Carlos Alós-Ferrer, Department of Economics, University of Zurich, is this week’s guest speaker at the SWE Colloquium.

Strength of preference, dual processes, and economic decision making

In a series of experiments, we investigate the sources of errors in economic decisions under risk. The first source is a “strength of preference” effect. Error rates increase and response times become longer as choice difficulty increases, in analogy with well-known psychophysical effects in perceptual discrimination tasks. However, in economic tasks the scale determining choice difficulty is not always obvious. When there is an objectively correct answer independently of attitudes toward risk, the effects (for error rates and response times) are explained by the distance between expected values (or winning probabilities). Differences in payoff-independent numerical magnitudes influence these gradual effects, but, contrary to pure discrimination tasks, they play a minor role. When correct answers depend on subjective attitudes toward risk, the gradual effects on error rates and response times are explained by “strength of preference,” as evidenced by cardinal differences in independently estimated, subjective utilities. The second source of errors reflects the presence of mental shortcuts capturing heuristics or behavioral rules, which interact with and modify the gradual effects arising from the strength of preference. The interaction of qualitatively different decision processes delivers testable hypotheses on errors and response times. Specifically, whenever decision processes are in conflict (prescribe different responses), error rates increase and errors are faster than correct responses. If different processes are in alignment, however, errors are slower than correct responses. These predictions become a test for the presence of multiple decision processes in economic decision making and complement the views derived from strength of preference.