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Elusive search for risk preferences:

Are risk preferences influenced by a dominated alternative?


Dmitrii Galkin
Alfred-Weber-Institute Heidelberg

Research Question

Method/Design

Use of the decoy to influence choice


Related Literature:
Huber, Joel, John W. Payne, and Christopher Puto. "Adding
asymmetrically dominated alternatives: Violations of regularity and the
similarity hypothesis."Journal of consumer research(1982): 90-98.
Masatlioglu, Yusufcan, and Efe A. Ok. "Rational choice with status
quo bias."Journal of Economic Theory121.1 (2005): 1-29.
Fox, Craig R., and David Tannenbaum. "The elusive search for stable
risk preferences."Frontiers in psychology2 (2011).
Research Questions:
Are risk preferences influenced by a dominated alternative?
Compare results with available data obtained from the similar sample
( German/US BSC/ MSc students)

Laboratory Experiment with one treatment


Multiple price list:
Instructions( Same for both Treatment/Control):
You are presented with nine games, for each of which you have to
choose one option you prefer the most.
During the payment stage you will receive 2 euro for participation. In
addition to that, one game will be randomly chosen and the option you
prefer will be played.
Decoy Option Group
Gam
e

3.00 EUR
3.00 EUR

3.00 EUR

3.00 EUR

3.00 EUR
3.00 EUR

Hypothesis:
Decoy option would increase the attractiveness of the risky lottery, thus
lowering the switching point.

Option A

1
2

Control
Group
Option B

3.00 EUR

SAMPLE
8
3.00 EUR
9
3.00 EUR
Variable

10% for 6.00


euro
20% for 6.00
euro
30% for 6.00
euro
40% for 6.00
euro
50% for 6.00
euro
60% for 6.00
euro
70% for 6.00
euro
80% for 6.00
euro
90% for 6.00
euro

Ga
me
1

90% for 0 euro


80% for 0 euro

2
3

70% for 0 euro


60% for 0 euro

50% for 0 euro

5
6

40% for 0 euro

30% for 0 euro

Control
20% for 0 euro
Group
10% for 0 euro
(N=9)

Decoy
Treatment
(N=8)

Age

22.44

24.375

Female

0.44

0.625

Bachelor Students

0.55

0.625

8
9

Option
A
3.00
EUR
3.00
euro
3.00
euro
3.00
euro
3.00
euro
3.00
euro
3.00
euro
3.00
euro
3.00
euro

Option B
10% for
6.00 euro
20% for
6.00 euro
30% for
6.00 euro
40% for
6.00 euro
50% for
6.00 euro
60% for
6.00 euro
70% for
6.00 euro
80% for
6.00 euro
90% for
6.00 euro

Option C

90% for
euro
80% for
euro
70% for
euro
60% for
euro
50% for
euro
40% for
euro
30% for
euro
20% for
euro
10% for
euro

0
0
0
0
0
0
0
0
0

12% for
5.2 euro
22% for
5.1 euro
32% for
5.0 euro
42% for
4.9 euro
52% for
4.8 euro
62% for
4.7 euro
72% for
4.6 euro
82% for
4.5 euro
92% for
4.4 euro

88% for
euro
78% for
euro
68% for
euro
58% for
euro
48% for
euro
38% for
euro
28% for
euro
18% for
euro
08% for
euro

0
0
0
0
0
0
0
0
0

Decoy Option(C) : Stochastically


dominated by Risky Option(B)

Results
Despite experimental evidence suggesting strong influence of the decoy option
(Dan Ariely Predictably Irrational; Huber, Payne(1984) ), the results were
inconclusive at most.
The average switching point of the treatment group was dragged down by one
subject(3, treatment), without the outlier, the average switching point with decoy
option would have been 5.42 which is even above the control group.
Overall, the data obtained is similar to the study from 2014 albeit lower stakes.

Control
Group

Gender
M
M
M
M
F
F
F
F

Age
20
20
19
28
20
23
26
22

Subject
Econs
History
Econs
Engl
Bio
Engl
Sociology
Chemistry

Degree
Abitur
Abitur
Abitur
BA
Abitur
Abitur
BSc
BSc

Switching Point
4
4
4
6
6
5
6
7

24

Politics/Economics

BSc

22.44

Control vs Treatment
100%

Treatm
ent
Group

80%
60%

Control Group

Cumulative Number of subjects

Treatment Group

40%
20%
0%

Player ID
1
2
3
4
5
6
7
8

1
2
3
4
5
6
7
8

F
F
M
F
M
M
F
F

26
25
23
26
23
25
21
26
24.38

Switching Point

Analysis
What could go (went) wrong:
List effect
People got used to seeing the alternative option and thus their consideration set
included only first two options
Small subject pool
References:
Huber, Joel, John W. Payne, and Christopher Puto. "Adding asymmetrically dominated alternatives: Violations of regularity and the
similarity hypothesis."Journal of consumer research(1982): 90-98.
Masatlioglu, Yusufcan, and Efe A. Ok. "Rational choice with status quo bias."Journal of Economic Theory121.1 (2005): 1-29.
Fox, Craig R., and David Tannenbaum. "The elusive search for stable risk preferences."Frontiers in psychology2 (2011).

Ariely, Dan.Predictably irrational. New York: HarperCollins, 2008.

Average Switching Point


Law
Sociology
Econs
Geo
Chemistry
Sociology
Econs
Engl

Abitur
Abitur
BSc
BSc
Abitur
Abitur
Abitur
BSc

Average Switching Point

5.22
8
0
4
7
5
3
6
5
4.75