This article was downloaded by: [American University Library] On: 14 May 2012, At: 23:31 Publisher: Routledge

Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK

Journal of Risk Research

Publication details, including instructions for authors and subscription information: http://www.tandfonline.com/loi/rjrr20

Win Some, Lose Some: The Effect of Chronic Losses on Decision Making Under Risk
Louie Rivers
a a b

& Joseph Arvai

c d

School of Environment and Natural Resources, The Ohio State University, Columbus, OH, USA
b

National Science Foundation, 4201 Wilson Boulevard, Arlington, VA, USA

c

Environmental Science and Policy Program, Michigan State University, MI, USA
d

Decision Research, Eugene, OR, USA

Available online: 27 Nov 2007

To cite this article: Louie Rivers & Joseph Arvai (2007): Win Some, Lose Some: The Effect of Chronic Losses on Decision Making Under Risk, Journal of Risk Research, 10:8, 1085-1099 To link to this article: http://dx.doi.org/10.1080/13669870701615172

PLEASE SCROLL DOWN FOR ARTICLE Full terms and conditions of use: http://www.tandfonline.com/page/terms-andconditions This article may be used for research, teaching, and private study purposes. Any substantial or systematic reproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in any form to anyone is expressly forbidden. The publisher does not give any warranty express or implied or make any representation that the contents will be complete or accurate or up to date. The accuracy of any instructions, formulae, and drug doses should be independently verified with primary sources. The publisher shall not be liable for any loss, actions, claims, proceedings, demand, or costs or damages whatsoever or howsoever caused arising directly or indirectly in connection with or arising out of the use of this material.

Journal of Risk Research Vol. 10, No. 8, 10851099, December 2007

ARTICLE

Win Some, Lose Some: The Effect of Chronic Losses on Decision Making Under Risk
Downloaded by [American University Library] at 23:31 14 May 2012

LOUIE RIVERS*,** & JOSEPH ARVAI{,{

*School of Environment and Natural Resources, The Ohio State University, Columbus, OH, USA, **National Science Foundation, 4201 Wilson Boulevard, Arlington, VA, USA, { Environmental Science and Policy Program, Michigan State University, MI, USA, {Decision Research, Eugene, OR, USA

ABSTRACT Losses, including those that are chronic in nature, are a fact of life. The research reported here was designed to examine, using a controlled experiment, the effect of chronic losses in a given contextual domain on subsequent decisions with uncertain outcomes that take place in the same and in unrelated domains. Randomly selected adult subjects who took part in the experiment were randomly assigned to one of three treatment groups: One group, chronic losers, was exposed to chronic financial losses as part of a controlled, multi-round gambling simulation. Groups two and three were exposed to chronic wins and random outcomes, respectively, as part of the same gambling simulation. Results from the experiment revealed that chronic losses, in contrast to random outcomes and chronic wins, had clear effects on decision making in the domain where the initial losses were incurred. Subjects who were exposed to the chronic loss induction demonstrated a significantly higher level of risk aversion when compared with subjects who were exposed to either random outcomes or chronic wins. Subjects exposed to chronic losses also displayed a depressed affective state and a tendency to accept less as an outcome of future decisions, and still consider it to be a satisfactory result, when compared to subjects in the two control conditions. There appears to be no spillover, however, of a similar degree of risk aversion when considering similar kinds of decisions in unrelated contextual domains. These results seem consistent with prospect theory and the theory of learned helplessness, and have implications for risk communication and management in a variety of contexts. KEY WORDS: Chronic loss, learned helplessness, representativeness, affect, decision making

Correspondence Address: Louie Rivers, National Science Foundation, 4201 Wilson Boulevard, Arlington, VA 22230, USA. Email: lrivers@nsf.gov 1366-9877 Print/1466-4461 Online/07/08108515 # 2007 Taylor & Francis DOI: 10.1080/13669870701615172

1086 Louie Rivers & Joseph Arvai Introduction Each day, people are faced with consequential decisions that are characterized by uncertain outcomes. Some of these decisions result in tangible gains, or in other words, outcomes that improve the welfare of the decision maker. In other cases, these decisions result in losses, which may lead to a decline in overall welfare. For many people e.g., those living in much of the developed world there exists a balance with respect to the degree to which losses and gains are experienced (e.g., fluctuations between financial gains and losses achieved as a result of investment decisions over a lifetime). In some cases, however, losses occur much more frequently than gains. And in some instances, these losses can be chronic in nature. In this paper, chronic loss can be defined as the experience of multiple, consecutive losses or negative outcomes in single or in related contextual domains. Consider, for example, the Prairie View A&M University football team, which between 1989 and 1998 endured a losing streak of 80 consecutive games. There is also the case of the television actor Susan Lucci who, between 1978 and 1998 received 18 consecutive Daytime Emmy Award nominations for her work on the program All My Children before finally winning her first award in 1999. Of course, the experience of chronic loss is not isolated to sports and entertainment and its long-term outcomes can be far from trivial. Consecutive losses via pathological gambling routinely results in significant social and financial costs for individuals and sometimes, entire communities (Cozzetto and Larocque, 1996; Lesieur, 1979, 1998). Chronic loss is also common in minority and marginalized communities; e.g., the case of African American farmers in the southern United States. In addition to annual losses resulting from falling crop prices, drought, and growing competition from larger factory farms, many African American farmers have also had to contend with financial losses associated with discrimination by the United States Department of Agriculture (USDA) in terms of access to much-needed federal assistance.1 The overall result of these losses has been a 98% decline in the number of farms owned by African Americans (vs. a 60% decline in the number of farms operated by white owners) since 1920 (Wood and Gilbert 2000). One can presume from their longer-term consequences that chronic losses have an effect on the decisions made by those experiencing them duringand immediately followingthe period when losses took place (e.g., during their respective losing streaks, decisions about athletic recruiting at Prairie View and acting jobs by Susan Lucci; more importantly,
1

Downloaded by [American University Library] at 23:31 14 May 2012

This situation led to the filingby a group of African American farmersof a class action lawsuit citing discrimination against the USDA; the case was settled in 1999 for $3 billion. Since 1999, however, 90% of those awaiting compensation from the USDA were denied payment resulting in the filing of a second lawsuitalso citing discriminationin which the plaintiffs are seeking $20.5 billion.

The Effect of Chronic Losses on Decision Making 1087 decisions about treatment in the case of pathological gambling or the sale of farmland in the case of African American farmers). Yet, despite growing interest in choices as they apply to linked or consecutive gambles (e.g., Croson and Sundali, 2005; Hardy et al., 2006; Ranyard and Charlton, 2006), there is a relative paucity of research that explicitly explores the effect of chronic losses on the decision-making process. There are, however, several theoretical propositions that provide cluesalbeit somewhat contradictory onesas to the possible effects of chronic losses on peoples decisions. Previous studies of the representativeness heuristic have shown, for example, that people often believe that the probability associated with wins and losses is self-correcting; the related gamblers fallacy (Croson and Sundali, 2005; Tversky and Kahneman, 1971) results when people erroneously believe in negative autocorrelation of a non-autocorrelated random sequence. Thus, in a simple gamble based on the outcome of coinflips, a player who observes an outcome of three consecutive heads is likely to judge the subjective probability of a fourth consecutive heads at less than 0.5; in other words, most players of this game will believe (incorrectly) that, probability being self-correcting, chance is more likely to deliver an outcome of tails on the fourth coin toss. Applied to choices following chronic loss, a decision maker may be willing to take greater risks in the belief that their run of bad luck (resulting in consecutive losses) is about to end. Similarly, prospect theory (Kahneman and Tversky, 1979) in its most basic form suggests that assessments of the potential outcomes in a choice problem are a function of two judgmental operations. First, people tend to evaluate potential outcomes based on discernable changes in welfare relative to an easily accessible reference point rather than final states. Second, in the minds of most, losses loom larger than gains; as Kahneman and Tversky (1979, p. 279) put it, the aggravation that one experiences in losing a sum of money appears to be greater than the pleasure associated with gaining the same amount. As a result, decision makers are more likely to take additional risks to recover losses (and return to their initial reference point) as compared to individuals that have experienced the same relative level of gain. The theory of learned helplessness (Mikulincer, 1994; Peterson et al., 1993), by contrast, posits that that when individuals are exposed to repeated aversive events (e.g., a series of difficult-to-solve puzzles), they often learn (or assume) that overcoming them is impossible. When similar aversive circumstances arise in the future, these individuals will only make a limited attempt or no attempt at all to overcome them. It seems plausible that a form of learned helplessness would apply in the case of decision making following chronic loss. Following chronic loss in a given context (e.g., a series of failed gambles), individuals may learn to feel that any future decision that they make in this context will not lead to a positive outcome; the subsequent result might be a risk averse decision such as a safer bet or the avoidance of the gamble altogether.

Downloaded by [American University Library] at 23:31 14 May 2012

1088 Louie Rivers & Joseph Arvai In light of these conflicting predictions, the exploratory research reported here was designed to examine, via a controlled experiment, the effect of chronic losses on subsequent decisions with uncertain outcomes that take place in the same and in unrelated contextual domains. Methods Subjects 430 randomly selected adult subjects were invited to take part in this study through the web-enabled panel of Knowledge Networks (KN). These potential subjects were drawn from a probability sample of active members in KNs database. The sampling approach for this project was designed to increase the demographic similarities between those who completed the experimental protocol and U.S. Federal Census benchmarks by factoring demographic groups estimated response rates into the initial sample draw. The probability that members of a given demographic group would take part in the experiment was factored into the overall sampling frame by over-sampling groups that tend to have a lower response and consistency rate and under-sampling groups that tend to have a higher response and consistency rate. The set of completed experiments came from a subject pool that mirrored that of the U.S. Federal Census. Of the 430 subjects invited to take part in the research, 332 subjects completed the experiment for a response rate of 77%. All elements of the experiment took place on a secure internet site. Before the start of the experiment, subjects were randomly assigned to one of three treatment conditions: (1) those who, at the start of the experiment (see below), would be subjected to an experimental manipulation designed to induce chronic losses (CL; n5127); (2) those who would be subjected to an experimental manipulation designed to induce chronic wins (CW; n598); and (3) those who would be subjected to an experimental manipulation designed to induce completely random outcomes (RO; n5108). Design The research was designed around a three-part controlled experiment that consisted of: (1) a seven round gambling game (Game A), played with hypothetical dollars (which was unknown to subjects at the time) that was used to induce either chronic losses, chronic wins, or random outcomes; (2) a real-money lottery (Game B) which was used to test for the effect of chronic losses on subsequent decisions in the same financial context; and (3) a series of related intervening questions that asked subjects to make similar decisions in a differentenvironmentalcontext (Figure 1). On average, the experiment took slightly longer than 20 minutes to complete. The experiment began the same way in each of the three (CL, CW, and RO) treatment conditions. Subjects were told that they were about to participate in an experiment that involved two simple games of chance

Downloaded by [American University Library] at 23:31 14 May 2012

The Effect of Chronic Losses on Decision Making 1089

Downloaded by [American University Library] at 23:31 14 May 2012

Figure 1. Experimental design; the gambling and decision tasks were briefly halted at three points (S1, S2, and S3) so that subjects could respond to a series of self-rating questions. The experiment ended with a series of post-test self-ratings (S4).

during which they would have the opportunity to win real money (to a maximum of $25). Prior to the start of the experiment, subjects were endowed with $12 in an account containing hypothetical funds (as noted above). After receiving their endowment, subjects took part in Game A, which consisted of a seven round gambling game designed to induce chronic losses (or chronic wins and random outcomes in the case of the two control groups). During each round of the game, subjects were shown a game board that was comprised of 10 blank squares (2 squares high by five squares wide). The object of the game as it was described to subjects was simple: During the first six rounds, subjects task was to select a desired square. If they selected a winning square, word win would appear in the square and between $1 and $7 would be added to their account (with the larger amounts appearing randomly in the 7th, final round of the game). If they did not select a winning square, the word lose would appear and between $1 and $7 would be subtracted from their account (with the larger amounts once again appearing randomly in the final round of the game; thus, it would be possible for subjects in the CL treatment to lose their entire $12 endowment). All subjects were told that, on average, other players of the game selected a winning square 70% of the time. However, the actual probability of selecting a winning square varied by treatment group. In the CL condition, pwin50.1. For subjects in the In the CW condition, pwin50.9. And in the RO group, pwin50.5. The goal here was to ensure that those in the CL group would, in all likelihood, experience a long string of consecutive (or chronic) losses. Similarly, this procedure would help to ensure that those in the control groups the RO and CW treatments would either experience a series of consecutive wins (CW) or a pattern of outcomes that were random in nature (RO).

1090 Louie Rivers & Joseph Arvai To determine the role that the loss (as well as the win and random outcome) induction had on subjects frame of mind, the game was interrupted briefly after the 3rd, 6th and 7th rounds (Figure 1). At these times, subjects were asked a series of time-limited and closed-ended questions (with responses provided on 7-point Likert scales) aimed at determining their affective state in relation to the game. One question was aimed at subjects level of arousal (where 15very frustrated, 45indifferent, and 75very calm) while another measured the level of valence associated with the game (where 15very bad, 45indifferent, and 75very good). In addition to these questions, subjects were asked to predict the outcome of the next round of the game; this question was asked only after the 3rd and 6th rounds (where 15Im sure that Ill lose, 45I dont know the outcome, and 75Im sure that Ill win). The second element of the experiment, Game B, was composed of a single-question lottery based on a modified Becker, DeGroot, Marschak (BDM) procedure (Becker et al., 1964) designed to elicit incentive compatible responses. This element of the experiment was played for real money. Prior to playing the Game B, subjects were reminded of their overall performance in Game A (their number of wins and losses, and the subsequent dollar total) and were told that the maximum amount of money that could have won during the first game was $25. Subjects were next asked the following question: If you had a chance to play all seven rounds of the gambling game over again, how much money would you need to win at the end of the seven rounds in order to be satisfied with the final result? Prior to providing their response, the way in which the lottery worked was explained to all subjects. First, each subject was asked to indicate their preferred dollar amount by keying it into their computer terminal. Then the computer program would randomly draw a number between 1 and 25. If the number drawn by the computer was equal to or greater than the amount specified by the subject, then the subject would win their stated dollar amount. If, however, the number drawn by the computer was less than the amount specified by the subject, then the subject would receive nothing. Thus, the higher the dollar amount selected by the subject, the lower their probability of winning the lottery. To help them fully understand the lottery, subjects were provided with two written examples of potential lottery outcomes with both a winning and a losing scenario described to each subject. Subjects were also given a single opportunity to practice the lottery question prior to playing the game for real money,2 which was paid to each subjectdepending upon their performance in the lotteryat the close of the experiment.

Downloaded by [American University Library] at 23:31 14 May 2012

Previous research (e.g., Bohm et al., 1997) has shown that the opportunity to practice a BDM-type questions increases the validity of the final result.

The Effect of Chronic Losses on Decision Making 1091 The practice and actual (i.e., real money) rounds of Game B were separated by a series of related intervening tasks. Here, subjects were asked to respond to a series of questions detailing gambles in an unrelated context (natural resource management). One question asked subjects to select their preferred plan for eradicating non-native species in a National Park. The other asked for their preferred option for reducing the risk of wildfires in state forests. For the question dealing with invasive species, subjects were asked to choose from a set of five options that differed in terms of their level of effectiveness and degree of certainty such that:

Downloaded by [American University Library] at 23:31 14 May 2012

N N N N N

Option 1, which is successful 100% of the time but only results in a 10% reduction in the number of non-native species; Option 2, which is successful 80% of the time but only results in a 12.5% reduction; Option 3, which is successful 50% of the time but only results in a 20% reduction; Option 4, which is successful 20% of the time but only results in a 50% reduction; and Option 5, which is successful only 10% of the time but eliminates all nonnative species.

The question that dealt with wildfire simply asked subjects to indicate their preference for how fire risks should be managed given the uncertain outcomes associated with many fire management strategies. Subjects responded on 7-point Likert scales where 15carry out risk management only if outcomes are certain, 45Carry out risk management even if outcomes are somewhat uncertain and 75Carry out risk management even if outcomes are extremely uncertain. The goal of these questions was to determine if the experience of chronic losses in one domain (i.e., financial gambles) effected choices in another, unrelated domain (i.e., resource management). The experiment ended with two closed-ended post-game questions with responses provided on 7-point Likert scales. These questions asked about subjects previous experience with respect to playing games of chance. One asked how often subjects played these games in their day-to-day lives (where 15never, 45sometimes, and 75often); the other asked subjects how much they enjoyed playing these kinds of games (where 15not at all, 45somewhat, and 75very much). Analysis Data collected during each element of the experiment was analyzed using either an analysis of variance (ANOVA) coupled with a Tukeys post hoc test (to test for significant differences between treatment groups for single measure items) or a repeated-measures ANOVA coupled with a Tukeys post hoc test (to test for significant differences within treatment groups for repeated measure items).

1092 Louie Rivers & Joseph Arvai Results Game A With respect to Game A, the mean number of rounds won among subjects in the CL condition (x51.14, se50.08) was significantly lower (repeated measures ANOVA with Tukeys post-test, p,0.001) than the mean number of rounds won by subjects in either the RO (x53.53, se50.14) or CW (x56.00, se50.09) treatment groups. Subjects in the CL treatment also ended Game A with a significantly (p,0.001) lower mean dollar total (x5$6.54, se5$0.46) compared with subjects in the RO (x5$12.13, se5$0.55) and CL (x5$16.95, se5$0.52) conditions. In terms of subjects affective responses to Game A, subjects in the CL treatment began by feeling relatively indifferent (x53.95, se50.18) but grew more frustrated as the game progressed through the 6th and 7th rounds. In contrast, subjects in both the RO (x55.02, se50.22) and CW (x55.46, se50.20) treatments felt relatively calm after the third round but then grew to feel relatively indifferent about it as the game progressed (Figure 2). The declines in all three groups were significant (repeated measures ANOVA with Tukeys post-test, p,0.001) as was the difference between the overall ratings of frustration (i.e., arousal) in the CL treatment as compared with either the RO or CW treatments. Similarly, subjects in each of the CL, RO, and CW treatments felt relatively indifferent about Game A after the third round; while subjects in the RO and CW treatments remained indifferent after the 6th and 7th rounds, subjects in the CL treatment began to feel increasingly bad about their performance in the game (Figure 2). While the observed withintreatment decline was not significant (repeated measures ANOVA with Tukeys post-test, p.0.05), the overall mean difference between the CL

Downloaded by [American University Library] at 23:31 14 May 2012

Figure 2. Affect ratings across two dimensions (valence and arousal) elicited from subjects in the chronic loss (CL), random outcome (RO), and chronic wins (CW) conditions following rounds 3, 6, and 7 of Game A.

The Effect of Chronic Losses on Decision Making 1093

Downloaded by [American University Library] at 23:31 14 May 2012

Figure 3. Subjects predicted outcomes following the rounds 3 and 6 of Game A. Responses were elicited on a 7-point Likert scale where 15Im sure that Ill lose, 45I dont know the outcome, and 75Im sure that Ill win.

(x53.33, se50.19) and both the RO (x54.09, se50.22) and CW (x54.46, se50.21) treatments was (repeated measures ANOVA with Tukeys posttest, p,0.001). With respect to subjects predictions about their performance during the future rounds of Game A (Figure 3), subjects in the CL treatment were generally pessimistic when compared with subjects in both the RO and CW treatments following the 3rd and 6th rounds of the game. While within treatment differences were not significant, the mean prediction in the CL treatment (x52.96, se50.13) was significantly lower than the predictions made by subjects in both the RO (x53.86, se50.15) and CW (x54.03, se50.14) treatments (repeated measures ANOVA with Tukeys post-test, p,0.001).

1094 Louie Rivers & Joseph Arvai Game B Lottery prices provided by subjects in the CL condition (x5$9.44, se5$0.55) were significantly lower than those provided by subjects in either the RO (x5$12.31, se5$0.60) or CW (x5$13.81, se5$0.57) treatments (single factor ANOVA with Tukeys post-test, p,0.001; Figure 4). Further analysis of the data, when it was split based on subjects responses to the post-game questions that dealt with how often and how much they enjoyed playing games of chance, revealed no significant within-treatment differences (2-sample t-test, p.0.05).
Downloaded by [American University Library] at 23:31 14 May 2012

Figure 4. Lottery prices provided during Game B by subjects in the chronic loss (CL), random outcome (RO), and chronic wins (CW) conditions.

The Effect of Chronic Losses on Decision Making 1095 Intervening Tasks and Post-test Questions Significant differences were not observed across the three treatment groups (single factor ANOVA with Tukeys post-test, p.0.05) with respect to their responses to the management questions that comprised the intervening tasks that dealt with the eradication of an invasive species (xCL52.78, se50.13; xRO53.23, se50.15; xCW53.06, se50.14) in National Parks and the reduction of risk from forest fires (xCL53.35, se50.15; xRO53.95, se50.14; xCW53.78, se50.14) in State Forests. Discussion
Downloaded by [American University Library] at 23:31 14 May 2012

Results from the experiment reported here suggest that chronic loss in comparison to either random outcomes or chronic wins has a unique effect on the decision making process. Subjects who were exposed to the chronic loss induction during Game A demonstrated a significantly higher level of risk aversion, as displayed by a tendency to accept less money in terms of their lottery selections during Game B and still consider it to be a satisfactory result than did subjects in either the RO or CW treatment (Figure 4). This case of lowered expectations displayed by subjects in the CL condition is analogous to the passive behavior predicted by learned helplessness (Peterson et al., 1993). Despite the fact that Game B was introduced as a new game coupled with the presentation of a real financial incentive play, subjects in the CL condition indicated, through their decisions during the modified BDM procedure, that they would be satisfied with receiving less money as a potential lottery payout when compared with their counterparts in the RO and CW conditions. Exit interviews with subjects suggest that these choices came as a result of their experiences of chronic loss during Game A. Subjects in the CL condition reported feeling a lack of connection between their choices during Game A and the resulting outcomes. These feelings of lost control over possible outcomes, which comes as a result of the loss induction, are a central feature of learned helplessness. In learned helplessness, the perceived lack of an apparent cause and effect relationship between an individuals actions and subsequent outcomes heightens ones sense of a lack of control surrounding their ability to do anything that would result in a positive outcome. Consequently, subjects who suffer from learned helplessness enter a depressed state that effects their subsequent judgments (Peterson et al., 1993). Subjects in our study were no different; during the exit interviews, many reported that these feeling were evoked during Game A and then carried over to influence their choices during Game B. Results from the experiment also suggest that these feelings associated with learned helplessness affected subjects during Game A. When asked to predict the outcome of future rounds of Game A, people who were subjected to chronic losses predicted additional losses in subsequent rounds when

1096 Louie Rivers & Joseph Arvai compared to the people who were subjected to random outcomes and chronic wins (Figure 3). Moreover, subjects in the CL treatment were characterized by a negative affective state when compared with subjects in the RO and CW treatments (Figure 2). The development of these negative affective states are common features of learned helplessness (Miller and Seligman, 1975; Seligman and Schulman, 1986) that effect, often negatively, the decision making process. Indeed, chronic losers noted that their predictions about their (poor) performance, and their feelings of frustration and badness influenced their subsequent decisions, during Game B, to accept less and still consider it a satisfactory result. The representativeness heuristic, by contrast, did not seem to play a role in the decisions (following chronic loss) made by subjects in the CL treatment. These subjects did not adjust their choices in Game B upward (relative to the choices made by subjects in the RO and CW treatments) as might have been the case if they believed according to the gamblers fallacy that their run of bad luck was about to end. It is much more difficult to determine if the results obtained in this experiment are in line with predictions that would be made according to prospect theory. It would appear, at first glance, that the choices made in Game B by subjects in the CL condition represent a violation of prospect theory. Faced with the prospect of repeated failures in Game A, which often resulted in the complete erosion of their original $12 endowment, subjects in the CL condition could be expected to make decisions that reflect a desire to take risks as a means of recovering their losses (Kahneman and Tversky, 1979). However, their choices (x5$9.44, se5$0.55) did not reflect the risk seeking behavior in the face of losses that is predicted by prospect theory; in fact, the choices made by these subjects was significantly more risk averse given the structure of Game B than those made by subjects in the two control conditions (xRO5$12.31, se5$0.60; xCW5$13.81, se5$0.57). Similarly, if CL subjects choices in Game B are compared with their final dollar totals in Game A (x5$6.54, se5$0.46), one could again argue that anticipated level of risk seeking behavior (to recover losses and return to a level that is at or very near their initial reference point of $12) is not observed. However, examination of the value function that describes prospect theory also shows that, in the domain of losses, the curve flattens as losses continue to accumulate; in other words, the value of accumulated losses begins to diminish with each successive loss over time. To this end, previous work exploring prospect theory (e.g., Tversky and Kahneman, 1992; Wakker and Tversky, 1993) has suggested that individuals who have experienced a significant loss in a given context cease to place increasing value on subsequent losses. With these large losses, individuals seem to develop a sense of numbness to additional losses in the same context. Though this previous work in the context of prospect theory did not explore chronic losses, it is conceivable that a similar effect would be observed in this

Downloaded by [American University Library] at 23:31 14 May 2012

The Effect of Chronic Losses on Decision Making 1097 case. Based on this interpretation, the results obtained from subjects in the CL condition would tend to support prospect theory. Of interest, however, is the fact that subjects responses in the CW condition do seem to fit with predictions associated with both prospect theory and the gamblers fallacy. In this case, subjects are adjusting their choices in Game B downward (x5$13.81, se5$0.57) relative to their winnings earned in Game A (x5$16.95, se5$0.52). These choices in Game B reflect a degree of risk aversion consistent with prospect theory (which predicts risk aversion in the gains domain of the value function; see Kahneman and Tversky, 1979) and the common belief consistent with the representativeness heuristic that their run of good luck is about to come to an end. These findings suggest, in part, that decision-making under conditions of chronic loss cannot simply be accounted for by assuming that the choices will be reciprocal in nature to those made under conditions of repeated gains. In addition to the theoretical implications of these results, this exploratory study begins to shed light on some of the unique practical challenges associated with decision making under conditions of chronic loss. There are numerous risk policy contexts that involve decision making under conditions where chronic losses are likely. One of the frequently discussed and poorly understood examples is that of adaptive management (Arvai et al., 2006; Gregory et al., 2006); here, the management of risks is regarded as a process of learning over time from policies designed to reduce uncertainty and improve managements ability to respond to inevitable environmental, social, or economic surprises. The implementation of adaptive management calls for carefully planned and monitored policy experiments, with replication and comparison of management treatments at appropriate spatial and temporal scales. Thus, risk management policies are not viewed as one-time decisions made on the basis of the best existing knowledge. Instead, adaptive management regards policy choices for complex environmental problems as part of a carefully planned, iterative, and sequential series of treatments that emphasizes monitoring and learning as the system changes, both in response to external stimuli and in response to the managers actions (Walters, 1986). But treating individual risk policies as experimental probes that must be compared under a strictly adaptive framework explicitly acknowledges that failures are to be anticipated. In the context of adaptive management, failures of management treatments are an important observation and even re-coded as successes insofar as they provide opportunities for learning, reducing uncertainty, and improving future outcomes in a managed system. This double-edged sword of successful failures has served as an institutional, political, and emotional barrier to the implementation of adaptive management (Lee, 1993). The research reported here suggests that, beyond these types of barriers, the likelihood of consecutive policy failures (i.e., chronic losses) can lead to significant cognitive and judgmental difficulties. A run of consecutive failures within an adaptive management

Downloaded by [American University Library] at 23:31 14 May 2012

1098 Louie Rivers & Joseph Arvai framework may result in an unnecessarily high level of risk aversion and a lower threshold for what constitutes a satisfactory result, both of which can be problematic when ambitious risk management action is called for. There is also the example that opened this paper: chronic losses in minority and marginalized communities. Unlike Susan Lucci who finally won her Daytime Emmy Award in 1999 and the Prairie View A&M Panthers who snapped their 80 game losing streak also in 1999 there is often no such happy ending in many minority and marginalized communities. In the case of African American farmers, for example, chronic losses have resulted in a sharp decline in their numbers. In 1920, 1 in every 7 farmers was Black; by 1994, less than 1 in every 100 farmers was Black. Unfortunately, there are many other examples. In America, continually declining living conditions in many urban areas and the loss of many social services (e.g., affordable housing, access to healthcare, community services such as libraries and recreation centers) has resulted in a tangible sense of chronic loss among members of minority and marginalized communities. Abroad, nearly one billion people live under conditions that fit the definition of extreme poverty (i.e., living on less than $1 US dollar per day). Despite these conditions, losses in these areas continue to mount as people are deprived of food, clean water, critical foreign aid, and often, a safe place to live. How do these mounting losses in a real-world context affect peoples decisions? If the results from the experiment reported here are used as a guide, chronic losses will for many lead to a negative affective state, a growing sense of pessimism and frustration, risk aversion, and a sense of satisfaction with choices that offer only relatively minor improvements in welfare. It is worth noting, however, that the extent to which these factors will either worsen or perhaps improve (i.e., risk aversion isnt a bad thing when one risks losing everything) peoples long-term quality of life in the real world is largely unknown. As is often the case with exploratory studies of this type, more research both experimental and observational is necessary. But alongside this research, we also believe that risk practitioners and policy makers who work with real people and real problems must recognize that chronic loss will likely bring with it a unique set of challenges and, as a result, support in the form of specialized risk communication and decision aiding strategies will likely be necessary. Acknowledgments This research was supported by the National Science Foundation under grant numbers SES-0519551 and SES-0350777. Any opinions, findings, and conclusions or recommendations expressed in this publication are those of the authors and do not necessarily reflect the views of the sponsors. The research reported here benefited from the comments and insights of Melissa Finucane, Robyn Wilson, Hal Arkes, and Paul Slovic.

Downloaded by [American University Library] at 23:31 14 May 2012

The Effect of Chronic Losses on Decision Making 1099 References

Arvai, J. L., Bridge, G., Dolsak, N., Franzese, R., Koontz, T., Luginbuhl, A., Robbins, P., Richards, K., Smith Korfmacher, K., Sohngen, B., Tansey, J. and Thompson, A. (2006) Adaptive management of the global climate problem: Bridging the gap between climate research and climate policy, Climatic Change, 78, pp. 217225. Becker, G. M., DeGroot, M. H. and Marschak, J. (1964) Measuring utility by a single-response sequential method, Behavioral Science, 9, pp. 226232. Bohm, P., Linden, J. and Sonnegard, J. (1997) Eliciting reservation prices: Becker-DeGroot-Marschak mechanism vs. markets, The Economic Journal, 107, pp. 10791089. Cozzetto, D. A. and Larocque, B. W. (1996) Compulsive gambling in the Indian community: A North Dakota case study, American Indian Culture and Research, 20, pp. 7386. Croson, R. and Sundali, J. (2005) The gamblers fallacy and the hot hand: Empirical data from casinos, Journal of Risk and Uncertainty, 30, pp. 195209. Gregory, R., Ohlson, D. and Arvai, J. L. (2006) Deconstructing adaptive management: Criteria for applications to environmental management, Ecological Applications, 16, pp. 24112425. Hardy, D. J., Hinkin, C. H., Levine, A. J., Castellon, S. A. and Lam, M. N. (2006) Risky decision making assessed with the gambling task in adults with HIV, Neuropsychology, 20, pp. 355360. Kahneman, D. and Tversky, A. (1979) Prospect theory: An analysis of decision under risk, Econometrica, 47, pp. 263291. Lee, K. N. (1993) Compass and Gyroscope: Integrating Science and Politics for the Environment (Washington, DC: Island Press). Lesieur, H. R. (1979) The compulsive gamblers spiral of options and involvement, Psychiatry, 42, pp. 7987. Lesieur, H. R. (1998) Costs and treatment of pathological gambling, Annals of the American Academy of Political and Social Science, 556, pp. 153171. Mikulincer, M. (1994) Human Learned Helplessness (New York: Plenum Press). Miller, W. R. and Seligman, M. E. P. (1975) Depression and learned helplessness in man, Journal of Abnormal Psychology, 84, pp. 228238. Peterson, C., Maier, S. T. and Seligman, E. P. (1993) Learned Helplessness: A Theory for the Age of Personal Control (New York: Oxford University Press). Ranyard, R. and Charlton, J. P. (2006) Cognitive processes underlying lottery and sports gambling decisions: The role of stated probabilities and background knowledge, European Journal of Cognitive Psychology, 18, pp. 234254. Seligman, M. E. P. and Schulman, P. (1986) Explanatory style as a predictor of productivity and quitting among life insurance sales agents, Journal of Personality and Social Psychology, 50, pp. 832838. Tversky, A. and Kahneman, D. (1971) Belief in the law of small numbers, Psychological Bulletin, 76, pp. 105110. Tversky, A. and Kahneman, D. (1992) Advances in prospect theory: Cumulative representation of uncertainty, Journal of Risk and Uncertainty, 5, pp. 297323. Wakker, P. and Tversky, A. (1993) An axiomatization of cumulative prospect theory, Journal of Risk and Uncertainty, 7, pp. 147176. Walters, C. J. (1986) Adaptive Management of Renewable Resources (Caldwell, NJ: The Blackburn Press). Wood, S. D. and Gilbert, J. (2000) Returning African American farmers to the land: Recent trends and a policy rationale, Review of Black Political Economy, 27, pp. 4364.

Downloaded by [American University Library] at 23:31 14 May 2012