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HRW Behavioral Summer Camp: Sore Losers

30.08.2019

Welcome back to HRW’s Behavioral Summer Camp: where, throughout August, our internal team of behavioral scientists (known as HRW Shift) will teach you about some of the larger principles that drive behavior.

For week four’s activity, we return to three quick quiz questions. Have a look at the questions below to get your brain juices flowing, then scroll down for the solution.

We hope you enjoy.

The HRW Shift team

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Question 1

A new disease is sweeping across the country and epidemiologists project it will claim the lives of 600 people. Scientists have proposed two alternative programs to address the outbreak, and you must decide which to implement:

1. If program A is adopted, 400 people will die

2. If program B is adopted, there is a one-third probability that no one will die, but a two-thirds probability that 600 people will die

3. No preference between program A or B

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Question 2

  Choose between

1. Get paid $500 if you flip a coin and land heads

2. Get paid $200 for sure

3. No preference between option A or B

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Question 3

A study evaluated the happiness of medalists who participated in the 1992 Summer Olympics in Barcelona. Among gold, silver and bronze winners, which do you think felt the ‘most disappointed’ about the outcome?

  1. Gold
  2. Silver
  3. Bronze

 

 

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Solution

In traditional economics, one key assumption behind modelling is that everyone and the decisions they make are rational. This week’s questions aimed to challenge that assumption and to expose a preference towards the irrational ‘loss averse’ choice as opposed to the rational choice. ‘Loss aversion’ gives a name to the human tendency to favor more predictable situations, even if the more certain option has a lower expected payoff. To put it more simply, we dislike losing more than we like winning and choose to avoid losses rather than maximize gains.

Take question 1, if we lived in a world where people were entirely rational, a person would calculate the expected outcome for both program A and B to make their decision about which program to choose to address the outbreak:
A. If program A is adopted, 400 people will die. Expected outcome = 400 out of 600 will die.
B. If program B is adopted, there is a one-third probability that no one will die, but a two-third probability that 600 people will die. Expected outcome = (.33*0) + (.66*600) = 400 out of 600 will die.
C. No preference between program A or B.

In both options, A and B, it is expected that 400 out of the 600 lives will be claimed by the outbreak regardless of the program that is implemented. If a person was to make this choice based on the mathematical calculation alone, he would choose C as there is no benefit for choosing A vs. B. When many of us look at this question however, the certainty of 400 people dying incites a great deal of psychological pain as we imagine the loss of those 400 lives. Alternatively, Program B offers some hope with the 33% chance that everyone will survive, even though it is tied to a 66% chance that all 600 victims will die. In the original study, 78% of participants preferred program B as our mental calculation leads us to favor the choice that offers a potential for no one to die, especially among those who are more risk averse.

Similarly, the question 2 asks you to choose between the 50/50 chance of winning $500 or the certain option to receive $200. In this instance, the expected outcome of option A [.50 * 500 = $250] is larger than the guaranteed outcome for option B [$200]. The person choosing would have the potential to benefit more from choosing option A, but the stress of walking away with $0 and losing it all looms greater than that gain of $50 more dollars for most.

Daniel Kahneman and Amos Tversky explored the salience of losses in their work ‘Prospect Theory: an analysis of decision under risk’. Building on utility theory, they explored irrational factors and concluded that losses were perceived to be around 2.5 times more powerful than gains. This research contributed to Kahneman’s award of the Nobel Memorial Prize in Economic Sciences in 2002 and their findings brought behavioral economics to the mainstage with wide ranging applications. Their work has been a source of academic debates (with validators and skeptics), inspired major government policy changes (across continents), and trickled into the mainstream media (through many mediums including marketing, advertising, and even blockbuster movie hits like ‘The Big Short’).

An interesting example of applying Prospect Theory to a real-world paradox brings us to question 3 about Olympic medalists. In a study conducted by Victoria Medvec and Thomas Gilovich of Cornell University, and Scott Madey of the University of Toledo, researchers analyzed hours of winner announcement and podium footage from the 1992 Summer Olympics in Barcelona to codify each medalist’s expression on a 10-point scale with 1 being “agony” and 10 being “ecstasy”. The statistical analysis found that both immediately after medal placement announcements and later at the medal ceremony, bronze medalists were visibly happier than silver medalists. Psychologists believe this can be attributed to what they call ‘counterfactual thinking’: how people compare their objective achievements to what might have been or what they lost; leading to silver medalist’s to be less happy as they lost the opportunity to claim gold while a close alternative to the bronze medalist’s perspective is not qualifying for a medal at all.

Average Happiness Score of Medalists:
Immediately following

announcement

Later at the

medal ceremony

Silver medalists 4.8 4.3
Bronze medalists 7.1 5.7

 

Kahneman and Tversky: ‘Prospect Theory: An Analysis of Decision under Risk’
http://www.albacharia.ma/xmlui/bitstream/handle/123456789/31987/kahnmtversky.pdf?sequence=1

Medvec, Gilovich, and Madey: ‘When Less Is More: Counterfactual Thinking and Satisfaction Among Olympic Medalists’
https://www.researchgate.net/publication/15726123_When_Less_Is_More_Counterfactual_Thinking_and_Satisfaction_Among_Olympic_Medalists

Please contact our team of behavioral experts, HRW Shift, if you would like to find out more.

 

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