PSYCHOLOGY OF PREFERENCES

Abstract

Recent investigations of the psychology of preferences have demonstrated several intriguing discrepancies between subjective and objective conceptions of decisions. For example, the threat of a loss has a greater impact on a decision than the possibility of an equivalent gain. Most people are also very sensitive to the difference between certainty and high probability and relatively insensitive to intermediate gradations of probability. The regret associated with a loss that was incurred by an action tends to be more intense than the regret associated with inaction or a missed opportunity. These observations and others of a similar character contribute to the understanding of how people make decisions and to the elucidation of some puzzles of rational choice . . . . We asked a large number of physicians to consider the following problem: Imagine that the U.S. is preparing for the outbreak of a rare Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows: If Program A is adopted, 200 people will be saved. If Program B is adopted, there is a 1/3 probability that 600 people will be saved and a 2/3 probability that no people will be saved. Which of the two programs would you favor. The majority response to this problem is a risk-averse preference for Program A over Program B. Other respondents were presented with the same problem but a different formulation of the programs: If Program C is adopted, 400 people will die.

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