Journal of Mathematical Psychology 43, 286 313 (1999)
Article ID jmps.1999.1259, available online at http: www.idealibrary.com on
The Role of Aspiration Level in Risky Choice:
A Comparison of Cumulative Prospect Theory
and SP A Theory
Lola L. Lopes and Gregg C. Oden
University of Iowa
In recent years, descriptive models of risky choice have incorporated
features that reflect the importance of particular outcome values in choice.
Cumulative prospect theory (CPT) does this by inserting a reference point in
the utility function. SP A (security-potential aspiration) theory uses aspira-
tion level as a second criterion in the choice process. Experiment 1 compares
the ability of the CPT and SP A models to account for the same within-sub-
jects data set and finds in favor of SP A. Experiment 2 replicates the main
finding of Experiment 1 in a between-subjects design. The final discussion
brackets the SP A result by showing the impact on fit of both decreasing and
increasing the number of free parameters. We also suggest how the SP A
approach might be useful in modeling investment decision making in a
descriptively more valid way and conclude with comments on the relation
between descriptive and normative theories of risky choice. 1999 Academic Press
Formal models of decision making under risk can be found in three disciplinary
guises. Until quite recently, almost all economists believed that decision makers
both should and do select risks that maximize expected utility. In contrast, invest-
ment professionals have seen investors as selecting portfolios that achieve an
optimal balance between risk and return. Psychologists, too, have explored expected
utility theory and portfolio theory as possible descriptive models, and they have
also developed original information processing models focused on how people
choose rather than what people choose.
For the most part, these three disciplines have been isolated from one another,
although psychologists have been more eclectic in their outlooks than others.
Recently, however, both psychologists and economists have been exploring a non-
linear modification of the expected utility model that we term the ``decumulatively
Deirdre Huckbody ran the subjects and coded the data as part of an independent study during her
senior year at the University of Wisconsin.
Requests for reprints should be sent to Lola Lopes at the College of Business Administration, University
of Iowa, Iowa City, IA 52242 (lola-lopes uiowa.edu).
286
0022-2496 99 30.00
Copyright 1999 by Academic Press
All rights of reproduction in any form reserved.
ASPIRATION LEVEL AND RISKY CHOICE 287
weighted utility'' model. At present, this model has not affected practice in finance,
but we believe the model can also be applied at the level of the individual investor.
In what follows, we first describe decumulatively weighted utility generically and
then present two specific psychological instantiations of the model, cumulative
prospect theory (Tversky 6 Kahneman, 1992), and SP A theory (Lopes, 1987,
1990, 1995). Second, we test the ability of these two theories to account for the
same set of data. Third, we suggest how these results might apply in the investment
context. Finally, we comment on fitting and testing complex, nonlinear models.
Decumulatively Weighted Utility
In a nutshell, the expected utility model asserts that when people choose between
alternative probability distributions over outcomes (i.e., lotteries or gambles), they
should (the economic model) and do (the psychological model) make their choices
so as to maximize a probability weighted (i.e., linear) average of the outcome
utilities. Although much evidence supports the idea that averaging rules can model
people's choices and judgments reasonably well in a variety of tasks (Anderson,
1981), the linearity assumption of expected utility theory has not fared so well. Less
than a decade after the publication of von Neumann and Morgenstern's (1947)
axiomatization of expected utility theory, Allais (1952 1979) demonstrated that
linearity failed in qualitative tests comparing choices in which ``certainty'' was an
option to choices in which it was not.
For almost three decades afterward economists ignored these failures of linearity,
whereas psychologists assumed that they represented subject failures rather than
model failures. In the 1980s, however, some economists began to take the failures
seriously and to seek out variants of expected utility that could better account for
behavior. An obvious candidate at the time was prospect theory (Kahneman 6
Tversky, 1979), but this model violated stochastic dominance, ``an assumption that
many theorists [were] reluctant to give up'' (Tversky 6 Kahneman, 1992, p. 299).
Instead, these economists began to explore the normatively more acceptable idea of
decumulatively weighted utility. The first economic applications were proposed
independently by Quiggin (1982), Allais (1986), and Yaari (1987), followed quickly
by many others (Chew, Karni, 6 Safra, 1987; Luce, 1988; Schmeidler, 1989; Segal,
1989).
The best way to understand decumulative weighted utility is to start with the
structure of the expected value model:
n
EV= : pivi,(1)
i=1
in which the vi are the n possible outcomes listed in no particular order and the pi
are the outcomes' associated probabilities. Expected utility theory simply substitutes
utility, u(v), for monetary outcomes:
n
EU= : piu(vi). (2)
i=1
288 LOPES AND ODEN
Weighted utility models (e.g., prospect theory) substitute decision weights, w( p), for
probabilities,
n
WU= : w( pi) u(vi), (3)
i=1
but this is the move that allows violations of stochastic dominance.
Decumulative weighted utility models recast the issue of transforming raw
probabilities to one of transforming decumulative probabilities:
n n
DWU= : h : pj (u(vi)&u(vi&1))
\ +
i=1 j=i
n
= : h(Di)(u(vi)&u(vi&1)). (4)
i=1
In such models, the vi are ordered from lowest (worst outcome) to highest (best
n
outcome). Di= pj is the decumulative probability associated with outcome vi;
j=i
that is, Di is the probability of obtaining an outcome at least as high as outcome vi.
Thus, D1 (the decumulative probability of the worst outcome, v1) is 1 (you get at
least that for sure) and Dn+1 (the decumulative probability of exceeding the best
outcome, vn) is zero.
The function, h, maps decumulative probabilities onto the range (0, 1) and so
preserves dominance. It can also provide an alternative to using curvature in the
utility function to model risk attitudes. For example, in expected utility theory, if
u(v) is a concave function of v, decision makers will prefer sure things to actuarially
equivalent lotteries, a pattern termed ``risk aversion.'' Decumulative weighting can
predict the same pattern even while assuming that u(v)=v (a variant of decumulatively
weighted utility that we call decumulatively weighted value) by letting h(D) be a
convex function of D. Although the predicted behavior is the same, we call it
``security-mindedness'' in order to distinguish between utility-based and probability-
based mechanisms.
The other major risk attitudes also have analogues in the decumulative weighted
value (or utility) model. These are given in Table 1. Both models can accommodate
TABLE 1
Risk Attitudes in the Expected Utility and Decumulative Weighted Value Models
Expected utility Decumulative weighted value
Assumes h(D)=D Assumes u(v)=v
Risk attitude u(v) is: Risk attitude h(D) is:
Risk neutral linear Risk neutral linear
Risk averse concave Security-minded convex
Risk seeking convex Potential-minded concave
Markowitz type S-shaped Cautiously hopeful inverse S-shaped
ASPIRATION LEVEL AND RISKY CHOICE 289
risk neutrality (expected value maximizing behavior) and both can accommodate
the rejection of sure things in favor of actuarially equivalent lotteries (termed ``risk
seeking'' in expected utility theory and ``potential-mindedness'' by us). Both models
can also predict the ``cautiously hopeful'' (our term) pattern first described by
Markowitz (1959), in which subjects buy both insurance and lottery tickets, thereby
paying premiums sometimes to gamble and other times to avoid gambling.
Cumulative Prospect Theory
In cumulative prospect theory (CPT), Tversky 6 Kahneman (1992) reformulated
the original prospect theory in terms of (de)cumulative weighted utility. The utility
function, u(v), was unchanged from the original, being concave (risk averse) for
gains and convex (risk seeking) for losses, with the loss function assumed to be
steeper than the gain function (*>1):
v: if v 0
u(v)= (5)
{
&*(&v); if v<0.
The decumulative weighting function was also taken to differ for gains and losses.
For gains, the hypothesized function has an inverse S shape that reinforces risk
aversion for most lottery types but tends toward risk seeking for long shots (lotteries
that have small probabilities of large prizes):
D#
w+(D)= .(6)
(D#+(1&D)#)1 #
For losses, the weighting function is cumulative rather than decumulative and
S-shaped rather than inverse S-shaped. It reinforces risk seeking for most lotteries
but tends toward risk aversion for long shots (lotteries that have small probabilities
of very large losses):
P$
w&(P)= .(7)
(P$+(1&P)$)1 $
Thus, the utility functions and (de)cumulative weighting functions of CPT are
largely (but not perfectly) mirror imaged from gains to losses, producing what
Tversky 6 Kahneman (1992) term ``a four-fold pattern'' in the predicted pattern of
lottery preferences.
There are two general features of CPT that should also be noted here. The first
is that CPT is based on a physical principle of diminishing sensitivity from a
reference point. In the case of utility, the reference point is usually assumed to be
zero (the status quo). In the case of (de)cumulative weights, there are reference
points at 0 and at 1. In both cases, the rate of change in the perceived magnitude
(of value or of likelihood) is assumed to be greatest near the reference point and
to diminish as one moves away.
290 LOPES AND ODEN
The second feature of CPT is that it, like all its predecessors in the weighted
value family, is a one-criterion model. Although there is much room in the model
for psychological variables to operate, in the end, all these factors are melded into
a single assessment of lottery attractiveness.
SP A Theory
SP A theory (Lopes, 1987, 1990, 1995) is a dual criterion model in which the
process of choosing between lotteries entails integrating two logically and psycho-
logically separate criteria
SP A= f [SP, A], (8)
where SP stands for a security-potential criterion and A for an aspiration criterion.
The SP (security-potential) criterion is modeled by a decumulatively weighted
value rule (i.e., the model is identical to Eq. (4) except that the utility function is
assumed to be linear1):
n
SP= : h(Di)(vi&vi&1). (9)
i=1
The decumulative weighting function, h(D), has the form
s p
h(D)=wDq +1+(1&w)[1&(1&D)q +1] (10)
for both gains and losses. The equation is derived from the idea that subjects assess
lotteries from the bottom up (a security-minded analysis), or the top down
(a potential-minded analysis), or both (a cautiously hopeful analysis).2 The param-
eters qs and qp represent the rates at which attention to outcomes diminishes as the
evaluation process proceeds up or down. The parameter, w, determines the relative
weight of the S and P analyses. If w=1, the decision maker is strictly security-
minded. If w=0, the decision maker is strictly potential-minded. If 0decision maker is cautiously hopeful, with the degrees of caution and of hope
depending on the relative magnitudes of w and 1&w. Although Eq. (10) omits
subscripts on parameters for notational simplicity, SP A theory follows CPT in
allowing qs, qp , and w to assume different values for gains and for losses, moderat-
ing the relative importance of security and potential in the overall SP assessment.
1
Most theorists assume that u(v) is nonlinear without asking whether the monetary range under
consideration is wide enough for nonlinearity to be manifest in the data. We believe that u(v) probably
does have mild concavity that might be manifest in some cases (as, for example, when someone is
considering the huge payouts in state lotteries). But for narrower ranges, we prefer to ignore concavity
and let the decumulative weighting function carry the theoretical load.
2
We do not provide the derivation of the SP A decumulative weighting function at this time because
it is not relevant to the present focus. Interested readers may contact us for details.
ASPIRATION LEVEL AND RISKY CHOICE 291
Unlike CPT, however, the decumulative weighting function of SP A theory does
not switch between inverse S-shaped for gains and S-shaped for losses.
The A (aspiration) criterion operates on a principle of stochastic control (Dubins
6 Savage, 1976) in which subjects are assumed to assess the attractiveness of
lotteries by the probability that a given lottery will yield an outcome at or above
the aspiration level, ::
A= p(v :). (11)
For present purposes, we treat the aspiration level as crisp, which is to say,
a discrete value that either is or is not satisfied. In principle, however, the aspiration
level may be fuzzy: some outcomes may satisfy the aspiration level completely,
others to a partial degree, and still others not at all. To model this, Eq. (11) would
need to incorporate a particular probability, pi , according to the degree that its
associated outcome, vi , satisfies the aspiration level (Oden 6 Lopes, 1997).
SP A theory and CPT share some significant psychological features: they both
model the process by which subjects integrate probabilities and values by a
(de)cumulative weighting rule, and they both include a point on the value dimen-
sion that has special significance to subjects (the reference point for CPT and the
aspiration level for SP A). Indeed, the aspiration level may be considered to be a
kind of reference point. However, the theories differ three ways in how these
features function.
The first difference is in how the reference point (or aspiration level) exerts its
impact. In CPT, the reference point is incorporated into the utility function and
influences subjects by marking an inflection point about which outcomes are first
organized into gains and losses, and then scaled nonlinearly in accord with a principle
of diminishing sensitivity. In SP A theory, the aspiration level participates in a
direct assessment of lottery attractiveness reflecting a principle of stochastic control
and separate from the decumulatively weighted SP assessment. Because SP and A
embody different criteria, each may favor a different lottery. When this happens,
SP A theory predicts conflict, a prediction that does not follow from single-criterion
models such as CPT.
The second difference is that CPT predicts a four-fold pattern across gain preferences
and loss preferences. Although some small imperfections in the symmetry of the pattern
might obtain due to small differences in the value and weighting functions for gains
and losses, the overall pattern should be one of reflection between gains and losses.
SP A theory, in contrast, allows considerable asymmetry between gains and losses.
In the most commonly observed case, subjects appear to avoid risks strongly for
gains but to be more-or-less risk neutral for losses (Cohen, Jaffray, 6 Said, 1987;
Hershey 6 Schoemaker, 1980; Schneider 6 Lopes, 1986; Weber 6 Bottom, 1989).
Protocols suggest that this is because security-minded or cautiously hopeful sub-
jects set modest aspiration levels for gains, allowing the SP and A criteria to
reinforce one another. For losses, however, the same subjects set high aspiration
levels, hoping to lose little or nothing, and thereby setting up a conflict between the
A and the SP criteria (Lopes, 1995).
292 LOPES AND ODEN
The third difference is that SP A theory predicts nonmonotonicities in preference
patterns that depend on whether or not the aspiration level is guaranteed to be met
(by boosting all outcomes above the aspiration level) or guaranteed not to be met
(by pushing all outcomes below the aspiration level) no matter which lottery of a
pair is chosen. For example, consider a cautiously hopeful decision maker choosing
between 850 for sure versus a 50 50 chance of 8100, else nothing. Suppose also that
the decision maker wants to win ``at least something.'' Although the SP assessment
could favor the long shot mildly, the A assessment would favor the sure thing
strongly, leading to a choice of the sure thing. If 850 were added to all outcomes,
however, (e.g., 8100 for sure versus a 50 50 chance at 8150, else 850) the A assess-
ment would ``drop out'' (since both options satisfy the aspiration level with certainty)
leaving the SP assessment to carry the day. CPT, in contrast, is qualitatively unaffected
by cases in which outcomes are all pushed upward or downward so long as no out-
comes cross the reference point. The experiments that follow use his third difference
to distinguish between the two theories and test their abilities to account for subjects'
choices among a set of multioutcome lotteries.
EXPERIMENT 1
Method
Stimuli and task. Subjects chose between actuarially equivalent pairs of five-out-
come lotteries comprising three positive (gain) sets and three negative (loss) sets.
The standard positive lotteries are shown in Fig. 1. The tally marks represent lottery
tickets yielding the outcomes shown at the left. Each of these lotteries has 100
tickets and each has an expected value of approximately 8100. The names indicated
for the lotteries are for exposition only and were not used with subjects.
Scaled positive and shifted positive lotteries were created by transforming the
outcomes in the standard positive lotteries linearly. (Examples are shown in Fig. 2.)
To create the shifted lotteries, standard positive outcomes were increased by 850
(bringing the expected value of the shifted positive lotteries to 8150). To create the
scaled positive lotteries, standard positive outcomes were multiplied by 1.145
(bringing the expected value of the scaled lotteries to 8114.50). The multiplicative
constant was chosen to equate the maximum outcomes (8398) in the scaled and
shifted sets.
Standard negative, scaled negative, and shifted negative lotteries were created by
appending a minus sign to the outcomes in the respective positive sets.
Design and subjects. Lotteries within stimulus set were paired in all possible
combinations (6C2=15 pairs per set) and pairs were arrayed vertically on sheets of
U.S. letter paper. Two replications were created for each set differing in the order
of the lotteries on the page.
Pairs from the positive sets were randomized together (within replication) with
the constraint that no particular lottery appeared on adjacent pages. Pairs from the
negative sets were randomized similarly. Each replication consisted of 45 pairs
(3 sets_15 pairs per set).
ASPIRATION LEVEL AND RISKY CHOICE 293
FIG. 1. Standard positive stimulus set. The tally marks represent lottery tickets yielding the out-
comes shown at the left. Each lottery has 100 tickets and an expected value of approximately 8100.
The subjects for this experiment were 80 undergraduate students at the University
of Wisconsin who served for extra credit in introductory psychology courses.
Procedure. Subjects were run in groups of two to four. Each subject was given
a notebook containing practice materials and the randomized stimulus pairs. At the
beginning of the experiment, subjects were shown how to interpret the positive
lotteries and were told that the amount of prize money for each of the lotteries in
a pair was the same. Then they were told that we were interested in their preferences
for distributions (i.e., how the prizes are distributed over tickets) and were given
three positive pairs for practice. Subjects were asked to indicate whether they would
prefer the top lottery or the bottom lottery if they were allowed to draw a ticket
from either for free and keep the prize.
Next, subjects were shown exemplars of negative lotteries and were told that
these represented losses. They were then asked to indicate for a set of three more
practice pairs which of each pair they would prefer if they were forced to draw a
ticket from one or the other and pay the loss out of their own pockets.
Stimulus notebooks were divided into five sections, the first containing the
practice pairs and the remaining four containing the four sets of stimulus pairs (two
positive replications and two negative replications). Positive and negative replica-
tions were alternated with half of the subjects beginning with a positive replication
and the other half beginning with a negative replication. Each set was preceded by
a colored sheet announcing that ``The next set of lotteries are all win [or loss]
294 LOPES AND ODEN
FIG. 2. Examples of stimuli from the scaled positive stimulus set and the shifted positive stimulus
set. Scaled stimuli are produced from standard stimuli by multiplying outcomes by 1.145. Shifted stimuli
are produced from standard stimuli by adding 850 to each outcome.
lotteries.'' Subjects went through the notebooks at their own pace, indicating
preferences for the top or bottom lottery by circling ``T'' or ``B'' on a separate
answer sheet. The task took about an hour for most subjects. All choices were
hypothetical.
Results and Discussion
The data from Experiment 1 are shown in Fig. 3 for gains (left panel) and for
losses (right panel). Lotteries are listed along the abscissas in the order of subject
preferences for the standard lotteries. The data have been pooled over subjects,
replications, and stimulus pair. Each data point represents the proportion of times
the average subject chose the lottery out of the total number of times that the
lottery was available for choice. Each lottery was presented 10 times (5 pairs_
2 replications) so that the maximum number of choices per subject for a given
lottery was 10 and the minimum was zero.
The data reveal four patterns that are of special significance: (1) For both gains
and losses, there are obvious main effects for lotteries [F(5, 395)=93.08 and 25.00,
respectively, p<0.0001 for both] as well as interactions between lottery and condi-
tion [F(10, 790)=48.99 and 8.09, respectively, p<0.0001 for both]; (2) For both
gains and losses, the data for standard and scaled stimuli are virtually identical
ASPIRATION LEVEL AND RISKY CHOICE 295
FIG. 3. Data from Experiment 1 pooled over subjects, replications, and stimulus pair. Lotteries are
listed along the abscissa in order of average subject preference for standard lotteries. Data are the
proportion of occasions on which subjects chose a given lottery out of the 10 occasions on which that
lottery was available for choice.
[F(5, 395)=1.925, p=0.09 and F(5, 395)=0.602, p=0.69, respectively]; (3) The
slopes of the preference functions for the standard and scaled stimuli are steeper for
gains than for losses; and (4) the preference functions for the shifted stimuli are
nonmonotonically related to the preference functions for standard and scaled
stimuli, especially for gains, and the pattern of nonmonotonicity reverses between
gains and losses. Preference for lower risk lotteries decreases for gains and increases
for losses whereas preference for higher risk lotteries increases for gains and
decreases for losses. As will be seen, these differences between preference functions
for shifted lotteries and preference functions for standard and scaled lotteries are
critical to disentangling the roles of decumulative (or cumulative) weighting and
aspiration level in risky choice.
In what follows, we use the Solver function of Microsoft Excel to fit both CPT
(Tversky 6 Kahneman, 1992) and SP A theory (Lopes, 1990; Oden 6 Lopes, 1997)
to the data. Solver is an iterative curve fitting procedure that adjusts free
parameters to optimize the fit of a model to a data set according to whatever
criterion the user specifies. We used root-mean-squared-deviation (RMSD) between
predicted and obtained. In order to lessen the possibility of finding only a local
minimum, good practice requires starting with one's best guesses of parameter
values and then, once a minimum is found, checking the fit by systematically alter-
ing parameter values and rerunning the program to make sure that a better fit
cannot be found. The values we report are the best that we could find.
For both CPT and SP A, we fit the models to the aggregate choice proportions
(given in Table 2) for the two-alternative choice task that subjects performed and
then pooled the prediction across choice pair to obtain means (as are shown for the
obtained data in Fig. 3). Although we had too few replications to fit single subject
data, visual inspection of single subject means revealed that the patterns of primary
interest were evident at the single subject level, being especially clear for strongly
security-minded subjects and somewhat attenuated for subjects whose preferences
tended toward cautious hopefulness or potential-mindedness.
296 LOPES AND ODEN
TABLE 2
Choice Proportions
Gains Losses
Standard lotteries
RL PK SS RC BM LS LS BM RC SS PK RL
LS 0.931 0.844 0.800 0.869 0.594 0.500 RL 0.781 0.756 0.731 0.606 0.556 0.500
BM 0.875 0.819 0.850 0.806 0.500 0.406 PK 0.713 0.700 0.656 0.519 0.500 0.444
RC 0.856 0.719 0.631 0.500 0.194 0.131 SS 0.575 0.706 0.613 0.500 0.481 0.394
SS 0.844 0.588 0.500 0.369 0.150 0.200 RC 0.606 0.588 0.500 0.388 0.344 0.269
PK 0.713 0.500 0.413 0.281 0.181 0.156 BM 0.569 0.500 0.413 0.294 0.300 0.244
RL 0.500 0.288 0.156 0.144 0.125 0.069 LS 0.500 0.431 0.394 0.425 0.288 0.219
Scaled lotteries
RL PK SS RC BM LS LS BM RC SS PK RL
LS 0.856 0.844 0.813 0.806 0.563 0.500 RL 0.781 0.763 0.725 0.644 0.563 0.500
BM 0.856 0.788 0.813 0.750 0.500 0.438 PK 0.663 0.675 0.613 0.500 0.500 0.438
RC 0.863 0.744 0.650 0.500 0.250 0.194 SS 0.675 0.631 0.575 0.500 0.500 0.356
SS 0.844 0.531 0.500 0.350 0.188 0.188 RC 0.644 0.563 0.500 0.425 0.388 0.275
PK 0.769 0.500 0.469 0.256 0.213 0.156 BM 0.488 0.500 0.438 0.369 0.325 0.238
RL 0.500 0.231 0.156 0.138 0.144 0.144 LS 0.500 0.513 0.356 0.325 0.338 0.219
Shifted lotteries
RL RC LS BM PK SS RC LS BM SS PK RL
SS 0.788 0.625 0.600 0.625 0.519 0.500 RL 0.725 0.688 0.650 0.675 0.613 0.500
PK 0.713 0.550 0.513 0.588 0.500 0.481 PK 0.606 0.588 0.525 0.463 0.500 0.388
BM 0.731 0.575 0.575 0.500 0.413 0.375 SS 0.544 0.550 0.538 0.500 0.538 0.325
LS 0.788 0.519 0.500 0.425 0.488 0.400 BM 0.594 0.488 0.500 0.463 0.475 0.350
RC 0.769 0.500 0.481 0.425 0.450 0.375 LS 0.488 0.500 0.513 0.450 0.413 0.313
RL 0.500 0.231 0.213 0.269 0.288 0.213 RC 0.500 0.513 0.406 0.456 0.394 0.275
Note. Lotteries within each matrix are listed in descending order of preference across the columns
and in ascending order of preference down the rows.
Fitting CPT. As noted previously, CPT is a one-criterion model in which both
values and probabilities are transformed psychologically during the lottery evalua-
tion process. The utility function (Eq. (5)) has three parameters: : defines the
curvature of the function for gains (or values above the reference point); ; defines
the curvature of the function for losses (or values below the reference point); and
* defines the relative slope of the two functions, with the loss function specified to
be steeper than the gain function (*>1).
Weights in CPT also are defined separately for gains and for losses, as shown in
Eqs. (6) and (7). For gains, the function is decumulative with a parameter, #,
regulating both the curvature and crossover point of the inverse S-shaped weighting
function. For losses, the function is cumulative with an analogous parameter, $,
regulating curvature and crossover points.
ASPIRATION LEVEL AND RISKY CHOICE 297
TABLE 3
Fitting CPT to the Data for Scaled Gain Pairs
Matrix A: Raw choice proportions
RL PK SS RC BM LS
LS 0.856 0.844 0.813 0.806 0.563 0.500
BM 0.856 0.788 0.813 0.750 0.500 0.438
RC 0.863 0.744 0.650 0.500 0.250 0.194
SS 0.844 0.531 0.500 0.350 0.188 0.188
PK 0.769 0.500 0.469 0.256 0.213 0.156
RL 0.500 0.231 0.156 0.138 0.144 0.144
Means 0.838 0.628 0.580 0.460 0.271 0.224
Matrix B: Choice predictions based on CPT attractiveness values
13.42 12.11 11.72 10.61 9.91 10.19
10.19 0.916 0.805 0.756 0.577 0.449 0.500
9.91 0.931 0.835 0.792 0.626 0.500 0.551
10.61 0.889 0.752 0.694 0.500 0.374 0.423
11.72 0.779 0.572 0.500 0.306 0.208 0.244
12.11 0.725 0.500 0.428 0.248 0.165 0.195
13.42 0.500 0.275 0.221 0.111 0.069 0.084
Means 0.848 0.648 0.578 0.374 0.253 0.299
CPT was fit simultaneously to the data for the three scaling conditions (standard,
scaled, and shifted) and for both outcome types (gains and losses), estimating a
single set of six parameter values. The fitting process can best be understood by
reference to Table 3. Matrix A shows the pair choice data for the scaled positive
pairs. Each entry is the proportion of times that subjects preferred the column
lottery to the row lottery. Lotteries are ordered across the columns in descending
order of preference and down the rows in ascending order of preference. Com-
plementary pairs of entries sum to 1.00, e.g., entries (1, 1) and (6, 6) in which
riskless (RL) and long shot (LS) lotteries are opposed. The value 0.500 is entered
in the minor diagonal where opposing lotteries are identical. These pairs were not
included in the stimulus set for obvious reasons.
Matrix B gives the best fitting predictions of CPT for scaled positive pairs
obtained iteratively by minimizing the root mean square deviation between obtained
and predicted choice proportions. The utility and weighting functions of CPT were
fit using the five value and weight parameters described above to estimate CPT
attractiveness3 values for the six various lotteries. These values are shown as the
column and row headings in Matrix B.
3
We use the term ``attractiveness'' to refer to individual lottery values. Others have used ``strength-of-
preference'' to mean the same thing, but we prefer to distinguish between individual lottery assessments
(attractiveness) and choices (or preferences) between lotteries.
298 LOPES AND ODEN
FIG. 4. Predictions of CPT pooled over stimulus pair using the six parameter values shown in
Table 4. h, standard; m, scaled; M, shifted.
The second and final step was to use the CPT attractiveness values as input to
a pair-choice process that we modeled using the logistic function of CPT difference
scores shown below4:
1
p(CPT1>2)= . (12)
1
1+e&k(CPT &CPT2 )
The function predicts the proportion of times that lottery 1 is preferred to lottery
2 based on the two individual attractiveness values. The function has a single
parameter, k, that is inversely related to the variance of the distribution of dif-
ference scores, CPT1&CPT2. Although it might seem reasonable to allow CPT to
fit separate k parameters for gains and for losses, the second k would be redundant
with * and would, in the present case, allow * to fall below 1 (see Footnote 5).
Figure 4 shows the best-fitting predictions of CPT to the data for gains (left
panel) and for losses (right panel). Parameter value are in Table 2. Although the
RMSD of 0.0810 is respectable for fitting 90 data points with six parameters,
a comparison of predictions and data (Fig. 3) reveals a qualitative discrepancy for
the shifted gain lotteries. Although CPT is able to capture the general flattening of
this preference function relative to the standard and scaled functions, all but the
prediction for the long shot are monotonically decreasing. In contrast, subjects'
preferences for the shifted rectangular, bimodal, and long shot lotteries were all
greater than for the shifted short shot. Moreover, the nonmonotonicity that is
induced for the shifted long shot comes at the expense of incorrectly predicting non-
monotonicity for the standard and scaled long shots as well.
A second issue concerns the CPT parameter values (see Table 4). Beginning with
the parameters for the utility functions, note that although the function for gains is
4
Although CPT is intended to be a theory of risky choice, the process that maps two or more
individual lottery assessments onto choice has not been specified. The logistic function that we apply
here and below is commonly used as the cumulative probability distribution function in statistical
decision theory models of the two-alternative choice process (Luce 6 Galanter, 1963) and is presumed
to be neutral with respect to its impact on CPT's and SP A's ability to fit the qualitative features of the
data.
ASPIRATION LEVEL AND RISKY CHOICE 299
TABLE 4
Parameter Values for CPT
Parameter Value
: 0.551
; 0.970
* 1.000
# 0.699
$ 0.993
k 0.739
sharply curved (:=0.426), the function for losses is close to linear (;=0.942).
Second, looking at the probability weights, note that the function for gains shows
considerable nonlinearity (#=0.685), whereas the function for losses is again essen-
tially linear ($=0.980). Finally, looking at *, the parameter that determines the
relative slopes of the utility functions for gains and losses, note that it has reached
its floor value of 1.00.5 Although the values of these parameters are consistent with
the observed fact that the loss data are essentially linear and relatively shallow in
slope, there is nothing in CPT that would lead one to expect this large asymmetry
between gains and losses. Indeed, CPT is well-known for its prediction of reflection
in preferences between gains and losses (i.e., the four-fold pattern).
In all, then, CPT does reasonably well in fitting the data if one considers only
RMSD. When one looks at qualitative effects, however, CPT fails with the shifted
gains. Moreover, in order to get a reasonable fit, CPT must make use of parameter
values that are inconsistent with the underlying psychophysical principle (diminishing
sensitivity from a reference point) on which both utility and weighting functions are
theorized to depend.
Fitting SP A theory. As explained previously, SP A theory proposes that risky
choice involves two criteria, one based on a comparison of decumulatively weighted
averages of probabilities and outcomes (the SP criterion) and the other based
on a comparison of probabilities of achieving an aspiration level (the A criterion).
The SP assessment process (Eq. (4)) has three parameters: q defines the degree of
attention to different outcomes in assessments of security (qs) and potential (qp),
whereas w defines the relative importance of security and potential assessments
overall. In principle, all three parameters might differ between gains and losses. The
A assessment process (Eq. (5)) has a single parameter, :, the aspiration level, which
can also differ for gains (:+) and losses (:&). Although : might need to be fit as
a free parameter in some cases (e.g., with continuous outcome distributions or with
5
A somewhat improved RMSD (0.0770) resulted when * was allowed to drop to 0.400 (i.e., for the
gain function to be considerably steeper than the loss function). Although this value is consistent with
the observed fact that the standard and scaled gain data are steeper than the standard and scaled loss
data, the value is not consistent with CPT's oft-repeated claim that ``losses loom larger than gains.''
300 LOPES AND ODEN
manipulated aspiration levels), our stimuli and choice conditions justified fixing :+
at 1 and :& at zero.6
In fitting SP A theory to the data, we modeled the SP criterion and the A
criterion separately (but not sequentially) and integrated the results into a final
choice. The procedure is schematized in Table 5. Matrix A gives the scaled positive
data and Matrix B gives the best-fitting predictions based on just the SP criterion.
The column and row headings are estimated SP attractiveness values. We let w
differ between gains (w+) and losses (w&) but, in order to hold our parameters to
six, set qs=qp=q and used the same single value for both gains and losses. The
entries in the cells are choice proportions, p(SP1>2), obtained by applying the
logistic function to difference scores just as we did in fitting CPT:
1
p(SP1>2)= . (13)
1
1+e&k(SP &SP2 )
The parameter, k, is inversely related to the variance of the distribution of difference
scores, SP1&SP2.
Matrix C shows best-fitting predictions based on just the A criterion. The row
and column headings show the probability that the row (or column) lottery will
yield a value that meets the aspiration level (e.g., the riskless gain lottery, column
1, guarantees a nonzero payoff whereas the peaked gain lottery, column 2, has only
a 0.96 probability of a nonzero payoff). The table entries are choice proportions,
p(A1>2), obtained by submitting the A values to a relative ratio process having a
parameter, t, 0 t that controls contrast. Equation (14) shows the process for
gains:
+
At
1
p(A1>2)= . (14)
+ +
At +At
1 2
The equation for losses looks a little different but has the same structure
&
(1&A1)t
p(A1>2)=1&
& &
(1&A1)t +(1&A2)t
&
(1&A2)t
= . (15)
& &
(1&A1)t +(1&A2)t
The difference between gains and losses reflects the fact that gains engender an
approach approach process based on relative lottery goodness, A, whereas losses
6
Our assumption concerning the values of the aspiration level is analogous to Kahneman and
Tversky's assumption (1979; Tversky 6 Kahneman, 1992) that the reference point of the utility function
is at zero. Although we, as they, might sometimes want to modify this simplifying assumption, in the
present case the lottery outcomes are spaced widely enough that minimum (or maximum) outcomes are
good approximations for what might be ``at least a small gain'' or ``no more than a small loss'' in choices
between more continuous lotteries.
ASPIRATION LEVEL AND RISKY CHOICE 301
TABLE 5
Fitting SP A Theory to the Data for Scaled Gain Pairs
Matrix A: Raw choice proportions
RL PK SS RC BM LS
LS 0.856 0.844 0.813 0.806 0.563 0.500
BM 0.856 0.788 0.813 0.750 0.500 0.438
RC 0.863 0.744 0.650 0.500 0.250 0.194
SS 0.844 0.531 0.500 0.350 0.188 0.188
PK 0.769 0.500 0.469 0.256 0.213 0.156
RL 0.500 0.231 0.156 0.138 0.144 0.144
Means 0.838 0.628 0.580 0.460 0.271 0.224
Matrix B: Choice predictions based on SP criterion
114.86 113.98 113.60 113.91 113.91 113.88
113.88 0.839 0.537 0.382 0.510 0.509 0.500
113.91 0.834 0.528 0.374 0.501 0.500 0.491
113.91 0.833 0.527 0.372 0.500 0.499 0.490
113.60 0.894 0.652 0.500 0.628 0.626 0.618
113.98 0.818 0.500 0.348 0.473 0.472 0.463
114.86 0.500 0.182 0.106 0.167 0.166 0.161
Matrix C: Choice proportions based on A criterion
1.000 0.960 0.960 0.800 0.680 0.620
0.620 0.989 0.984 0.984 0.917 0.705 0.500
0.680 0.975 0.963 0.963 0.823 0.500 0.295
0.800 0.892 0.848 0.848 0.500 0.177 0.083
0.960 0.595 0.500 0.500 0.152 0.037 0.016
0.960 0.595 0.500 0.500 0.152 0.037 0.016
1.000 0.500 0.405 0.405 0.108 0.025 0.011
Matrix D: Predictions combining SP and A criteria
RL PK SS RC BM LS
LS 0.956 0.895 0.861 0.773 0.612 0.500
BM 0.933 0.844 0.797 0.684 0.500 0.388
RC 0.865 0.714 0.646 0.500 0.316 0.227
SS 0.779 0.578 0.500 0.354 0.203 0.139
PK 0.720 0.500 0.422 0.286 0.156 0.105
RL 0.500 0.280 0.221 0.135 0.067 0.044
Means 0.850 0.662 0.590 0.446 0.271 0.181
engender an avoidance avoidance process based on relative lottery badness, 1&A.
In other words, the probability of choosing Lottery 1 over Lottery 2 for gains
reflects the degree to which Lottery 1 is better than Lottery 2, whereas the probabil-
ity of choosing Lottery 1 over Lottery 2 for losses reflects the degree to which
Lottery 2 is worse than Lottery 1.
302 LOPES AND ODEN
FIG. 5. Predictions of SP A theory pooled over stimulus pair using the six parameter values shown
in Table 6. h, standard; m, scaled; M, shifted.
Matrix D combines the p(SP1>2) values and the p(A1>2) values according to
[ p(SP1>2) p(A1>2)]1 2
p(SP A1>2)= . (16)
[ p(SP1>2) p(A1>2)]1 2+[(1&p(SP1>2))(1& p(A1>2))]1 2
This rule (which is useful for cases in which both the domain and the range of the
function are 0 to 1) displays both averaging properties [ p(S A1>2) lies between
p(SP1>2) and p(A1>2)] and Bayesian properties (the impact of an input value
depends on its extremity). The exponent, 1 2, sets the weight of the two input quan-
tities to be equal. Although one might imagine that this could be a free parameter
in the model, our experience suggests that it shares variance with the SP and A
parameters, muddying the fitting process when it is included.
Figure 5 shows the best fitting predictions of SP A theory to the data for gains
(left panel) and for losses (right panel). The RMSD of predicted to obtained is
0.0681 (relative to 0.0810 for CPT). As can be seen by inspection of the figures,
SP A has also done a better job of capturing the qualitative features of the data. In
particular, SP A predicts the nonmonotonic increases in preference for the shifted
rectangular, bimodal, and long shot gain lotteries.
TABLE 6
Parameter Values for SP A Theory (Six-Parameter Fit)
Parameter Value
q 1.053
w+ 0.505
w& 0.488
k 1.694
t+ 9.447
t& 2.035
ASPIRATION LEVEL AND RISKY CHOICE 303
The parameter values for the SP A model are in Table 6. Although the values are
generally reasonable, the values for the SP component are not far from an expected
value fit (w=0.50, qs=qp=1). We believe this reflects the simplifying constraints
that we imposed on the parameters of the SP criterion. We shall have more to say
about the matter in the final discussion.
EXPERIMENT 2
It is sometimes thought that the opportunities for comparison offered by repeated
measures designs create choice patterns that might not occur if subjects made only
a single choice. The purpose of Experiment 2 was to replicate the main finding of
Experiment 1 (i.e., that shifted lotteries are evaluated differently than standard or
scaled lotteries) using a between-subjects design. We also wanted to collect subjects'
reasons for their choices. Because between-subject experiments are costly in terms
of the required number of subjects, we used only positive lotteries.
Method
The stimuli were the 45 pairs comprising the standard, scaled, and shifted
positive sets. Each pair was printed separately on a single sheet of U.S. letter paper.
Sheets were randomized and distributed at the beginning of experimental sessions
to subjects who were participating in other related experiments. In a given session,
different subjects had different pairs. Consequently, it was necessary to describe how
to interpret the lotteries in very general terms, never mentioning particular out-
comes or numbers of tickets.
As in Experiment 1, subjects were asked to mark which of the two lotteries they
would prefer if they were allowed to draw a ticket from either for free and keep the
prize for themselves. They were also asked to write a sentence or two explaining the
basis for their preference.
FIG. 6. Data from Experiment 2 pooled over subjects and stimulus pair. Data are the proportion
of subjects choosing a given lottery out of the total number of subjects who had that lottery available
for choice. h, standard; m, scaled; M, shifted.
304 LOPES AND ODEN
A total of 433 subjects from the University of Wisconsin Madison and the
University of Iowa participated in the experiment for extra course credit. Six of
these subjects indicated by their written responses that they had not understood
how to interpret the lotteries, leaving 427 usable responses ranging over the 45
choice pairs.
Results and Discussion
The data from Experiment 2 are shown in Fig. 6. Clearly, the means are noisier
than the means from Experiment 1, a result one might anticipate not only from the
different subjects contributing to each data point, but also from the reduced
amount of data going into each data point (400 choices per data point in the
within-subject case versus about 24 choices per data point in the between-subject
TABLE 7
Illustrative Protocols from Experiment 2
Scaled lotteries (LS vs SS) Shifted lotteries (LS vs SS)
1. Have a greater chance of winning at least 7. I picked [LS] because winning any amount
some money [in the SS]. The greatest chance is of money would be exciting for me. If I picked
8160. [In the LS] lottery, your greatest chance 850 that would be great but if I picked any other
is zero. (Picks SS) number it automatically gives me more money
in comparison with the other lottery choices.
2. There is a better chance to win money [in the 8. The amount of money to be won [in LS] is
SS] because there are more tally marks for the greater. Even though the chances of winning
higher value of money than there is for 80. may be less, it's worth the risk. (Picks LS)
(Picks SS)
3. The odds of winning any amount of money 9. The [SS] seems to be the better choice
here [in the SS] are a lot higher. Only 4 people because the most tickets are for the larger prize
out of 100 didn't get anything. (Picks SS) amounts. But the [LS] has larger prizes. Your
chances of winning more money seem to be
greater here. (Picks LS)
4. There are more chances for winning money in 10. Excluding the extremes (the 8190 top lottery
the [SS]. The [LS] has a lot of tickets that prize in [SS] and the 850 lottery prize in [LS])
have no monetary value. Even though the it appears that if you win, the prize will be for
amounts are greater in the [LS], your chances more money in [LS]. A better payoff for not
are better in the [SS] to get a ticket worth that much more risk. (Picks LS)
money. (Picks SS)
5. I was not putting forth any money for this 11. I prefer the [SS] because there is more likeli-
lottery, so even though the [LS] has a greater hood of winning. The best chance in the [LS] is
chance of getting 80 even if I was unfortunate 850 while the [SS] is 8190. Although [with the
I lose nothing. But if I win, I win substantially LS] you can win more there is a greater chance
more money. (Picks LS) of not winning.
6. There is a better chance of winning more 12. There are less tickets for more money in the
money [in the LS] and there is more money [LS]. I'd rather have a better chance for a little
involved (higher prizes). (Picks LS) less money. My odds are better to get 8190 [with
SS] than 8398 [with LS]. My odds are equal to
get 8190 [with SS] or 850 [with LS]. I opted for
the 8190 bracket. (Picks SS)
Note. Protocols in italic are from subjects whose preferences went against majority preferences.
ASPIRATION LEVEL AND RISKY CHOICE 305
case). Despite the noise, however, a chi-square analysis shows that the key differen-
ces between the three scaling conditions were replicated. Specifically, (1) the
patterns of preferences for standard stimuli and scaled stimuli do not differ signifi-
cantly from one another, /2(1)=1.65, p>0.05; whereas (2) the pattern of preference
for shifted stimuli differs significantly from the overall pattern of preference for standard
and scaled stimuli, /2(1)=25.13, p<0.001.
Table 7 illustrates the reasons that subjects gave for their choices, taking the
long shot (LS) and short shot (SS) lotteries as examples. (These are the lotteries
that are shown in Fig. 2.) Protocols for the scaled condition are on the left and for
the shifted condition are on the right. In each set, the first four subjects (plain text)
chose with the majority whereas the last two subjects (italic) chose with the
minority.
In the scaled condition, the majority of subjects (5 of 8) preferred the short shot
to the long shot. Protocols 1 through 4 show clearly that such subjects are concerned
with achieving a nonzero outcome. In terms of SP A theory, the A criterion seems
to be outweighing the SP criterion. Neither of the remaining two subjects seems
particularly concerned with avoiding zero (the A criterion). Consequently, the extra
high outcomes in the long shot have more impact (the SP criterion).
In the shifted condition, the majority of subjects (7 of 10) preferred the long shot
to the short shot. In particular, protocols 7, 8, and 10 convey the sense that the 850
guaranteed outcome is good enough (the A criterion is fully satisfied for both lotteries)
allowing the subjects to choose the slightly riskier long shot (the SP criterion). In
contrast, protocol 11 suggests that the subject has adjusted his or her aspiration
level upward, so that 850 is now equivalent to ``not winning'' (the A criterion)
whereas protocol 12 reveals a subject who focused on the relative magnitudes of
high and low outcomes, but placed more weight on the low outcomes (the SP
criterion).
In sum, then, Experiment 2 confirms that preference patterns differ for shifted
lotteries and for standard or scaled lotteries even when the data are gathered in a
between-subjects design. Moreover, the protocols show, as SP A theory predicts,
that this result reflects differences in the relative impacts of SP and A criteria under
the shifted and scaled or standard conditions. In the shifted condition, all lotteries
satisfy the A criterion for gains and none satisfy it for losses, allowing the SP
criterion to manifest itself more strongly in either case. In the scaled and standard
conditions, however, there are large differences in the degree to which the A
criterion is satisfied, reducing the importance of the SP criterion overall.
DISCUSSION
The model comparison in Experiment 1 showed that, on six parameters, SP A
does a better job than CPT of fitting the present set of choice data. Not only is the
RMSD for SP A 160 smaller, the model also captures (as CPT does not) the
nonmonotonic relation between preferences for shifted lotteries and preferences for
standard and scaled lotteries. Experiment 2 reinforced this finding by replicating the
critical nonmonotonicity for gain lotteries in a between-subjects design. It also
306 LOPES AND ODEN
provided protocols confirming that the nonmonotonicity may arise because adding
850 to standard positive lotteries eliminates aspiration level as a consideration for
most subjects, thus enhancing the impact of the decumulatively weighted SP
criterion. In what follows, we discuss the implications of this result for modeling
investment risk. We also provide comments on fitting complex models along with
two instructive comparisons to the six-parameter SP A model. We end with a
discussion of the relation between descriptive and normative theories.
Risk Taking and Aspiration Level
It has often been pointed out that when people are in economic difficulty, they
tend to take risks that they would avoid under better circumstances. This tendency
appears among sophisticated managers in troubled firms (Bowman,1980, 1982) as
well as among unsophisticated subsistence farmers (Kunreuther 6 Wright, 1979).
Experimental studies using managers as subjects have also confirmed the tendency
toward risk-taking for losses, at least when ruin is not at issue (Laughhunn, Payne,
6 Crum, 1980; Payne, Laughhunn, 6 Crum, 1981). Standard thinking in invest-
ment theory would not lead one to expect risk taking in threatening situations.
Instead, hard-pressed decision makers should value low risk over high expected
return and choose accordingly.
The S-shaped utility function of prospect theory seems to provide an explanation
for this paradoxical risk-taking: people take risks when they face losses because
their utility function for losses is ``risk seeking'' (i.e., convex). Though one can
criticize the circularity of the ``explanation,'' it at least predicts preferences better
than the more standard assumption of uniform ``risk aversion'' (i.e., diminishing
marginal utility). But predicting preferences is only half the story, especially when
predictions fail, as they often do in experimental studies of preferences for losses
with students (Cohen, Jaffray, 6 Said, 1987; Hershey 6 Schoemaker, 1980;
Schneider 6 Lopes, 1986; Weber 6 Bottom, 1989) as well as with managers
(MacCrimon 6 Wehrung, 1986). The other half of the story can be found in
protocol data. Studies by Mao (1970) and by Petty and Scott (cited in Payne,
Laughhunn, 6 Crum, 1980) suggest that managers tend to define investment risk
as the probability of not achieving a target rate of return (that is to say, an aspira-
tion level).
No one can doubt that expected return (i.e., expected or mean value) is a central
and well-understood concept for managers, but the concept of risk is less well
understood. In portfolio theory, for example, risk is usually equated with outcome
variance (Markowitz, 1959) but this is not entirely satisfactory descriptively since
it treats wins and losses alike. Other approaches to defining risk try to bypass this
objection by restricting the variance computation to losses (i.e., the semivariance)
or by computing risk as a probability weighted average of deviations below a target
level (Fishburn, 1977). Few, however, have explored the possibility of modeling risk
as the raw probability of not achieving an aspiration level. One who has is Manski
(1988) who developed the idea in what he called a utility mass model. Another
approach that incorporates raw probabilities comes from Weber (1988) who
augmented an expectation model with weighted probabilities of winning, losing,
and breaking even.
ASPIRATION LEVEL AND RISKY CHOICE 307
SP A theory incorporates both notions, each in a separate criterion. On the SP
side, a security-minded weighting function (or a cautiously hopeful function dis-
playing more caution than hope) pays more attention to the worst outcomes than
to better outcomes. On the A side, the model operates on the probability of achiev-
ing the aspiration level. Although normative models usually focus on a single
criterion, descriptive models must go where subjects lead. In the case at hand, the
subjects seem to be saying that they understand and use the term ``risk'' in both
distributional and aspirational senses. For example, in Table 7, two subjects refer
explicitly to risk. In Protocol 8, one subject uses the concept in the A criterion
sense: risk is the chance of winning less. In Protocol 10, however, another subject
does not count chances, but rather focuses on differences in prize amounts, an
SP-focused analysis.
Practitioners work at the boundary between normative and descriptive. Clients
expect guidance (the normative function) in how to achieve their personal goals
(the descriptive function). For the client who is concerned about not meeting a
target return, there seems little point in discussing variance. It would seem better
for the professional to recognize in a client's spoken desires the relevance of those
mathematical rules that seem most applicable and, then, to explain in simple
fashion, properties of the rules that may not be self-evident.
Although much has been claimed since von Neumann and Morgenstern (1947)
about the dire consequences of violating linearity, recent examination of alternative
rules based on decumulative weighted utility and aspiration criteria (e.g., Manski,
1988; March, 1996; Yaari, 1987) suggests that these alternatives are neither better
nor worse than maximizing expected utility. They are, however, different and seem
to come closer to doing what people want done.
Pushing the Model Tests
In Experiment 1, we fit the CPT and SP A models on the same number of free
parameters even though SP A theory could reasonably use several more. In order
to better illuminate the roles of the various psychological components of the theory,
we now bracket the 6-parameter SP A fit by comparing it to a 0-parameter fit and
a 10-parameter fit.
The top panel of Fig. 7 shows what happens when the SP criterion of SP A
theory is neutralized by setting its parameters to yield the expected value for all
lotteries (w=0.50, qs=qp=1.00), thus allowing the A criterion to dominate. We set
the aspiration level here as we did previously: : gains>0; : losses=0. The choice
rule is also zero-parameter, assuming that subjects choose whichever lottery has the
higher value on the A criterion and are indifferent if lotteries tie on aspiration level.
The A criterion alone produces a reasonable quantitative fit, with an RMSD of
0.1206. Although it may seem surprising that such a simple mechanism does so well
in fitting complex data given the very complicated models that have been favored
for risky choice recently (including both CPT and SP A), the result maps well onto
the classic finding of information processing studies using duplex bets (Payne 6
Braunstein, 1971; Slovic 6 Lichtenstein, 1968) that probability of winning dominates
the choice process. Still, the best that aspiration can do by itself with the shifted
data is to fit a flat line. Aspiration alone also predicts a mirror symmetry (reflection
308 LOPES AND ODEN
FIG. 7. Top panel: SP A predictions based on the A criterion alone with the SP criterion
neutralized. Bottom panel: SP A predictions based on the ten parameter values shown in Table 8.
h, standard; m, scaled; M, shifted.
in preferences) between gains and losses whereas the actual loss preference functions
are much flatter than the gain preference functions for all three lottery types.
The bottom panel of Fig. 7 shows what happens with a full, 10-parameter fit of
SP A theory. The fit (RMSD=0.0484) is obviously much better than the 6-parameter
fit. What interests us more, however, is that removing constraints on the SP param-
eters reveals theoretically meaningful values (see Table 8). Whereas previously the SP
criterion came very close to an expected value criterion, the new parameter values
suggest important process differences between gains and losses. For gains, it appears
that the bottom-up (security) evaluation is more important than the top-down
(potential) evaluation whereas, for losses, the top-down (potential) evaluation appears
more important than the bottom-up (security) evaluation. Similarly, differences in the
w parameter also suggest that the importance of security is greater for gains than for
losses (w+>w&). Thus, SP A parameters confirm the CPT-based intuition that
subjects do, indeed, evaluate high-risk options more favorably for losses than for gains.
There is, however, an important difference between the mechanisms used by
CPT and SP A to account for these differences between gains and losses. CPT's
ASPIRATION LEVEL AND RISKY CHOICE 309
TABLE 8
Parameter Values for SP A Theory (10-Parameter Fit)
Parameter Value
q+ 372.07
s
q+ 64.37
p
q& 4.86
s
q& 16.58
p
w+ 0.837
w& 0.003
k+ 0.043
k& 0.023
t+ 10.000
t& 2.070
zero reference point provides the rationale for qualitative inversions of its utility
function (from concave for gains to convex for losses) and its decumulative
weighting function (from inverse S-shaped for gains to S-shaped for losses). Thus,
CPT specifies that the value processing mechanisms and probability weighting
mechanisms used by subjects differ qualitatively for gains and losses. SP A, on the
other hand, allows the relative attention paid to worst outcomes and best outcomes
to shift as a function of domain (gains versus losses) and also allows the relative
importance of the SP and A components to differ between gains and losses. But
domain-mediated reference effects in SP A theory are potentially applicable to a
broader range of domain differences.
For example, Edwards 6 von Winterfeldt (1986) propose that a person's risk
attitude may be different in different ``transaction streams.'' Choices involving
amounts in what they call the ``quick cash'' and ``play money'' streams (the former
being what people have available in their wallets and the latter being money reserved
for enjoyment) should be less risk averse (i.e., less security-minded) than choices
involving ``capital assets'' and ``income and fixed expenditures'' streams. Similarly,
MacCrimon 6 Wehrung (1986) found that executives are more risk averse in
making decisions about their own personal investments than they are about
business investments. Shifts of these sorts in one's willingness to accept risk need
not involve gain loss shifts. Instead, they may involve only differences in outcome
scale (large versus small transaction stream) or differences in real-world expecta-
tions or consequences (personal decisions versus business decisions). The param-
eters of SP A theory, while restricting the decumulative weighting function to an
inverse S shape for both gains and losses, nevertheless allow for modeling this
broader class of reference effects through differences in the relative attention paid to
bad versus good outcomes in the SP assessment and through the relative impor-
tance accorded to SP and A assessments in the final choice.
The Importance of Normative Theory for Description and vice versa
In most of economics, expected utility theory remains the workhorse of academic
research which is to say, of normative research despite its poor fit to data from
310 LOPES AND ODEN
psychological experiments. Recently, however, a number of economists have turned
their attention to testing expected utility theory in laboratory settings involving
stylized economic games. Up to now, this new enterprise has been doggedly empirical
and intently focused on theoretically appropriate task instantiation and on experimen-
tal rigor and control. Despite this attention to detail, however, the predictions of
the theory have frequently not been borne out, leaving the experimentalists with the
not inconsiderable task of persuading their colleagues that the model's failures are
meaningful and should not be overlooked (for reviews, see the essays by Smith,
1982, 1989, 1991; and the various chapters in Kagel 6 Roth, 1995). There has not,
however, been a commensurate effort from these researchers to develop better
theory, although Roth (1995, p. 18) has pointed out that at least some of those who
ran the earliest economic experiments expected that experimental data would con-
tribute to the development of both better descriptive theories and better normative
theories.
Most economists view their discipline as one that deals with ideally rational
behavior and, thus, attach little significance to discrepancies between what the
theory predicts and what people actually do. Psychologists, on the other hand, view
their task as one of predicting behavior and describing its cognitive sources in
psychologically meaningful terms, whether or not that behavior is rational. The
utility and probability weighting functions of CPT rest on perceptual concepts. The
SP and A components of SP A theory rest on attentional and motivational concepts.
Thus, both theories provide a psychological grounding that allows each to appeal
directly to intuitions via easily understood and compellingly named components.
Intuitiveness is not enough, however. Mathematical analysis of the sort pursued
here is necessary to specify the quantitative mechanisms from which theoretical
predictions flow and to confirm that it is these specific mechanisms that provide the
best account of behavior. History shows that it is easy to conflate phenomena with
explanations, especially when the explanations appeal to intuition. Thus, the
phenomenon of risk aversion became conflated with the idea of diminishing
marginal utility (concavity) because the intuition was powerful and, indeed, is
accurate, that constant marginal gains or losses in assets are more noticeable to
poor people than to rich people. Conflation of phenomena with explanation is
especially hazardous to theoretical advancement in that it suppresses interest in
psychologically important alternative explanations, such as the aspiration and
decumulatively weighted utility mechanisms on which this paper has focused.
The model comparisons we presented pitted competing psychological mechanisms
against one another while constraining them to the same number of free parameters.
For the data set at hand, SP A theory provided the better fit, both quantitatively
and qualitatively. However, a more important comparison may reside in the
relative strengths and weaknesses of the three different parameterizations of SP A
theory. On the one hand, the zero-parameter model, relying solely on the aspiration
level mechanism, did surprisingly well in providing a rough fit to the data. That a
mechanism as simple as this was overlooked as an alternative to more complicated
accounts is testimony to the unhealthy power that the ``best existing theory'' has
to stifle research into alternatives. On the other hand, the 6- and 10-parameter
versions of SP A theory show the necessity of the SP component for modeling
ASPIRATION LEVEL AND RISKY CHOICE 311
preferences among the shifted lotteries and for capturing the relative flattening of
preferences for loss lotteries. Although the possible contributions of aspiration level
should not have been overlooked, theorists and experimentalists since Bernoulli
have not been foolish in pursuing weighted utility models. Aspiration alone is
simply too simple.
SP A theory is a descriptive theory, through and through. Its dual choice criteria
the security-potential criterion and the aspiration criterion are both included
because each seems necessary to adequately capture human choices under risk. It
is worth noting, however, that even though these two criteria are inconsistent with
expected utility maximization except in special cases, the rationality of each has
been defended recently on normative grounds, (e.g., see Manski's (1988) utility
mass model and Yaari's (1987) decumulatively weighted value model). Although
there is still a great divide between normative and descriptive theories of risky
choice, perhaps we are seeing the first evidence that descriptive research is finally,
as Roth (1995, p. 22) put it, ``speaking to theorists.''
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Received: November 19, 1998


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