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Regret theory and risk attitudes

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Abstract

We examine risk attitudes under regret theory and derive analytical expressions for two components—the resolution and regret premiums—of the risk premium under regret theory. We posit that regret-averse decision makers are risk seeking (resp., risk averse) for low (resp., high) probabilities of gains and that feedback concerning the foregone option reinforces risk attitudes. We test these hypotheses experimentally and estimate empirically both the resolution premium and the regret premium. Our results confirm the predominance of regret aversion but not the risk attitudes predicted by regret theory; they also clarify how feedback affects attitudes toward both risk and regret.

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Notes

  1. The role of regret in the psychology of decision making has been extensively investigated (Larrick 1993; Larrick and Boles 1995; Zeelenberg 1999; Connolly and Zeelenberg 2002; Connolly and Butler 2006).

  2. 2Loomes and Sugden (1982) refer to u as a “choiceless utility function”.

  3. If instead the DM does want to hear about (resp., is indifferent to) the foregone prospect’s payoffs, then the resolution premium is negative (resp., zero).

  4. In our set-up, note that the resolution premium is computed independently from the regret premium. So our set-up allows a regret-averse DM to be resolution seeking.

  5. The full list of questions is given in Appendix B (the instructions are available at goo.gl/jKOT3R and goo.gl/3ftKzu).

  6. A subject with a concave or convex utility function might prefer the RA prospect despite not being regret averse. For instance, consider a choice between prospects a = (E1, 20; E2, 70; E3, 30) and b = (E1, 45; E2, 25; E3, 50) when all three events are equally likely. Prospect a is a RA prospect because if Q is convex and u is linear then Q(45) > Q(25) + Q(20), in which case a ≽ b. If instead u is convex and Q is linear, we still have a ≽ b. Similar cases occur also when u is concave and Q is linear. To avoid classifying such subjects as regret averse, we included eight questions in which the RA prospect’s EV was lower than that of the RS prospect.

  7. If more than 50% of choices are consistent with H1, we classify the subject and question as “consistent with H1.” In case of indifference, we choose one of the options with equal probability.

  8. The estimated regret functions of regret-seeking subjects are identical under conditions F and N: Q F (α) = Q N (α) = α0.9. However, feedback increases the number of regret-seeking subjects. In particular, the number (14) of regret-seeking subjects in condition F is significantly larger than the number (3) of regret-seeking subjects in condition N. Feedback therefore decreases the entire subject pool’s regret aversion. The extremely few regret-seeking subjects under condition N precludes any meaningful comparison with their counterparts under condition F.

  9. If the certainty effect influenced our result, then the subjects would have been more consistent with respect to H1 for the second set of questions (since both prospects are risky). However, our evidence points in the opposite direction.

  10. When subjects whose responses in Section II were inconsistent with regret theory are removed and the Q-function is then recomputed, we still find that feedback polarizes regret attitudes.

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Acknowledgements

We thank Aurélien Baillon, Han Bleichrodt, Luc Wathieu, Klaus Wertenbroch, Horst Zank, the editor, and an anonymous referee for their helpful comments. We also gratefully acknowledge support from the People Program (Marie Curie Actions) of the European Union’s Seventh Framework Program FP7/2007–2013/ under REA grant agreement 290255.

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Authors and Affiliations

  1. Decision Sciences, INSEAD, Boulevard de Constance, 77305, Fontainebleau, France

    Jeeva Somasundaram & Enrico Diecidue

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  1. Jeeva Somasundaram
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  2. Enrico Diecidue
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Correspondence to Enrico Diecidue.

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Appendices

Appendix A

1.1 Example of experimental stimuli for Sections I and II

Fig. 3
figure 3

Screenshot of Section I stimuli

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Fig. 4
figure 4

Screenshot of Section II stimulii

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Fig. 5
figure 5

Screenshot of feedback

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Appendix B

1.1 Questions used in Sections I and II of the lab experiment

Table 16 Questions used in Section I of the lab experiment
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Table 17 Questions used in Section II of the lab experiment to identify attitudes toward risk
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Somasundaram, J., Diecidue, E. Regret theory and risk attitudes. J Risk Uncertain 55, 147–175 (2017). https://doi.org/10.1007/s11166-017-9268-9

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