Neuroeconomics Write Up 5

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Sokol-Hessner et al. (2009). Thinking like a trader selectively reduces individuals’ loss aversion. Proceedings of the National Academy of Sciences. 106: 5035-5040.

An intentional cognitive regulation strategy is a strategy that emphasizes “perspective taking,” in other words, thinking from another angle. Sokol-Hessner and his co-workers showed that an intentional cognitive regulation strategy would lead to changes in loss aversion and physiological correlates of behavior.

30 people participated in two studies, in which they made a series of monetary choices between a binary gamble and a guaranteed amount. In the behavioral sessions of both study 1 and study 2, these participants were pre-endowed $30 as their fund. This would be the maximum amount of loss they could endure. They were also told that at the end of the study, the endowment would be adjusted to the sum of 10% of the randomly chosen trials they conducted. Theoretically, if they did well, they could earn up to $572.

In study one, there were 140 choices per “set,” and each participant engaged in two sets. All choices’ results would be revealed immediately after the decision. For each of the sets, participants used one of the two strategies taught: the Attend strategy and the Regulate strategy. With the Attend strategy, each participant should consider each of their monetary choices independently and let their emotions occur naturally without intentional control. With the Regulate strategy, each participant should imagine herself as a trader, thus considering the big picture of the portfolio throughout the process. This method design was oriented towards the concept of reinterpretation. Reinterpretation could keep the physical identity of the stimuli identical, while changing the meaning of it, aiming to change the resulting affective state. In this study, there could be two ways of reinterpretation. As a participant, one could think of each gamble by itself, without considering how this round could influence her overall gain. One could also think of herself as a professional trader and pay attention to building up a portfolio. In essence, reinterpretation focuses on changing the meaning of the stimuli for the participants.

Study two was almost identical to study one, with the exception of the number of trials conducted and the use of SCR. At study two, a participant would complete 120 choices, half which were with the Attend the strategy and the other half with the Regulate strategy. SCR was used to measure the trough-to-peak amplitude difference in conductance. In addition, one participant was missing in the second study.

These two studies mainly investigated three aspects of emotions: action tendencies, bodily responses, and cognitive appraisals. Action tendencies were the participants’ decisions; bodily responses were the results of skin conductance that quantify bodily arousal responses; and cognitive appraisal was conducted by the intentional cognitive regulation strategy that they instructed participants to use. Three aspects of behaviors were quantified, including the weighting of losses relative to gains, attitudes toward chance, and consistency over choices.

Results show that taking different strategies would lead to different extents of loss aversion. In study 1, 26 of the subjects showed less loss aversion using the Regulate strategy compared to that of the Attend strategy. In study 2, according to participants’ skin conductance responses (SCR), participants in the study were more aroused per dollar by the loss than by the gains. These differences were correlated to the behavioral loss aversion, which is people’s tendency to prefer avoiding losses over getting an equivalent amount of gains. These results indicate that arousal responses have a specific role in loss aversion. Furthermore, the intentional cognitive regulation strategy reduced both behavioral loss aversion and arousal to losses, thus reducing the arousal to losses relative to gains.

Discussion

Pros of the Articles:

Lerner and his co-workers’ article was written very clearly and concisely. They were very careful in eliminating the demand effect and managed to minimize the influence of the participants’ other potentially related emotions (e.g. loss of pre-owned money). The other paper demonstrates superior use of econometric tools.

Cons of the Articles:

For Lerner et al.’s paper:

- Instead of having two negative emotions, it may be more interesting to see the comparison between a negative emotion and a positive emotion.

- Incentives differed for participants in the choice and sell conditions. For participants in the sell condition, they received the highlighters as a gift, whereas for choice participants, they were essentially purchasing the highlighters through forgoing cash opportunities. For example, if I were a participant in the choice condition, I might think that I had plenty of highlighters at home so I would not need the highlighters unless they were really cheap. Compared to the endowment effect, what I just described was an effect from the buyer’s perspective. Researchers could take this perspective into consideration to make their argument more robust.

For the Sokol-Hessner et al. paper:

- Is it really possible for one to think of herself as a trader without having been a trader? The participants might have just felt the pressure to change their behaviors under the Regulate strategy, but did not really think of themselves in the way that researchers intended.

- In these studies, participants might gain up to $572 and lose up to $30, meaning that their overall expectation of gaining is much higher than that of losing money. Would this influence the arousal level? In other words, participated might be used to or relaxed when they were wining, and became more sensitive to loss.

Discussion Question：

- Do you think that participants in the second paper were really able to fully possess the trader’s mindset? If not, how can we improve the study? If yes, would it be possible for anyone to trade like a trader (in terms of mindset, not techniques) in daily investments?

- Would temperature of the experiment setting influence the results of SCR?

- Have you encountered the expel effect?

Further Research Question:

- How long would the carryover effect last?