The loss-bet paradox : Actuaries, accountants, and other numerate people rate numerically inferior gambles as superior

Abstract

Psychologists have convincingly demonstrated that preferences are not always stable and, instead, are often "constructed" based on information available in the judgment or decision context. In 4 studies with experts (accountants and actuaries in Studies 1 and 2, respectively) and a diverse lay population (Studies 3 and 4), the evidence was consistent with the highly numerate being more likely than the less numerate to construct their preferences by rating a numerically inferior bet as superior (i.e., the bets effect). Thus, the effect generalizes beyond a college student sample, and preference construction differs by numeracy. Contrary to prior thinking about preference construction, however, high expertise and high ability (rather than low) consistently related to the paradoxical phenomenon. Results across studies including Study 3's experimental modifications of the task supported the hypothesized number comparison process (and not a lack of expertise with monetary outcomes and probabilities or numeracy-related differences in attention to numbers) as the effect's underlying cause. The bets effect was not attenuated by Study 4's instructions to think about what would be purchased with bet winnings. Task results combined with free-response coding supported the notion that highly numerate participants have a systematic and persistent inclination for doing simple and complex number operations that drive their judgments (even after controlling for nonnumeric intelligence). Implications for 3 types of dual-process theories are discussed. The results were inconsistent with default-interventionist theories, consistent or unclear with respect to fuzzy trace theory, and consistent with interactive theories.