Tuesday, June 21, 2011

Risk vs. Regret Aversion

As I'm working on revising an article, I'm referencing risk aversion which, because one needs to cite every claim one ever makes regardless of how self-evident one thinks the claim is, led me to look for articles and I came across an interesting distinction (and how I love a good distinction!). The suggestion made was that while some people are risk averse others are regret averse and that the latter can appear to be the former.

I'm fascinated by this because, well, here's my Rawlsian decision making method: given a particular decision one is struggling with, assume that no matter what decision you make it's going to not turn out well, which decision would you rather make in the event that it won't turn out well?

I've always thought this was a test regarding risk and one that works for me because I'm risk averse. But, now I'm wondering if this is about regret — which outcome would you prefer even if it turns out badly? Even as I type this, though, I don't think that the test, itself, differentiates. I think that depending on the reasons one gives this could be a test of risk or regret.

And this gets me to the next thought which is whether there really is a distinction or is it just that 'regret aversion' is more accurate than 'risk aversion.' That is, do people really avoid risk qua risk?

I think that the distinction makes sense but I think that I am just regret averse, not risk averse. I think that the distinction makes sense because of the following thought experiment:

You are given a lottery ticket — a ticket that if it is the winning ticket will get you $5000. Someone offers to buy the ticket from you for $500. You take them up on the offer and they go on to win the $5000 with the ticket you sold for $500.

It is conceivable to me that some folks would prefer to sell the ticket for $500 and would not experience regret (they might even be able to smack themselves in the head and laugh about it because, well, they got the $500 and they didn't have to worry about having not taken the $500 and the possibility of not winning the $5000. That is they opted out of the psychological angst of losing all.

This scenario suggests, I think, that risk aversion is about avoiding a particular psychological experience that is in the moment (i.e., not a consequence of the outcome of the experience). A risk averse person may avoid an experience that they admit is completely safe because they experience a particular response to it — say, roller coaster rides — that is associated with the felt danger of the experience (because the whole point of the roller coaster ride is to give someone a 'safe' experience of plummeting, no?).

I think that the regret averse person is the person who looks to the available end results and decides which of the results they'd most, well, regret given the psychological experience they would have to 'endure' for that result. So, it isn't the the bungee cord jumper doesn't experience fear but that she is willing to look past the fear to the rush at the end of the experience while the risk averse person gets stuck at the fear part.

I'm not sure. Even as I write this they seem to collapse into each other again and 'regret aversion' simply seems like the more accurate description but then right when they're about to merge into each other, they seem to be a little bit different.

I think the moment of possible conflation is when I think about risk averse folks as focusing on the cost and regret averse folks focusing on the outcome. So far, these are two different things. But does anyone really avoid cost in and of itself and not because they think that the cost is not worth the outcome? So, that's where they begin to conflate. BUT, it could be a matter of the attitude one takes that then influences how one weighs the cost in comparison to the outcome such that the regret averse person is, a more optimistic (?) person (or, the risk averse person will say 'more reckless') and the risk averse more pessimistic (either as a consequence or cause — I suspect as both which then reinforces each). That is, a risk averse person will focus more on the risks and, thus, become more pessimistic and, thus, become more risk averse. While the regret averse person has the attitude that things will basically turn out okay. And so there's where the conflation seems to disappear.

Does this matter? probably not. I think this is a symptom of the fact that I'm rewriting an article that I am intellectually over but have to rework for a revise & resubmit if I want it published (and I do) and so as I work on it I'm finding other puzzles in what I'm using to do something different and intellectually interesting. The trick is going to be restraining myself from interjecting these new thoughts into this article since this article just needs to be done and out of my life.

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