- Email: [email protected]
Risk behavior in decision-making in a multi-person-setting
The Journal of Socio-Economics 38 (2009) 752–756
Contents lists available at ScienceDirect
The Journal of Socio-Economics journal homepage: www.elsevier.com/locate/soceco
Risk behavior in decision-making in a multi-person-setting Thomas Fenzl ∗ , Thomas Brudermann University of Klagenfurt, Institute of Psychology, Department of Economic Psychology, Universitätsstraße 65-67, A-9020 Klagenfurt, Austria
a r t i c l e
i n f o
Article history: Received 26 November 2008 Received in revised form 11 June 2009 Accepted 17 June 2009 JEL classification: 28.002 Z2 (Economic Psychology) 4.008 D81 (Criteria for Decision-Making under Risk and Uncertainty)
a b s t r a c t When people have to make a choice in an individual setting between a known-risk option and an untested situation of uncertainty, the majority prefers the known risk over the uncertainty of the alternative. The confrontation with an unfamiliar situation in an environment including other participants allows for new mechanisms in risk-perception and risk-evaluation. People tend to become other-directed and use the behavior and consequences of actions of other people in the environment to assess risk. Our investigations show that warning signals observable in the behavior of other participants in the setting reinforce people’s preference for known risks over uncertainty. © 2009 Elsevier Inc. All rights reserved.
Keywords: Risk behavior Uncertainty Decision-making Multi-person-setting Other-directed
1. Introduction The current global crisis causes the largest transformation since more than 80 years and comes along with uncertainty and disorientation. Previously set standards, structures and norms are replaced and revolutionary economic processes are being accelerated. Within this new framework people have to make choices between several alternatives, some including known risks, others containing unknown and untested ventures accompanied by highest uncertainty. How do people cope with such risks and uncertainty represented by novel decision-making situations? Human risk behavior has to a great extent been studied as individual cognitive process in which individuals collect and process information to form their decisions and actions. We present a field experiment that allowed for new mechanisms in riskperception and risk-evaluation, as participants were confronted with an unfamiliar situation in a multi-person-setting. The findings are discussed with respect to economic decision-making in situations of uncertainty. 2. Related work When it comes to decision-making under uncertainty, familiarity often cuts out all other factors of orientation. In an experiment
∗ Corresponding author. Tel.: +43 676 7362 381; fax: +43 463 2700 1626. E-mail address: [email protected] (T. Fenzl). 1053-5357/$ – see front matter © 2009 Elsevier Inc. All rights reserved. doi:10.1016/j.socec.2009.06.001
Alter and Oppenheimer (2008) showed that the estimation of the value, which participants attached to certain assets or items, depended crucially on their familiarity with it. Pulford and Colman (2008) have shown in their recent investigations that decisionmakers prefer known-risk situations over unknown alternatives irrespective of the degree of uncertainty in the untested options. As in the illustration of the Ellsberg paradox (1961) several urns were filled with balls of two different colors in various distributions. In an individual setting a participant had to choose between a known-risk option, an urn containing 50 balls of each color randomly mixed, and a situation of uncertainty, an urn with an unknown distribution of balls of each color, for a blind drawing of a ball of a specified color. Drawing the specified color entered participants into a lottery with the chance of winning one of three £30 prizes. In this experiment more than 70% of the 149 undergraduate students and members of the general public chose the known-risk option. Pulford and Colman furthermore found that urn size had no statistically significant impact on the preference of the known-risk option over the situation of uncertainty. In their conclusions they stated that purely cognitive models do not give a full explanation of people’s behavior in such situations and they suggest taking affective processes into account. These kinds of experiments however do not direct enough attention towards the fact that in real life, for example in markets, people are embedded in an environment that includes other people and therefore are subject to social influence. Even if individuals sometimes decide independently based on available facts and fundamental data, there is a wide variety of situations where they
T. Fenzl, T. Brudermann / The Journal of Socio-Economics 38 (2009) 752–756
are heavily influenced by other people’s behavior and actions (see e.g. Hanson and Putler, 1996; Salganik et al., 2006; Olsson et al., 2007). Especially in situations including unknown and untested risks, where facts and fundamental data are missing and experience is lacking, and which provide conditions of uncertainty, disorientation, increased affective arousal as well as a suggestive and persuasive environment, people become other-directed (Schachter and Singer, 1962; Pelzmann et al., 2005). This process of keeping an eye on other people’s behavior as well as its consequences remains unaltered throughout the whole life (Riesman, 1952). But it is not necessarily constraints of conformity that account for assimilation and adaption to other people’s behavior. Often it is the observed result or outcome of the application of a certain behavior by others, their triumph or their failure, which makes people decide one way or the other (Schelling, 1978). This behavior to manage novel and risky decision-making situations can be observed for example in speculative booms in financial markets, when risk-perception and risk-evaluation are shifted from facts and fundamental data towards the behavior of other people. Caused by euphoria, exaggerated optimism and blinded by the prospects of high profits as well as the triumph and prosperity of others, critical thinking and doubts are often suppressed, facts are cast aside and fundamental risk is ignored. The risk of the given situation is perceived through the behavior, choices and actions of other market participants. Euphoria, excitement and optimism make people act along the lines: everybody else cannot be wrong. This trend in human behavior is compliant with well-known strategies of risk-perception and risk-evaluation used by rats when identifying unknown food (Galef et al., 1984; Galef and Stein, 1985; Galef, 1987). Before the rats eat the novel food they wait and see whether conspecifics have eaten the food before survived the diet. When rats encounter unknown food, they usually let those eat first, which are curious enough. The “other-directed” rats only eat the new food once they can smell the odor of the foreign food in the breath of conspecifics. The state of others indicates whether there is danger or not. Similar trends can be observed when watching children play. For instance we observed that as soon as a self-constructed waterslide was finished, the elder children of the group sent forward the youngest and inexperienced ones as dummies to test whether its use was safe and whether it worked out the way they had planned it. 3. Method, sample, design In our investigations we wanted to examine the different strategies of how people deal with the risk represented by novel situations, for which facts and fundamental data are scarce or not available, experience is lacking and affective arousal is increased, in an environment that includes other people. The focus of our research was to study the influence of other people’s behavior and its consequences observed in the environment on the perception and evaluation of risks by individuals. Therefore we chose a real-world-situation and set up an experimental design with three stages that registered the risk-behavior of university students in an oral exam under particular conditions. The 59 participants (51 females, 8 males) that showed up for the course exam needed to pass the test with grade A in order to be admitted to a research seminar in the following semester that as usually had very strict entrance restrictions. At the university, where this qualitative field experiment was conducted, only one course met this selection criterion and the requirements illustrated in the next section. Thus we were not able to draw a random sample or to influence sample size and structure.
753
3.1. First experimental stage In the first stage of our experiment a decision-making situation with highest uncertainty was created in following manner: as a novelty we provided the participants of the selected psychology class with the opportunity to pass their exam at either one of two examiners. 1. The known-risk option: Students could choose the well-known alternative picking the familiar examiner, a notorious professor who is generally known for risky and uneasy exams at campus (P1). In a university-wide survey among 147 psychology students (122 females, 25 males) a majority of respondents (75%) rated the examination style and procedure comparatively uneasy and risky.1 According to usual practice the professor took public exams in the lecture hall, where all candidates had to wait for examination regardless of which examiner they had chosen. 2. The attractive and tempting situation of uncertainty: Candidates could also take their exam with a young and friendly universityassistant, whose examination procedure was unknown up to this point (P2). Students did not have any experience or knowledge, since this person took exams for the first time. They could derive information only from lectures and tutorials held by the assistant and from his years of study at the same university. In contrary to the public tests with the professor the unfamiliar examiner held his exams in an extra room adjacent to the lecture hall without any audience (Fig. 1). The alternative hypothesis H1(1) in the first experimental stage was that a significantly higher number of students would rather choose the known-risk option, despite taking the exam with the unknown and friendly assistant constituted a promising and tempting alternative to the rather difficult and uneasy exams of the known professor. The null hypothesis H0(1) postulated no considerable difference between the two groups with respect to the number of candidates. 3.2. Second experimental stage After candidates had picked either one of the two possibilities and oral exams had started, we manipulated the alternative of taking the exam with the unfamiliar but friendly assistant in two steps in order to investigate the effect of warnings and signals of danger represented by other people’s behavior and its consequences on individual decisions. The first three candidates taking the exam with the assistant, well-informed and trained students, returned bleak and depressed to the lecture hall, making sure the waiting candidates could clearly recognize their frustration. These undercover confederates showed angry and furious expressions, one of them slammed the door and they all left the lecture hall immediately. Nevertheless no information about their obtained grades or the examination procedure was passed on to the waiting candidates in the lecture hall. Furthermore two other confederates among the students reacted to the signs of danger observable in the behavior of the first three candidates and signaled an escape route for the other candidates waiting in the lecture hall. They revised their previous decision for the exam with the unknown examiner and moved over to the examination group of the known, uneasy professor, making sure that the waiting candidates in the lecture hall could register their alteration. The testing hypothesis H1(2) in the
1 The sample with a mean age of 28.3 years (SD = 9.7 years, range 19–64 years) was selected conveniently but with respect to the criterion that respondents either had already heard about, listened to or had already taken an exam with the notorious professor. The sample roughly reflected the ratio of males to females in our field experiment.
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T. Fenzl, T. Brudermann / The Journal of Socio-Economics 38 (2009) 752–756
Fig. 1. Schematic illustration of experimental setting.
second stage of the experiment argued that caused by the warning signals displayed in the bleak and depressed behavior of the three confederates a substantial number of students would follow the signaled escape route. The null hypothesis H0(2) postulated no significant number of candidates revising their initial decision for the assistant. 3.3. Third stage of investigation A post-survey among participants was conducted in the third stage of our investigations via e-mail the day after the exams had taken place. Students were asked whether they doubted their choice of picking their respective examiner while waiting for the exam and furthermore for which reasons they doubted their preliminary decisions. Our alternative hypothesis H1(3) postulated that the number of candidates doubting their choice was substantially higher in the group of students waiting to take the exam with the assistant than in the group of the professor. The null hypothesis H0(3) postulated no significant difference between the two groups with respect to the number of candidates doubting their choice for the respective examiner. Using this experimental setting we could examine firstly, which behavioral strategies participants applied to get along with the risk and uncertainty of the new situation, especially whether they would perceive and evaluate risk using the information derived from the observation of the behavior of other students taking the exam before them, and finally to which degree a suspected bad performance of the first few candidates and the signaling of an escape route would influence their behavior.
stands open, even though this option may include substantial risks. In consequence of our manipulation of the alternative with the unknown examiner in the second experimental stage only four candidates waiting in the examination group of the assistant revised their original choice for the situation of uncertainty and exchanged for the known-risk option of an exam with the notorious professor. We expected to observe a deeper impact of the manipulation, but conditions did not favor a larger number of alterations. Nevertheless some participants simply followed the escape route signaled by the two confederates and adopted their behavior. Regarding the size of the observed effect we tend to reject the alternative hypothesis H1(2) . A replication of the experiment in order to enlarge the sample could not be conducted as the setting and manipulation as mentioned in experimental stage two used a one-time effect. In the third stage of our investigations, a post-survey with a response rate of more than 50% in both groups, almost two thirds of the remaining participants in the group of the assistant declared having doubted their choice of picking the tempting opportunity with its uncertainty while waiting for the exam. They mentioned the warning signals perceived through the bleak and frustrated behavior of the first three candidates returning from the exam with the unknown assistant as the main reason for their doubts. In contrast only 15% of the candidates in the group waiting to take the uneasy exam with the known professor doubted their decision (Fig. 2). Doubts among respondents in the group of the unfamiliar assistant – the situation of uncertainty – were statistically significantly higher (2 = 6.838; df = 1; ˛ = 5%) than in the group of the notorious
4. Results In the first stage of our experiment two thirds of the participants chose the less-attractive but familiar examination situation with the uneasy but known professor. They even did so despite the familiar situation was generally related to being uneasy and posed a substantial risk. Only one third of the participants opted for the supposedly tempting and seducing alternative of taking the exam with the unknown, friendly assistant. The two groups – unfamiliar assistant and notorious professor – did not show any significant differences concerning the distributions of sex, age and obtained grades in the exam. Therefore the alternative hypothesis H1(1) proved right and the null hypothesis H0(1) was rejected. Referring to economic significance the observed effect shows that a majority of people rather avoids new and tempting alternatives, which include uncertainty and for which facts, fundamental data or experiences are missing, as long as the door to another familiar and known-risk choice
Fig. 2. Doubts about choice of examiner in the two groups of respondents.
T. Fenzl, T. Brudermann / The Journal of Socio-Economics 38 (2009) 752–756
professor – known-risk option. Due to the strength of the observed effect we accept the alternative hypothesis H1(3) . Bringing together the results of the last two stages of our investigations we find that three fourths of the students initially opting for the situation of uncertainty evaluated the risk anew after perceiving warnings and signs of danger in the behavior of others in their environment. Thus the registered effects validate the influence of other people’s behavior and its observable consequences on ones decision-making process in situations of uncertainty. 5. Conclusions, open problems and discussion The novelty of our investigations is the systematic examination of risk behavior of people in a multi-person-setting in a real-worldsituation. In contrast to most of the research work on risk behavior in decision-making processes, which is mostly based on artificial, hypothetical and laboratory decisions and bet situations (e.g. Faragó et al., 2008; Lawrence et al., 2008), participants in our setting were confronted with a choice leading to real-life results with poor or beneficial outcomes. In conclusion to our findings the risk-behavior of people in decision-making situations, which include unknown and untested risks, disorientation, uncertainty, an increased affective arousal and other participants in the environment that are confronted with the same novelty, can be described as follows: 1. In conjunction with the findings of Pulford and Colman (2008) as well as Alter and Oppenheimer (2008) the observed effect in the first stage of our experiment leads to the conclusion that people in general want to know what is going on regardless of whether they are making decisions independently or whether they are part of a setting including other participants. Most people avoid situations with uncertainty, for which they do not have any facts, fundamental data or experiences, neither from their own nor from others, when they are among the first to enter the unknown and untested territory. Caused by the human tendency to preserve habits and rather strive for consistency, stability and status quo than to continuously seek new behaviors, people rather pick the known evil and renounce other alternatives, even if they provide attractive and tempting opportunities. 2. The findings of the second experimental stage validate that the behavior of other people in the environment and the observable consequences of their actions play an essential role in perceiving and evaluating risk in a novel situation. The research of Kahneman and Tversky (1973, 1974, 1979) suggests that under uncertainty people employ heuristics in cognitive processing, which allow for a simple, fast and frugal judgment of the situation. According to the anchoring paradigm (Kahneman and Tversky, 1974) waiting participants in the lecture hall may have used the information revealed by the behavior of the three returning confederates as an anchor to predict and assess the odds of passing or failing in the exam with the unknown and friendly assistant. Just as other heuristics lead to substantial biases in decision-making, anchoring results in a tendency to rely too heavily on one piece of information and thus it may contribute to the explanation of the observed disparity in doubts between the two groups. Despite recording substantial doubts among students in the group of the assistant the majority of them however stuck to their initial choice. 3. Furthermore the results of the second stage of our experiment showed that some people became other-directed and joined others on an escape route from the originally chosen tempting and seducing new alternative when they perceived signs of danger, losses or downfall in the consequences experienced by others in the novel situation. Therefore such warning signals reinforce a bias of preferring a known-risk option over a situation of uncertainty in the decision-making process. Aspects such as one’s
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preparedness for the exam became less relevant in the given situation. Although the observed effect in our experiment was not significant, the underlying social and psychological concepts of this behavioral pattern are central to a more detailed understanding of economic decision-making in several situations. One possible explanation for this behavior is that the warning signals on the risks observed in other student’s behavior may have increased the affective arousal among participants through psychological contagion, causing their tolerance for uncertainty to decrease and resulting in a stronger preference of the known-risk option among students. Contagion seems to be relevant in this context, since it is not restricted to cognitive processes but may also include emotional contagion, a process in which individuals influence each others’ emotions or behavior through the conscious or unconscious induction of emotion states and behavioral attitudes (Barsade, 2002). 4. Finally only a few particular students trusted in their abilities, the subjective appraisal of their skills and the sufficient quality of their preparation and opted for the situation of uncertainty instead of the known-risk option. They believed in the chances of the novel alternative and did not doubt their decision for the unknown and untested assistant even when warning signals and signs of danger sent out from other actors in the setting could be observed. In economic decision-making this group of people includes entrepreneurs, which according to Lawrence et al. (2008) use their functional impulsiveness and enhanced cognitive flexibility to seize opportunities in a rapidly changing environment. On a more generalized level Pulford and Colman (2008) suggest, that when people are confronted with the choice between a known-risk option and a situation of uncertainty including unknown and untested risks, the ones with a higher general tolerance of uncertainty tend to get involved in the novel alternative. Even if the included risks are widely unknown to them they take a chance on the new opportunities and possible benefits provided by the novelty regardless of what other participants in the setting are doing and irrespective of the possible known-risk alternative. Our experiment suggests that in certain situations confident and sufficiently prepared people with a high subjective appraisal of their skills and abilities seem to have a higher tolerance of uncertainty than others. Hence there is still to be clarified, under which framework conditions which factors and components account for the fact that some people are more intolerant to uncertainty than others when making a decision between a known-risk alternative and a situation of uncertainty in an environment including other actors. Acknowledgements Suggestions by two anonymous referees greatly improved this paper. The authors gratefully acknowledge the support of the lecturer of the affected course and thank the confederates. References Alter, A.L., Oppenheimer, D.M., 2008. Easy on the mind, easy on the wallet: the effects of familiarity and fluency on currency valuation. Psychonomic Bulletin and Review 15, 985–990. Barsade, S.G., 2002. The ripple effect: emotional contagion and its influence on group behavior. Administrative Science Quarterly 47 (4), 644–675. Ellsberg, D., 1961. Risk, ambiguity, and the savage axioms. Quarterly Journal of Economics 75, 643–669. Faragó, K., Kiss, O., Boros, J., 2008. Risk-taking in entrepreneurs, compared to criminals and students: the role of uncertainty and stakes. Journal of Socio-Economics 37, 2231–2241. Galef Jr., B.G., Stein, M., 1985. Demonstrator influence on observer diet preference: analysis of critical social interactions and olfactory signals. Animal Learning & Behavior 13, 31–38. Galef Jr., B.G., 1987. Social influence on the identification of toxic foods by Norway rats. Animal Learning & Behavior 15 (3), 327–332.
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Galef Jr., B.G., Kennett, D.J., Wigmore, S.W., 1984. Transfer of information concerning distant foods in rats: a robust phenomenon. Animal Learning & Behavior 12 (3), 292–296. Hanson, W.A., Putler, D.S., 1996. Hits and misses: herd behavior and online product popularity. Marketing Letters 7 (4), 297–305. Kahneman, D., Tversky, A., 1979. Prospect theory: an analysis of decision under risk. Econometrica 47 (2), 263–292. Kahneman, D., Tversky, A., 1974. Judgment under uncertainty: heuristics and biases. Science 185 (4157), 1124–1131. Kahneman, D., Tversky, A., 1973. On the psychology of prediction. Psychological Review 80, 237–251. Lawrence, A., Clark, L., Labuzetta, J.N., Sahakian, B., 2008. The innovative brain. Nature 456 (7219), 168–169. Olsson, A., Nearing, K.I., Phelps, E.A., 2007. Learning fears by observing others: the neural systems of social fear transmission. Social Cognitive and Affective Neuroscience Advance Access 2, 3–11.
Pelzmann, L., Hudnik, U., Miklautz, M., 2005. Reasoning or reacting to others? How consumers use the rationality of other consumers. Brain Research Bulletin 67, 438–442. Pulford, B.D., Colman, A.M., 2008. Size doesn’t really matter ambiguity aversion in Ellsberg urns with few balls. Experimental Psychology 55 (1), 31–37. Riesman, D., 1952. The Lonely Crowd. A Study of the Changing American Character. Yale Nota Bene, New Haven. Salganik, M.J., Dodds, P.S., Watts, D.J., 2006. Experimental study of inequality and unpredictability in an artificial cultural market. Science 311 (2), 854–856. Schachter, S., Singer, J., 1962. Cognitive, social and physiological determinants of emotional states. Psychological Review 69, 379–399. Schelling, T.C., 1978. Micromotives and Macrobehavior. W. W. Norton & Company, New York.
Contents lists available at ScienceDirect
The Journal of Socio-Economics journal homepage: www.elsevier.com/locate/soceco
Risk behavior in decision-making in a multi-person-setting Thomas Fenzl ∗ , Thomas Brudermann University of Klagenfurt, Institute of Psychology, Department of Economic Psychology, Universitätsstraße 65-67, A-9020 Klagenfurt, Austria
a r t i c l e
i n f o
Article history: Received 26 November 2008 Received in revised form 11 June 2009 Accepted 17 June 2009 JEL classification: 28.002 Z2 (Economic Psychology) 4.008 D81 (Criteria for Decision-Making under Risk and Uncertainty)
a b s t r a c t When people have to make a choice in an individual setting between a known-risk option and an untested situation of uncertainty, the majority prefers the known risk over the uncertainty of the alternative. The confrontation with an unfamiliar situation in an environment including other participants allows for new mechanisms in risk-perception and risk-evaluation. People tend to become other-directed and use the behavior and consequences of actions of other people in the environment to assess risk. Our investigations show that warning signals observable in the behavior of other participants in the setting reinforce people’s preference for known risks over uncertainty. © 2009 Elsevier Inc. All rights reserved.
Keywords: Risk behavior Uncertainty Decision-making Multi-person-setting Other-directed
1. Introduction The current global crisis causes the largest transformation since more than 80 years and comes along with uncertainty and disorientation. Previously set standards, structures and norms are replaced and revolutionary economic processes are being accelerated. Within this new framework people have to make choices between several alternatives, some including known risks, others containing unknown and untested ventures accompanied by highest uncertainty. How do people cope with such risks and uncertainty represented by novel decision-making situations? Human risk behavior has to a great extent been studied as individual cognitive process in which individuals collect and process information to form their decisions and actions. We present a field experiment that allowed for new mechanisms in riskperception and risk-evaluation, as participants were confronted with an unfamiliar situation in a multi-person-setting. The findings are discussed with respect to economic decision-making in situations of uncertainty. 2. Related work When it comes to decision-making under uncertainty, familiarity often cuts out all other factors of orientation. In an experiment
∗ Corresponding author. Tel.: +43 676 7362 381; fax: +43 463 2700 1626. E-mail address: [email protected] (T. Fenzl). 1053-5357/$ – see front matter © 2009 Elsevier Inc. All rights reserved. doi:10.1016/j.socec.2009.06.001
Alter and Oppenheimer (2008) showed that the estimation of the value, which participants attached to certain assets or items, depended crucially on their familiarity with it. Pulford and Colman (2008) have shown in their recent investigations that decisionmakers prefer known-risk situations over unknown alternatives irrespective of the degree of uncertainty in the untested options. As in the illustration of the Ellsberg paradox (1961) several urns were filled with balls of two different colors in various distributions. In an individual setting a participant had to choose between a known-risk option, an urn containing 50 balls of each color randomly mixed, and a situation of uncertainty, an urn with an unknown distribution of balls of each color, for a blind drawing of a ball of a specified color. Drawing the specified color entered participants into a lottery with the chance of winning one of three £30 prizes. In this experiment more than 70% of the 149 undergraduate students and members of the general public chose the known-risk option. Pulford and Colman furthermore found that urn size had no statistically significant impact on the preference of the known-risk option over the situation of uncertainty. In their conclusions they stated that purely cognitive models do not give a full explanation of people’s behavior in such situations and they suggest taking affective processes into account. These kinds of experiments however do not direct enough attention towards the fact that in real life, for example in markets, people are embedded in an environment that includes other people and therefore are subject to social influence. Even if individuals sometimes decide independently based on available facts and fundamental data, there is a wide variety of situations where they
T. Fenzl, T. Brudermann / The Journal of Socio-Economics 38 (2009) 752–756
are heavily influenced by other people’s behavior and actions (see e.g. Hanson and Putler, 1996; Salganik et al., 2006; Olsson et al., 2007). Especially in situations including unknown and untested risks, where facts and fundamental data are missing and experience is lacking, and which provide conditions of uncertainty, disorientation, increased affective arousal as well as a suggestive and persuasive environment, people become other-directed (Schachter and Singer, 1962; Pelzmann et al., 2005). This process of keeping an eye on other people’s behavior as well as its consequences remains unaltered throughout the whole life (Riesman, 1952). But it is not necessarily constraints of conformity that account for assimilation and adaption to other people’s behavior. Often it is the observed result or outcome of the application of a certain behavior by others, their triumph or their failure, which makes people decide one way or the other (Schelling, 1978). This behavior to manage novel and risky decision-making situations can be observed for example in speculative booms in financial markets, when risk-perception and risk-evaluation are shifted from facts and fundamental data towards the behavior of other people. Caused by euphoria, exaggerated optimism and blinded by the prospects of high profits as well as the triumph and prosperity of others, critical thinking and doubts are often suppressed, facts are cast aside and fundamental risk is ignored. The risk of the given situation is perceived through the behavior, choices and actions of other market participants. Euphoria, excitement and optimism make people act along the lines: everybody else cannot be wrong. This trend in human behavior is compliant with well-known strategies of risk-perception and risk-evaluation used by rats when identifying unknown food (Galef et al., 1984; Galef and Stein, 1985; Galef, 1987). Before the rats eat the novel food they wait and see whether conspecifics have eaten the food before survived the diet. When rats encounter unknown food, they usually let those eat first, which are curious enough. The “other-directed” rats only eat the new food once they can smell the odor of the foreign food in the breath of conspecifics. The state of others indicates whether there is danger or not. Similar trends can be observed when watching children play. For instance we observed that as soon as a self-constructed waterslide was finished, the elder children of the group sent forward the youngest and inexperienced ones as dummies to test whether its use was safe and whether it worked out the way they had planned it. 3. Method, sample, design In our investigations we wanted to examine the different strategies of how people deal with the risk represented by novel situations, for which facts and fundamental data are scarce or not available, experience is lacking and affective arousal is increased, in an environment that includes other people. The focus of our research was to study the influence of other people’s behavior and its consequences observed in the environment on the perception and evaluation of risks by individuals. Therefore we chose a real-world-situation and set up an experimental design with three stages that registered the risk-behavior of university students in an oral exam under particular conditions. The 59 participants (51 females, 8 males) that showed up for the course exam needed to pass the test with grade A in order to be admitted to a research seminar in the following semester that as usually had very strict entrance restrictions. At the university, where this qualitative field experiment was conducted, only one course met this selection criterion and the requirements illustrated in the next section. Thus we were not able to draw a random sample or to influence sample size and structure.
753
3.1. First experimental stage In the first stage of our experiment a decision-making situation with highest uncertainty was created in following manner: as a novelty we provided the participants of the selected psychology class with the opportunity to pass their exam at either one of two examiners. 1. The known-risk option: Students could choose the well-known alternative picking the familiar examiner, a notorious professor who is generally known for risky and uneasy exams at campus (P1). In a university-wide survey among 147 psychology students (122 females, 25 males) a majority of respondents (75%) rated the examination style and procedure comparatively uneasy and risky.1 According to usual practice the professor took public exams in the lecture hall, where all candidates had to wait for examination regardless of which examiner they had chosen. 2. The attractive and tempting situation of uncertainty: Candidates could also take their exam with a young and friendly universityassistant, whose examination procedure was unknown up to this point (P2). Students did not have any experience or knowledge, since this person took exams for the first time. They could derive information only from lectures and tutorials held by the assistant and from his years of study at the same university. In contrary to the public tests with the professor the unfamiliar examiner held his exams in an extra room adjacent to the lecture hall without any audience (Fig. 1). The alternative hypothesis H1(1) in the first experimental stage was that a significantly higher number of students would rather choose the known-risk option, despite taking the exam with the unknown and friendly assistant constituted a promising and tempting alternative to the rather difficult and uneasy exams of the known professor. The null hypothesis H0(1) postulated no considerable difference between the two groups with respect to the number of candidates. 3.2. Second experimental stage After candidates had picked either one of the two possibilities and oral exams had started, we manipulated the alternative of taking the exam with the unfamiliar but friendly assistant in two steps in order to investigate the effect of warnings and signals of danger represented by other people’s behavior and its consequences on individual decisions. The first three candidates taking the exam with the assistant, well-informed and trained students, returned bleak and depressed to the lecture hall, making sure the waiting candidates could clearly recognize their frustration. These undercover confederates showed angry and furious expressions, one of them slammed the door and they all left the lecture hall immediately. Nevertheless no information about their obtained grades or the examination procedure was passed on to the waiting candidates in the lecture hall. Furthermore two other confederates among the students reacted to the signs of danger observable in the behavior of the first three candidates and signaled an escape route for the other candidates waiting in the lecture hall. They revised their previous decision for the exam with the unknown examiner and moved over to the examination group of the known, uneasy professor, making sure that the waiting candidates in the lecture hall could register their alteration. The testing hypothesis H1(2) in the
1 The sample with a mean age of 28.3 years (SD = 9.7 years, range 19–64 years) was selected conveniently but with respect to the criterion that respondents either had already heard about, listened to or had already taken an exam with the notorious professor. The sample roughly reflected the ratio of males to females in our field experiment.
754
T. Fenzl, T. Brudermann / The Journal of Socio-Economics 38 (2009) 752–756
Fig. 1. Schematic illustration of experimental setting.
second stage of the experiment argued that caused by the warning signals displayed in the bleak and depressed behavior of the three confederates a substantial number of students would follow the signaled escape route. The null hypothesis H0(2) postulated no significant number of candidates revising their initial decision for the assistant. 3.3. Third stage of investigation A post-survey among participants was conducted in the third stage of our investigations via e-mail the day after the exams had taken place. Students were asked whether they doubted their choice of picking their respective examiner while waiting for the exam and furthermore for which reasons they doubted their preliminary decisions. Our alternative hypothesis H1(3) postulated that the number of candidates doubting their choice was substantially higher in the group of students waiting to take the exam with the assistant than in the group of the professor. The null hypothesis H0(3) postulated no significant difference between the two groups with respect to the number of candidates doubting their choice for the respective examiner. Using this experimental setting we could examine firstly, which behavioral strategies participants applied to get along with the risk and uncertainty of the new situation, especially whether they would perceive and evaluate risk using the information derived from the observation of the behavior of other students taking the exam before them, and finally to which degree a suspected bad performance of the first few candidates and the signaling of an escape route would influence their behavior.
stands open, even though this option may include substantial risks. In consequence of our manipulation of the alternative with the unknown examiner in the second experimental stage only four candidates waiting in the examination group of the assistant revised their original choice for the situation of uncertainty and exchanged for the known-risk option of an exam with the notorious professor. We expected to observe a deeper impact of the manipulation, but conditions did not favor a larger number of alterations. Nevertheless some participants simply followed the escape route signaled by the two confederates and adopted their behavior. Regarding the size of the observed effect we tend to reject the alternative hypothesis H1(2) . A replication of the experiment in order to enlarge the sample could not be conducted as the setting and manipulation as mentioned in experimental stage two used a one-time effect. In the third stage of our investigations, a post-survey with a response rate of more than 50% in both groups, almost two thirds of the remaining participants in the group of the assistant declared having doubted their choice of picking the tempting opportunity with its uncertainty while waiting for the exam. They mentioned the warning signals perceived through the bleak and frustrated behavior of the first three candidates returning from the exam with the unknown assistant as the main reason for their doubts. In contrast only 15% of the candidates in the group waiting to take the uneasy exam with the known professor doubted their decision (Fig. 2). Doubts among respondents in the group of the unfamiliar assistant – the situation of uncertainty – were statistically significantly higher (2 = 6.838; df = 1; ˛ = 5%) than in the group of the notorious
4. Results In the first stage of our experiment two thirds of the participants chose the less-attractive but familiar examination situation with the uneasy but known professor. They even did so despite the familiar situation was generally related to being uneasy and posed a substantial risk. Only one third of the participants opted for the supposedly tempting and seducing alternative of taking the exam with the unknown, friendly assistant. The two groups – unfamiliar assistant and notorious professor – did not show any significant differences concerning the distributions of sex, age and obtained grades in the exam. Therefore the alternative hypothesis H1(1) proved right and the null hypothesis H0(1) was rejected. Referring to economic significance the observed effect shows that a majority of people rather avoids new and tempting alternatives, which include uncertainty and for which facts, fundamental data or experiences are missing, as long as the door to another familiar and known-risk choice
Fig. 2. Doubts about choice of examiner in the two groups of respondents.
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professor – known-risk option. Due to the strength of the observed effect we accept the alternative hypothesis H1(3) . Bringing together the results of the last two stages of our investigations we find that three fourths of the students initially opting for the situation of uncertainty evaluated the risk anew after perceiving warnings and signs of danger in the behavior of others in their environment. Thus the registered effects validate the influence of other people’s behavior and its observable consequences on ones decision-making process in situations of uncertainty. 5. Conclusions, open problems and discussion The novelty of our investigations is the systematic examination of risk behavior of people in a multi-person-setting in a real-worldsituation. In contrast to most of the research work on risk behavior in decision-making processes, which is mostly based on artificial, hypothetical and laboratory decisions and bet situations (e.g. Faragó et al., 2008; Lawrence et al., 2008), participants in our setting were confronted with a choice leading to real-life results with poor or beneficial outcomes. In conclusion to our findings the risk-behavior of people in decision-making situations, which include unknown and untested risks, disorientation, uncertainty, an increased affective arousal and other participants in the environment that are confronted with the same novelty, can be described as follows: 1. In conjunction with the findings of Pulford and Colman (2008) as well as Alter and Oppenheimer (2008) the observed effect in the first stage of our experiment leads to the conclusion that people in general want to know what is going on regardless of whether they are making decisions independently or whether they are part of a setting including other participants. Most people avoid situations with uncertainty, for which they do not have any facts, fundamental data or experiences, neither from their own nor from others, when they are among the first to enter the unknown and untested territory. Caused by the human tendency to preserve habits and rather strive for consistency, stability and status quo than to continuously seek new behaviors, people rather pick the known evil and renounce other alternatives, even if they provide attractive and tempting opportunities. 2. The findings of the second experimental stage validate that the behavior of other people in the environment and the observable consequences of their actions play an essential role in perceiving and evaluating risk in a novel situation. The research of Kahneman and Tversky (1973, 1974, 1979) suggests that under uncertainty people employ heuristics in cognitive processing, which allow for a simple, fast and frugal judgment of the situation. According to the anchoring paradigm (Kahneman and Tversky, 1974) waiting participants in the lecture hall may have used the information revealed by the behavior of the three returning confederates as an anchor to predict and assess the odds of passing or failing in the exam with the unknown and friendly assistant. Just as other heuristics lead to substantial biases in decision-making, anchoring results in a tendency to rely too heavily on one piece of information and thus it may contribute to the explanation of the observed disparity in doubts between the two groups. Despite recording substantial doubts among students in the group of the assistant the majority of them however stuck to their initial choice. 3. Furthermore the results of the second stage of our experiment showed that some people became other-directed and joined others on an escape route from the originally chosen tempting and seducing new alternative when they perceived signs of danger, losses or downfall in the consequences experienced by others in the novel situation. Therefore such warning signals reinforce a bias of preferring a known-risk option over a situation of uncertainty in the decision-making process. Aspects such as one’s
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preparedness for the exam became less relevant in the given situation. Although the observed effect in our experiment was not significant, the underlying social and psychological concepts of this behavioral pattern are central to a more detailed understanding of economic decision-making in several situations. One possible explanation for this behavior is that the warning signals on the risks observed in other student’s behavior may have increased the affective arousal among participants through psychological contagion, causing their tolerance for uncertainty to decrease and resulting in a stronger preference of the known-risk option among students. Contagion seems to be relevant in this context, since it is not restricted to cognitive processes but may also include emotional contagion, a process in which individuals influence each others’ emotions or behavior through the conscious or unconscious induction of emotion states and behavioral attitudes (Barsade, 2002). 4. Finally only a few particular students trusted in their abilities, the subjective appraisal of their skills and the sufficient quality of their preparation and opted for the situation of uncertainty instead of the known-risk option. They believed in the chances of the novel alternative and did not doubt their decision for the unknown and untested assistant even when warning signals and signs of danger sent out from other actors in the setting could be observed. In economic decision-making this group of people includes entrepreneurs, which according to Lawrence et al. (2008) use their functional impulsiveness and enhanced cognitive flexibility to seize opportunities in a rapidly changing environment. On a more generalized level Pulford and Colman (2008) suggest, that when people are confronted with the choice between a known-risk option and a situation of uncertainty including unknown and untested risks, the ones with a higher general tolerance of uncertainty tend to get involved in the novel alternative. Even if the included risks are widely unknown to them they take a chance on the new opportunities and possible benefits provided by the novelty regardless of what other participants in the setting are doing and irrespective of the possible known-risk alternative. Our experiment suggests that in certain situations confident and sufficiently prepared people with a high subjective appraisal of their skills and abilities seem to have a higher tolerance of uncertainty than others. Hence there is still to be clarified, under which framework conditions which factors and components account for the fact that some people are more intolerant to uncertainty than others when making a decision between a known-risk alternative and a situation of uncertainty in an environment including other actors. Acknowledgements Suggestions by two anonymous referees greatly improved this paper. The authors gratefully acknowledge the support of the lecturer of the affected course and thank the confederates. References Alter, A.L., Oppenheimer, D.M., 2008. Easy on the mind, easy on the wallet: the effects of familiarity and fluency on currency valuation. Psychonomic Bulletin and Review 15, 985–990. Barsade, S.G., 2002. The ripple effect: emotional contagion and its influence on group behavior. Administrative Science Quarterly 47 (4), 644–675. Ellsberg, D., 1961. Risk, ambiguity, and the savage axioms. Quarterly Journal of Economics 75, 643–669. Faragó, K., Kiss, O., Boros, J., 2008. Risk-taking in entrepreneurs, compared to criminals and students: the role of uncertainty and stakes. Journal of Socio-Economics 37, 2231–2241. Galef Jr., B.G., Stein, M., 1985. Demonstrator influence on observer diet preference: analysis of critical social interactions and olfactory signals. Animal Learning & Behavior 13, 31–38. Galef Jr., B.G., 1987. Social influence on the identification of toxic foods by Norway rats. Animal Learning & Behavior 15 (3), 327–332.
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