People make financial choices to avoid losing money or experiencing regret, rather than simply balancing expected monetary returns with their tolerance for financial risk, according to a new study led by Lisa Posey, associate professor of risk management in the Penn State Smeal College of Business.
For many years, economists proposed that people try to maximize their satisfaction with a monetary outcome by balancing risk and returns. But this standard theory often fails to match how individuals behave, Posey said.
In a recent publication in Journal of Risk and Uncertainty, Posey and her colleagues tested two alternative models, one incorporating people's heightened concern about losing money and a competing one focusing on their desire to avoid regretting their decisions. They were trying to see if, rather than being competing explanations, these models might work together to explain behavior. The team found that people bias their choices to avoid the possibility of losing any money and also behave differently when they can observe what they could have earned if they had chosen differently. The results also indicated that women, on average, are more likely than men to make decisions to avoid the potential of regretting choices that result in less money.
