Risk evaluation and behaviour: defining appropriate frames of reference

TL;DR

This paper examines how the frame of reference influences risk evaluation and decision-making, revealing that subjects' perceptions of risk are affected by their inference processes, complicating interpretations of risk preferences.

Contribution

It highlights the importance of the subject's frame of reference in risk experiments, challenging traditional assumptions about risk preference measurement.

Findings

Subjects never fully agree on equal expected rewards in finite time.

Inference of reward distribution affects risk perception.

Risk preferences are influenced by the experimental frame of reference.

Abstract

Many biological, psychological and economic experiments have been designed where an organism or individual must choose between two options that have the same expected reward but differ in the variance of reward received. In this way, designed empirical approaches have been developed for evaluating risk preferences. Here, however, we show that if the experimental subject is inferring the reward distribution (to optimize some process), they will never agree in finite time that the expected rewards are equal. In turn, we argue that this makes discussions of risk preferences, and indeed the motivations of behaviour, not so simple or straightforward to interpret. We use this particular experiment to highlight the serious need to consider the frame of reference of the experimental subject in studies of behaviour.