When people are stressed, they tend to make riskier decisions overall, according to a study that examined how acute stress influences decision-making in the context of financial risk management. This research utilized hierarchical Bayesian modeling to explore the component processes underlying risky decision-making, as described by cumulative prospect theory.
Cumulative prospect theory is a quantitative approach that accounts for empirical regularities in risky decision-making, such as the “fourfold pattern of risk” (e.g., risk-seeking in low-probability gains, risk-averse in high-probability gains). This theory posits that risky decision-making is based on four primary parameters:
- Utility curvature (or risk aversion): Describes the subjective deceleration in expected utility as potential outcomes increase. For example, the subjective value from gaining $10 versus $0 is typically greater than that from gaining $20 versus $10.
- Loss aversion: Refers to the generally observed greater sensitivity to losses than to gains, meaning people are often more averse to losing a certain amount than attracted to gaining the same amount.
- Probability distortion: Describes the tendency to overweight low-probability outcomes and underweight high-probability outcomes, such as buying lottery tickets due to an overestimated chance of winning.
- Choice stochasticity: Represents the extent to which individuals deviate from their own strictly optimum expected utility, which can be thought of as pure randomness or a balance between exploration and exploitation.
The study involved 147 young adult participants who were randomly assigned to either an acute stress induction (using a Zoom-based psychosocial stressor) or a control condition. The stress induction successfully increased both negative affect and cortisol levels in the stress group compared to the control group. Subsequently, participants’ risky decision-making was assessed using a dynamic, adaptive task designed for reliable estimation of the cumulative prospect theory parameters in a reasonable number of trials.
A key finding was that while stress generally increased risky decision-making, it exerted strong and differential effects on these risky decision-making parameters based on participant sex. This differential impact helps explain previous inconsistencies in the literature regarding how stress affects risky decision-making and sex differences.
Specifically:
In female participants, stress led to a pattern of decision-making characterized by risk seeking with respect to gains, slightly reduced loss aversion, accurate outcome probability assessment, and greater choice stochasticity (less choice consistency). Overall, for females, stress was found to decrease choice consistency, probability distortion, and both loss and risk aversion.
In male participants, stress resulted in a pattern of decision-making characterized by very low loss aversion and poorer outcome probability assessment (increased probability distortion). For males, stress generally decreased loss aversion and increased probability distortion.
The study noted that the most consistent effect across both sexes was on loss aversion, although this effect was significantly weaker in female participants compared to male participants. The researchers conclude that stress changes how people make decisions, and it does so differently by sex, suggesting that the overall influence of stress on risky decision-making can vary depending on the specific forms of risk measured in different tasks. This research marks the first time that the effects of acute stress on all components of decision-making described by cumulative prospect theory have been examined concurrently using its specific equations.
Reference
Published In ScienceDirect
