Physiological Correlates Of Effects Of Prior Outcomes On Risky Choice

The question of how prior outcomes influence risk preferences is central to all sequential decision settings. A wealth of evidence has shown that such influences are poorly described by subjective expected utility (SEU) theory, and that prospect theory, where outcomes are coded as gains and losses relative to some reference point, offers a better framework for analyzing such behavior. However, due to the flexibility in how one can specify the reference point, prospect theory often fail to offer an unambiguous prediction concerning the effects of prior outcomes on behavior. For example, Kahneman & Tversky (1979) states that, “there are … situations in which gains and losses are coded relative to an expectation or aspiration level that differs from the status quo.” In the current study, we explored the possibility that psycho-physiological responses to gains and losses can be used to supplement the theory. In particular, we examine risk taking, its physiological correlates, and how prior outcomes influence risk attitudes. Indeed, there is a long tradition in prospect theory to describe the value function in terms of psychophysics principles such as diminishing sensitivity and reference dependence. Thaler (1999), for example, states that the prospect theory value function is “a representation of some central components of the human perceived pleasure machine”, with the reference point, diminishing sensitivity, and greater salience of losses relative to gains, as the three core properties of the value function. Recent studies in addition, have shown that this latter property—loss aversion—is directly reflected in the physiological responses (Sokol-Hessner, 2009), raising the possibility that such a measure can be a general strategy for understanding how the value function changes in sequential decisions.