Psychological factors influencing decisions under risk and ambiguity

Everyday people are confronted with decisions related to risk and ambiguity. We wonder if we should try out a new restaurant for lunch; If we should rather take the train or the car; If we should speak our mind to our boss?

In these cases risk is defined as a decision problem, with the decision yielding a negative outcome with a certain known probability. Ambiguity on the other hand is defined as a lack of information about the probability and/or the size of the loss/win.

Scientific investigations on human behavior in risky or ambiguous situations usually use different kinds of gambling games where the participants win money.

We are examining what happens if different groups of participants or participants in different states play such gambling games. To investigate this, we are comparing economics students to students of social work, for instance. In another condition we let the participants ride a bike before they gamble. In addition we vary several features of the gambles like the amount of money won, the probability of winning and losing and the levels of risk and ambiguity. This allows us to see whether these features influence the participants' gambling behavior.

Information on the localization of processes that are connected to risk and ambiguity can be gained by means of functional magnetic resonance imaging (fMRI). Thus we also let participants play gambling games in the fMRI scanner to investigate which brain areas are active in these tasks. We gather further information on the brain activity during a gamble by using electroencephalogram (EEG), which allows us to measure where and when the brain reacts to wins and losses with a high temporal resolution.

Some studies have already investigated which brain areas are active in risk and ambiguity using fMRI. Risky decisions showed different activation patterns compared to decisions under ambiguity. These results indicate that risk and ambiguity can be distinguished by their respective patterns of brain activation.

Further results on risk behavior from our research shows that the medial prefrontal cortex plays an important role in processing feedback and for guiding future decisions under risk.

A neglected issue thus far, especially in economics, is how emotions contribute to decision making under risk and ambiguity. Uncertain situations should cause people to follow their intuition. Intuition can be understood as a process of integrating emotional somatic markers that make the person consciously aware of which behavior leads to success in the current situation. Results on this topic showed that intuitive decision making has contributed positively to the success of companies.

Below are the studies that have been conducted in this area as part of the Schumpeter Fellowship:

1. The influence of the amount, possibility and valence of possible wins and losses on the amplitude of the feedback negativity in the EEG

2. The influence of directly preceding wins and losses on components of the event related potential in the EEG

3. The influence of state and trait arousal on risk behavior