Elsevier

Economics Letters

Volume 114, Issue 1, January 2012, Pages 102-105
Economics Letters

Risk-taking for others under accountability

https://doi.org/10.1016/j.econlet.2011.09.037Get rights and content

Abstract

We let subjects take risky decisions that affect themselves and a passive recipient. Adding a requirement to justify their choices significantly reduces loss aversion. This indicates that such an accountability mechanism may be effective at debiasing loss aversion in agency relations.

Highlights

► We test the effects of a justification requirement on decisions under responsibility. ► Loss aversion is found to decrease with the justification requirement. ► Choices in the pure gain and pure loss domains are unaffected. ► This points to a de-biasing mechanism for (myopic) loss aversion.

Introduction

Deviations from economically normative behavior have been found time and again in individual decisions. People often reverse their preferences under alternative systems of preference elicitation (Maafi, forthcoming), weight probabilities non-linearly (Abdellaoui, 2000), and take too little risk in investments involving losses (Fellner and Sutter, 2009). These findings have been reproduced for the general population (Booij et al., 2010), and in a variety of countries (Akay et al., forthcoming).

An important class of decisions is the one in which a decision-maker takes decisions not (only) for herself, but is responsible (also) for somebody else. Examples include a decision-maker taking decisions that affect her and her family, or an agent taking decisions for a principal where both the principal’s and the agent’s payoffs depend on the outcome of that decision. It is all the more surprising that we are only beginning to understand risk-taking under conditions of responsibility. Charness and Jackson (2009) studied Rousseau’s stag hunt game when decision-makers were responsible either only for themselves or also for somebody else, and found that under responsibility the safer, dominated, strategy was chosen more often. Eriksen and Kvaløy (2010) found myopic loss aversion in decisions of salaried agents for their principals. Pahlke et al. (2011) found that responsibility amplified the fourfold pattern of risk attitudes predicted by prospect theory relative to an individual baseline.

Instead of comparing decisions under responsibility to individual decisions, we introduce a justification requirement, whereby decision-makers need to justify their decisions to the passive recipient who depends on them. Sutter (2009) found that payoff commonality is sufficient to increase investment levels into a risky asset with positive expected returns relative to an individual baseline. More important for our present study, he found that adding the possibility of sending non-binding messages on top of the salient group membership induced by payoff commonality further increased investment levels. The latter is related to our accountability requirement, with the difference that subjects receive messages before taking their decisions, whereas in our experiment they may have to justify their decisions after taking them.

Accountability–the expectation on the side of the decision-maker that she may have to justify her decisions (Lerner and Tetlock, 1999)–has been found to be a powerful debiasing mechanism. It activates deeper thinking processes and thus generally leads to better decisions (Vieider, forthcoming). Introducing an accountability mechanism is interesting for several reasons. For one, some form of accountability is generally present in real-world decisions under responsibility. Furthermore, inasmuch as accountability will induce subjects to think more carefully about their decisions, we may gain important insights into the perceived justifiability or awareness of various decision making biases.

Section snippets

The experiment

Design.

We asked subjects to choose repeatedly between two alternatives. Payoffs affect the decision-maker and recipient in a parallel manner to avoid issues of payoff inequality (Bolton and Ockenfels, 2010).

Subjects. 192 subjects were recruited at the MELESSA laboratory at LMU-Munich. The experiment took 1.5 h, average earnings were € 18.48. 41% of subjects were female. The experiment was conducted using z-Tree (Fischbacher, 2007).

Task. Subjects were asked to choose repeatedly between a sure

Discussion

The finding that accountability reduces loss aversion may be surprising at first. It is however in agreement with previous findings by one of the authors. Vieider (2009) found that loss aversion was reduced when subjects had to justify their individual decisions in front of the experimenter. Since that experiment was conducted without incentives, it was costless to conform to what the student–subjects may have thought to be the experimenter’s expectations. Our new finding gives the original

Conclusion

We compare risky decisions in a situation of responsibility to an identical situation in which the decision-maker may have to justify her decisions to the recipient. While decisions in the gain and loss domains are unaffected, decision-makers are less risk-averse for mixed prospects, indicating reduced levels of loss aversion under accountability. The findings indicate that accountability requirements introduced by principals may be an effective mechanism to reduce loss aversion in agents.

References (18)

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