INSEAD Library

For the degree of Ph.D. in management, INSEAD, June 2009

Includes bibliographical references

The dissertation consists of three essays exploring different aspects of decision making. The first two essays present models of preferences under risk which attempt to capture and incorporate important aspects of human cognition in the decision making process. The third essay is an empirical investigation of the link between thinking dispositions and expected utility violations.
Essay 1 presents a Dual System Model (DSM) of decision making under risk and uncertainty where the value of a gamble is a combination of the values assigned to it independently by the affective and deliberative systems of thought. Motivated by research on dual process theories and empirical research in Hsse and Rottenstreich (2004) and Rottenstreich and Hsse (2001) among others, DSM incorporates 1) individual differences in thinking dispositions; 2) affective nature of outcomes; and 3) different task construals within its framework. The model has good descriptive validity and accounts for (a) violation of non-transparent stochastic dominance; (b) four-fold pattern of risk attitudes; (c) ambiguity aversion; (d) common consequence effect; (e) common ratio effect; (f) isolation effect; and (g) coalescing and event-splitting effects. DSM is also used to make several novel predictions of conditions under which specific behavior patterns may or may not occur.
Essay 2 presents a context dependent valuation (CDV) model of decision making under risk where the valuation of a gamble depends not only on its own probability-outcome structure but also on the other gambles with which it is compared. This descriptive model draws motivation from the range-frequency theory which is a psychophysical theory concerned with the judgment of categories like "good" and "bad" and "large" and "small" and states that the subjective value of a stimulus depends on its position as well as its rank in the set of observed stimuli. CDV is deterministic, is based on the value maximization paradigm, and is shown to account for (a) violation of non-transparent stochastic dominance, (b) procedure invariance in the form of buying-selling price gaps, preference reversals and elicitation biases, (c) description invariance in the form of coalescing/event splitting effects, and (d) classical phenomena such as violation of monotonicity, violation of independence and the common ratio effect. The model also raises the possibility that some of the probability weighting observed in the literature may be context driven.
The model can be used to predict conditions under which specific behaviors can occur and how behavior patterns may change with changes in parameters of a decision situation.
In the third essay, individual differences in five types of expected utility (EU) violations are investigated using thinking orientation (rational versus experiential) as the predictor variable. The effect on choice performance of priming one thinking system or the other is aslo explored. The key findings are: (a) EU violations are independent of rational thinking but reduce on priming it; (b) experiential thinking correlates positively with overweighting of small probabilities and negatively with ambiguity aversion and priming it improves EU performance; (c) greater deliberation does not lead to lower violations; and (d) men are more rationally oriented while women are more experientially oriented, women violate EU more than men, and both show maximum improvement when primed on their dominant thinking orientations. Results show that individual differences due to thinking orientation can have predictive implications for risky decision making.