversky’s 1979 empirical foundation for proposing prospect theory broadly replicates in all the countries they studied. They report a 90 percent replication in areas directly testing the theoretical contrasts at the heart of prospect theory.
Certain effects were less robust than in 1979, but the researchers believe this is due to the convenience of obtaining individuals in 2019, rather than a defect in the original study conclusions. Another alternative reason — a third of respondents were aware of the idea of loss aversion — was found to have only a little impact on their selections.
Prospect theory has far-reaching consequences, spanning economics and behavioral psychology, including health behaviors. Prospect theory has helped explain why people underutilize preventive care in health, how people misunderstand risk in health, and how to design behavioral treatments for smoking cessation in terms of losses rather than gains, among many other health-related findings.
Abstract
Prospect theory is among the most influential frameworks in behavioural science, specifically in research on decision-making under risk. Kahneman and Tversky’s 1979 study tested financial choices under risk, concluding that such judgements deviate significantly from the assumptions of expected utility theory, which had remarkable impacts on science, policy and industry. Though substantial evidence supports prospect theory, many presumed canonical theories have drawn scrutiny for recent replication failures. In response, we directly test the original methods in a multinational study (n = 4,098 participants, 19 countries, 13 languages), adjusting only for current and local currencies while requiring all participants to respond to all items. The results replicated for 94% of items, with some attenuation. Twelve of 13 theoretical contrasts replicated, with 100% replication in some countries. Heterogeneity between countries and intra-individual variation highlight meaningful avenues for future theorizing and applications. We conclude that the empirical foundations for prospect theory replicate beyond any reasonable thresholds.
Reference:
- Kai Ruggeri, Sonia Alí, Mari Louise Berge, Giulia Bertoldo, Ludvig D. Bjørndal, Anna Cortijos-Bernabeu, Clair Davison, Emir Demić, Celia Esteban-Serna, Maja Friedemann, Shannon P. Gibson, Hannes Jarke, Ralitsa Karakasheva, Peggah R. Khorrami, Jakob Kveder, Thomas Lind Andersen, Ingvild S. Lofthus, Lucy McGill, Ana E. Nieto, Jacobo Pérez, Sahana K. Quail, Charlotte Rutherford, Felice L. Tavera, Nastja Tomat, Chiara Van Reyn, Bojana Većkalov, Keying Wang, Aleksandra Yosifova, Francesca Papa, Enrico Rubaltelli, Sander van der Linden, Tomas Folke. Replicating patterns of prospect theory for decision under risk. Nature Human Behaviour, 2020; DOI: 10.1038/s41562-020-0886-x
Last Updated on February 8, 2024