An economic decision-making model of anticipated surprise with dynamic expectation

Abstract

When making decisions under risk, people often exhibit behaviors that classical economic theories cannot explain. Newer models that attempt to account for these ‘irrational’ behaviors often lack neuropsychological bases and require introduction of subjective and problem-specific constructs. Neuroscience findings, like prediction error signals and introspective neuronal replay, as well as psychological theories like affective forecasting, suggest that people mentally simulate outcomes of events and anticipate their potential effects. Inspired by this, we propose a model in which decisions are chosen based on an entity which we call the ‘anticipated surprise’, defined by a nonlinear average of the differences between individual outcomes and a reference point. The reference point is determined by the expected value of the possible outcomes, which we assume to be dynamically changing during the mental simulation of a sequence of events. We illustrate how our model explains prominent economic paradoxes and gambling behaviors by considering the mental simulation of outcome resolution of the corresponding decision-making problems and interpreting those problems as compound lotteries. Our work could point towards an objective, potentially measurable quantity that describes the perceived ‘subjectiveness’ arising from emotional aspects in decision-making processes when evaluating predicted event outcomes.