Simultaneous Preferences for Hedging and Doubling Down: Focal Prospects, Background Positions, and Nonconsequentialist Conceptualizations of Uncertainty

Most theories of decision making are consequentialist. They presume that people evaluate prospects on the basis of potential outcomes. However, people may often conceptualize prospects in part nonconsequentially. Consider someone evaluating a new, “focal” prospect given an unresolved “background” position to which that person is already exposed. If the two are positively correlated, the individual may conceptualize the focal prospect as a bet “with” the individual’s background position; if they are negatively correlated, the individual may conceptualize the focal prospect as a bet “against” the individual’s background position. Because people like to be consistent, this nonconsequentialist conceptualization may induce a taste for betting “with” the background position. Such bets constitute risk-seeking doubling down, not risk-averse hedging. Indeed, we observe that relative to corresponding background-less choices, participants with unresolved background positions are relatively risk-seeking, favoring positively rather than negatively correlated focal prospects. They also sometimes show a simultaneous taste for both doubling down and hedging.

Data are available at https://doi.org/10.1287/mnsc.2017.2918.

This paper was accepted by Manel Baucells, decision analysis.