From high-stakes gambling in a casino to deciding whether or not to buy an airplane ticket today or wait for a possible seat sale, our processes for making decisions involving risk show distinct patterns.

A new study from the University of Alberta provides evidence that decisions involving risk depend on how we get the information about the potential risks and rewards.

The research team, led by Elliot Ludvig, gave people two kinds of choices. One choice was between a surefire win and a 50/50 chance at a double-or-nothing win. The other choice was between a surefire loss and a 50/50 chance at a double-or-nothing loss.

Decades of economic research have shown that people tend to take the safe option when the choice involves wins, but they tend to gamble when the choice involves losses. This aversion to risk for wins poses a puzzle: If people avoid gambling for wins, then why are casinos so popular, and why does problem-gambling affect so many people?

To answer these questions, the study compared people's decisions when choices were described to them versus when they experienced the wins and losses first hand.

The researchers put two games of chance on computers for a group of volunteer players. In one game, the choices were clearly described in text on a computer screen. This approach is the traditional way to study economic choice.

In the other game, the odds of winning and losing were exactly the same, but players were given no guidance whatsoever. Players were presented with doors and their choices revealed the wins or losses behind each door. The players had to learn about the odds through their own experience of trial and error. All players were put through both styles of games.

The researchers found that if people experienced the wins and losses first hand, as they would in a casino, they behaved completely differently than when they were told the odds. When they learned from experience, people were more likely to take the leap and gamble on the double-or-nothing wins. But with experience they become less likely to take the double-or-nothing gamble when the choice involved losses.

In other words, most people make the opposite choices if the odds are described to them than if they learn about the odds from their own experience.

"We are continuously confronted with risky decisions--be it shopping at the mall, picking a course of medical treatment, gambling at a casino, or deciding how to allocate assets in our retirement accounts," said Dr. Ludvig. "Our research suggests that people's propensity for risk in these situations may depend on how they learn about the odds."

Experiencing the odds causes people to behave differently than if the odds are presented to them verbally. The researchers suggest that part of this discrepancy may result from the influence of memory of winning, or possibly even by the wins they see other people experience.

"We think that people choose in fundamentally differently ways when they are remembering their past wins and losses than when they are thinking about abstract future possibilities", said Dr. Marcia Spetch, an author of the study. "When basing choices on memory, people may focus more on the bigger wins and the bigger losses."

The research was published in the journal PLoS ONE.

Citation: Ludvig EA, Spetch ML (2011) Of Black Swans and Tossed Coins: Is the Description-Experience Gap in Risky Choice Limited to Rare Events? PLoS ONE 6(6):e20262. doi:10.1371/journal.pone.0020262

Funding: This research was funded by Natural Sciences and Engineering Research Council of Canada Discovery Grant #38861 (MLS) and the Alberta Gaming Research Institute. The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscript.

Competing Interests: The authors have declared that no competing interests exist.

Source:
PLoS ONE