Personality economics: An investigation of how personality develops and how it predicts decisions

<p>This thesis is the product of three research papers, of which each one forms a paper of this thesis. In thefirst paper, I study how people’s personality evolves and whether it is shaped by family dynamics,specifically by the sex of one’s siblings. Researchers developed a good understanding of the importanceof personality for people’s lives but know very little how this personality is shaped. The first paperinvestigates whether growing up with a sister instead of a brother might be a cause of different personalitydevelopment. In the second paper, I study two specific personality traits, locus of control and risktolerance, as predictors of decisions under risk. Although we know risk is a crucial part of our lives, we stillhave not determined how to define and measure risk attitudes properly. The second paper delves deeperinto this topic and shows how risk tolerance and locus of control predict risky decisions in an experimentand in real-world choices and gives some additional insight into the measurement of risk attitudes. In thispaper I also studied other personality traits, which turned out to have no important role with regards todecisions under risk. In the third and last paper, I study property insurance decisions with data collectedin an experiment. I designed and coded the experiment and collected this data partially in a computer laband partially online. This project investigates what behavioral and financial factors influence propertyinsurance decisions, especially the choice to insure with fixed-price long-term contracts.</p>

Personality economics: An investigation of how personality develops and how it predicts decisions

<p>This thesis is the product of three research papers, of which each one forms a paper of this thesis. In thefirst paper, I study how people’s personality evolves and whether it is shaped by family dynamics,specifically by the sex of one’s siblings. Researchers developed a good understanding of the importanceof personality for people’s lives but know very little how this personality is shaped. The first paperinvestigates whether growing up with a sister instead of a brother might be a cause of different personalitydevelopment. In the second paper, I study two specific personality traits, locus of control and risktolerance, as predictors of decisions under risk. Although we know risk is a crucial part of our lives, we stillhave not determined how to define and measure risk attitudes properly. The second paper delves deeperinto this topic and shows how risk tolerance and locus of control predict risky decisions in an experimentand in real-world choices and gives some additional insight into the measurement of risk attitudes. In thispaper I also studied other personality traits, which turned out to have no important role with regards todecisions under risk. In the third and last paper, I study property insurance decisions with data collectedin an experiment. I designed and coded the experiment and collected this data partially in a computer laband partially online. This project investigates what behavioral and financial factors influence propertyinsurance decisions, especially the choice to insure with fixed-price long-term contracts.</p>

Impact of Induced Moods, Sensation Seeking, and Emotional Contagion on Economic Decisions Under Risk

In addition to probabilities of monetary gains and losses, personality traits, socio-economic factors, and specific contexts such as emotions and framing influence financial risk taking. Here, we investigated the effects of joyful, neutral, and sad mood states on participants’ risk-taking behaviour in a simple task with safe and risky options. We also analysed the effect of framing on risk taking. In different trials, a safe option was framed in terms of either financial gains or losses. Moreover, we investigated the effects of emotional contagion and sensation-seeking personality traits on risk taking in this task. We did not observe a significant effect of induced moods on risk taking. Sad mood resulted in a slight non-significant trend of risk aversion compared to a neutral mood. Our results partially replicate previous findings regarding the presence of the framing effect. As a novel finding, we observed that participants with a low emotional contagion score demonstrated increased risk aversion during a sad mood and a similar trend at the edge of significance was present in high sensation seekers. Overall, our results highlight the importance of taking into account personality traits of experimental participants in financial risk-taking studies.

Examining the Effect of Short-Term Affect on Farmers’ Risk and Time Preferences in Financial Decision-Making

Farmers regularly make intertemporal decisions under risk or uncertainty. To improve how farmers behave when faced with decisions that have financial consequences, there is a need for a deeper understanding of farmers’ risk and time preferences. While the relationship between individual components of affect and risk preferences is well documented, the same cannot be said for holistic measures of affect on one hand, and for affect and time preferences on the other hand. The data analysed in this paper is the 2014–2015 Indonesian Family Life Survey Wave 5. The survey included experimental measures designed to elicit both risk and time preferences from the same subjects. We analysed the data using limited dependent variable regression models. Our findings strengthen what is known about the affect infusion model. With increased pleasant affect, farmers’ willingness to take risks increases significantly. The results also suggest that pleasant affect is associated with increased odds that farmers will choose future rewards in the long horizon but had no statistically significant effect on the short horizon. The practical implications are that an experience of pleasant affect before decision-making may cause the decision-maker (DM) to perceive a prospect as having high benefits and low risks. Pleasant affect may also induce lower sensitivity towards losses and play the role of a buffer which reduces the immediate negative impact of information that otherwise would prevent the DM from focusing on the long-term. JEL Classifications: C93, D81, D91

Frontal but not parietal cortex is required for decisions under risk

Neurons in frontal and parietal cortex encode task variables during decision-making, but causal manipulations of the two regions produce strikingly different results. For example, silencing the posterior parietal cortex (PPC) in rats and monkeys produces minimal effects in perceptual decisions requiring integration of sensory evidence, but silencing frontal cortex profoundly impairs the same decisions. Here, we tested, for the first time, the causal roles of the rat frontal orienting field (FOF) and PPC in economic choice under risk. On each trial, rats chose between a lottery and a small but guaranteed surebet. The magnitude of the lottery was independently varied across trials and was indicated to the rat by the pitch of an auditory cue. As in perceptual decisions, both unilateral and bilateral PPC muscimol inactivations produced weak effects. FOF inactivations produced substantial changes in behavior even though our task had no working memory component. We quantified control and bilateral inactivation behavior with a multi-agent model consisting of a mixture of a 'rational' utility-maximizing agent (U=Vρ) with two `habitual' agents that either choose surebet or lottery. Silencing PPC produced no significant shifts in any parameters relative to controls. Effects of FOF silencing were best explained by a decrease in ρ, the exponent of the utility function. This effect was parsimoniously explained by a dynamical model where the FOF is part of network that performs sensory-to-value transformations.

Disentangling choice value and choice conflict in sequential decisions under risk

Recent years have witnessed a surge of interest in understanding the neural and cognitive dynamics that drive sequential decision making in general and foraging behavior in particular. Due to the intrinsic properties of most sequential decision-making paradigms, however, previous research in this area has suffered from the difficulty to disentangle properties of the decision related to (a) the value of switching to a new patch versus (b) the conflict experienced between choosing to stay or leave. Here, we show how the same problems arise in studies of sequential decision-making under risk, and how they can be overcome, taking as a specific example recent research on the `pig' dice game. In each round of the `pig' dice game, people roll a die and accumulate rewards until they either decide to proceed to the next round or lose all rewards. By combining simulation-based dissections of the task structure with two experiments, we show how an extension of the standard paradigm, together with cognitive modeling of decision-making processes, disentangles value- from conflict-related choice properties. Our study elucidates the cognitive mechanisms of sequential decision making and underscores the importance of avoiding potential pitfalls of paradigms that are commonly used in this research area.

Three Theories of Choice and Their Psychology of Losses

Loss aversion has long been regarded as a fundamental psychological regularity, yet evidence has accumulated to challenge this conclusion. We review three theories of how people make decisions under risk and, as a consequence, value potential losses: expected-utility theory, prospect theory, and risk-sensitivity theory. These theories, which stem from different behavioral disciplines, differ in how they conceptualize value and thus differ in their assumptions about the degree to which value is dependent on state and context; ultimately, they differ in the extent to which they see loss aversion as a stable individual trait or as a response to particular circumstances. We highlight points of confusion that have at least partly fueled the debate on the reality of loss aversion and discuss four sources of conflicting views: confusion of loss aversion with risk aversion, conceptualization of loss aversion as a trait or as state dependent, conceptualization of loss aversion as context dependent or independent, and the attention–aversion gap—the observation that people invest more attentional resources when evaluating losses than when evaluating gains, even when their choices do not reveal loss aversion.