The psychological evaluation of economic outcomes: A new dimension of behavioral economics

Behavioral economics is a relatively new sub-discipline of economics that recognizes that classic, rational prospective models of economic behavior are inconsistent with many aspects of financial decisions. The development of Prospect Theory explained how biases and heuristics can predict performance in economic events (Kahneman & Tverksy, 1979). However, most models of behavioral economics (including Prospect Theory) do not account for individual differences in predicting economic outcomes. The current study is aimed at examining individual differences in the evaluation of economic events and expanding the literature of behavioral economics to include analyses at the individual level. To do this we studied the impact of relative evaluation standards, personality traits and demographics on performance on several classic economic gambles set forth in the development of Prospect Theory. Examining data provided by 317 participants via online questionnaire showed that individuals change their evaluations of economic events based on relative Normative (comparisons with others), Ipsative (comparisons to the past), and Expectation (comparisons with expectations) information. These relative standards all showed strong influences on how individuals felt about gains and losses in both the stock market and while gambling. Furthermore, the amount that individuals were influenced by these relative standards was related to their personality traits, age, gender, and financial knowledge. We also demonstrated that the gambles set forth by Prospect Theory were not always answered in the same ways as documented in the literature. This showed that sample characteristics can cause variation in performance on these gambles. Determining relationships between individual differences and performance on Prospect Theory gambles was made difficult by the multi-dimensional nature of Prospect Theory constructs such as Loss Aversion and Risk Aversion for gains. As a result, correlations with performance on these gambles were difficult to interpret and we were unable to link relative standard use with these gambles. Further research is required to examine the constructs of Prospect Theory before individual differences in performance on Prospect Theory gambles can be systematically studied.