Playing for peanuts: Why is risk seeking more common for low-stakes gambles?

Weber, Bethany J.; Chapman, Gretchen B.

doi:10.1016/j.obhdp.2005.03.001

Cited by 123 publications

(119 citation statements)

References 33 publications

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“…The present results could also be explained via a single utility function with multiple inflection points (see Markowitz, 1952;Weber & Chapman, 2005). This is the idea that the utility function can be concave and convex within a domain (gains or losses) and magnitude defines the switch (i.e., inflection point) from one functional form to the other.…”

Section: Potential Explanations and Future Directionsmentioning

confidence: 59%

“…Similarly, the "peanuts" effect suggests that people prefer the risky option when the stakes are relatively low, thus becoming more risk averse with high-magnitude payoffs (e.g., Markowitz, 1952;Prelec & Loewenstein, 1991). The reflection of the "peanuts" effect in the loss domain indicates higher risk seeking with high nominal payoffs (Weber & Chapman, 2005).…”

Section: Introductionmentioning

confidence: 99%

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Magnitude and incentives: revisiting the overweighting of extreme events in risky decisions from experience

2017

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Recent experimental evidence in experiencebased decision-making suggests that people are more risk seeking in the gains domain relative to the losses domain. This critical result is at odds with the standard reflection effect observed in description-based choice and explained by Prospect Theory. The so-called reversed-reflection effect has been predicated on the extreme-outcome rule, which suggests that memory biases affect risky choice from experience. To test the general plausibility of the rule, we conducted two experiments examining how the magnitude of prospective outcomes impacts risk preferences. We found that while the reversed-reflection effect was present with small-magnitude payoffs, using payoffs of larger magnitude brought participants' behavior back in line with the standard reflection effect. Our results suggest that risk preferences in experience-based decision-making are not only affected by the relative extremeness but also by the absolute extremeness of past events.

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Section: Potential Explanations and Future Directionsmentioning

confidence: 59%

Section: Introductionmentioning

confidence: 99%

Magnitude and incentives: revisiting the overweighting of extreme events in risky decisions from experience

2017

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“…6 We are assuming independence of observations for the χ 2 test but, in actuality, we were not able to track and thus ensure that each of our purchase observations was made by a unique customer. 7 As Weber and Chapman (2005) report, it is not clear whether people actually become risk seeking. Further, risk seeking is not a necessary requirement of the "peanuts" effect (Prelec and Loewenstein 1991).…”

Section: Discussionmentioning

confidence: 99%

“…Next, we examined the robustness of the attraction to the probabilistic free price promotion across a range of probabilities and with a higher-priced product for which the prices and discounts are less likely considered "peanuts." Previous research (see, e.g., Prelec andLoewenstein 1991, Weber andChapman 2005) has shown that for small-stakes gains with at least medium probabilities (p > 10%) to win, people become less risk averse than for large-stakes gains. Furthermore, for sufficiently small gains of less than $1, Markowitz (1952) posited that people might even become risk seeking.…”

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confidence: 97%

When Retailing and Las Vegas Meet: Probabilistic Free Price Promotions

2017

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Abstract. A number of retailers offer gambling-or lottery-type price promotions with a chance to receive one's entire purchase for free. Although these retailers seem to share the intuition that probabilistic free price promotions are attractive to consumers, it is unclear how they compare to traditional sure price promotions of equal expected monetary value. We compared these two risky and sure price promotions for planned purchases across six experiments in the field and in the laboratory. Together, we found that consumers are not only more likely to purchase a product promoted with a probabilistic free discount over the same product promoted with a sure discount but that they are also likely to purchase more of it. This preference seems to be primarily due to a diminishing sensitivity to the prices. In addition, we find that the zero price effect, transaction cost, and novelty considerations are likely not implicated.

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“…According to this peanut effect (Prelec & Loewenstein, 1991;Weber & Chapman, 2005), the extreme risk seeking found would be the result of an increasing marginal utility of money for the small amounts of money offered for sure. Notice how this conceptual investment task.…”

Section: Discussionmentioning

confidence: 99%

Incentive effects on risk attitude in small probability prospects

Lefèbvre

Vieider²,

Villeval

2010

Economics Letters

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Most studies on the effect of incentives on risk attitude use within-subject designs. This may however raise an issue of sequentiality of effects as later choices may be influenced by earlier ones. This paper reports between-subject results on the effect of monetary stakes on risk attitudes for small probability prospects. Under low stakes, we find the typical risk seeking for small probabilities predicted by prospect theory. Under high stakes however risk seeking is dramatically reduced. This suggests that utility is not consistently concave over the outcome space, but may contain a convex section for very small amounts. JEL-Code: C91, D81, D89

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Playing for peanuts: Why is risk seeking more common for low-stakes gambles?

Cited by 123 publications

References 33 publications

Magnitude and incentives: revisiting the overweighting of extreme events in risky decisions from experience

Magnitude and incentives: revisiting the overweighting of extreme events in risky decisions from experience

When Retailing and Las Vegas Meet: Probabilistic Free Price Promotions

Incentive effects on risk attitude in small probability prospects

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