Wednesday, April 20, 2016

Aspiration Levels and Preference for Skewness in Choice Under Risk

CORICELLI Giorgio, DIECIDUE Enrico, ZAFFUTO Francesco D.
Read the working paper
INSEAD Working Paper 2016/28/DSC

This paper describes an experiment designed to study the effect of aspiration levels on individual choices under risk.
We observe preferences for prospects that offer various probabilities of achieving aspiration levels; the resulting choice patterns characterize a heuristic for reducing the complexity of risky decisions. In cases where aspiration levels are not predictive, choices can be explained by preferences for positive skewness. Our results confirm the efficacy of a two-pronged approach that includes both compensatory and simplifying strategies for choosing among risky prospects. Of the former strategies, cumulative prospect theory best fits our experimental data.