Decisions under Risk

Dongil Chung, PhD

Department of Biomedical Engineering
UNIST
 How to Estimate Parameters

Data Model Fitting

1 u(vi) = vi rho 1

EU = p1 u(v1) + p2 u(v2)
P(A)

P(A)
P(A) = 1
0 1 + exp(–beta { EUA - EUB }) 0
EV(A) – EV(B) EV(A) – EV(B)

1. Get behavioral choices; P(A)true

2. If rho = XXXX, beta = YYYY (e.g., rho = 0.1, beta = 0.1)
3. Calculate P(A) given those parameters; P(A)hat
4. See how well the P(A)hat matches with P(A)true; the “fit” is calculated with MSE, LL, AIC, BIC, etc.
5. Repeat 2-4
6. Parameters those give the best fit are chosen

See Chapter 4!

2
Another way to measure risk
preference
• Risk aversion = valuing option that has risk less than the one that
does not have risk
• Mean-Variance approach
• Originated from the fields of Finance

Variance (VAR): 2nd moment of a

distribution

Mean (EV): 1st moment of a distribution

3
Another way to measure risk
preference
• Risk aversion = valuing option that has risk less than the one that
does not have risk
• Mean-Variance approach
• Originated from Finance
$5
• Willingness-to-pay (WTP) = EV – alpha x VAR $2.5

$0
• “– alpha x VAR” is a disutility for the existing risk

• alpha > 0: risk-aversion $5

• alpha = 0: risk-neutral $0
• alpha < 0: risk-seeking

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 Two Methods Provide Consistent
Parameters

Risk seeking

[Rho] from Power-utility

EV = Σ pi vi
VAR = Σ pi (vi – EV)2
u(vi) = vi rho = p1 (1-p1) (v1-v2)2
r = 0.97
EU = Σ pi u(vi) P = 3.70e-59 EU = EV - alpha VAR

Risk seeking
[-Alpha] from Mean-Variance
* Note that the sign of alpha
is FLIPPED here
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Normalized Risk

• Variability in outcomes is perceived relative to average returns

• e.g., s.t.d. = ±$100 for the gamble with EV=$50 vs EV=$1,000,000

• Coefficient of variation (CV) = s.t.d(x) / EV(x) $5 $500

$0 $0

Variance = (s.t.d.) 2
s.t.d. = standard deviation

6
 Different forms of utility functions

U(V2)
subjective value

U(EV)

EU

U(V1) Risk premium

$V1 CE EV $V2
objective value

CE = certainty equivalent

EU = [ U(V1) + U(V2) ]/2

Risk premium = The difference between “EV” and the “corresponding objective value of the EU (CE)”

7
What if gamble information was
partially covered

$5
$5

$0
$0

9
 Ellsberg Paradox

30
or 60

A1: Win $100 if you draw a red ball

B1: Win $100 if you draw a black ball

If you chose A1, the choice represents that you thought Red is more likely to occur than Black.
If so, between A2 and B2, Red+Blue should be more likely to occur compared to Black+Blue.

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Ellsberg Paradox

30
or 60

A2: Win $100 if you draw a red or blue ball

B2: Win $100 if you draw a black or blue ball

If you chose A1, the choice represents that you thought Red is more likely to occur than Black.
If so, between A2 and B2, Red+Blue should be more likely to occur compared to Black+Blue.

11
 Ellsberg Paradox

30
or 60

A1: Win $100 if you draw a red ball A2: Win $100 if you draw a red or blue ball
B1: Win $100 if you draw a black ball B2: Win $100 if you draw a black or blue ball

If you chose A1, the choice represents that you thought Red is more likely to occur than Black.
If so, between A2 and B2, Red+Blue should be more likely to occur compared to Black+Blue.

12
How to model subjective valuation of
ambiguous gambles

Probability p $5
$5
A
1-p $0
$0

Revealed preference: Choosing ‘risky’ gamble over ‘ambiguous’ gamble

Utilityrisk > Utilityambiguity

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How to model subjective valuation of
ambiguous gambles

Probability p $5
$5
A/2
A
1-p $0
$0

Utilityrisk > Utilityambiguity

Utilityambiguity = (p V1 rho) – A/2 x ß x V1 rho

Utilityrisk = p x V1 rho Utilityambiguity = (p – A/2 x ß) x V1 rho

ß: ambiguity aversion
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 Allais Paradox

Between 1A and 1B, which one do you prefer?

15
 Allais Paradox

Between 1A and 1B, which one do you prefer? How about Between 2A and 2B?

16
Allais Paradox

Certainty effect

17
Descriptive Modifications:
Prospect Theory
• Introducing a transformation relating objective probabilities to
subjective probabilities

• Defining outcomes on gains and losses relative to a dynamic reference

point

• Allowing losses to have a different mapping into value than that of

gains

18
Probability Weighting Function

• Introducing a transformation relating objective probabilities to subjective

probabilities
EU = Σ p u(v) à EU = Σ w(p) u(v)

Underweight high probabilities

Overweight low probabilities

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 Concavity for Gains &
Convexity for Losses

$26.5 $1.3
$5
$7.50
$25.2 $10
$55.3
Subjective value

A B

Objective value

$26.5 –$1.3
$5
– $7.50
$25.2 –$55.3
$10

A B 20
Question: would you choose to play the
gamble (left option)?

+12 –12 vs 0

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Question: would you choose to play the
gamble (left option)?

+12 –6 vs 0

+12 –8 vs 0

ß Indifferent point (somewhere around here?)

+12 –10 vs 0 Individuals may be more sensitive to losses (-$8)
compared with gains ($12):
e.g., Ratio = 12/8 = 1.5

+12 –12 vs 0

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 Concavity for Gains &
Convexity for Losses

• If v > 0, U(v) = v rho_gain $26.5 $1.3

$5
$7.50
• If v < 0, U(v) = – λ (–v) rho_loss $25.2 $10
$55.3

rho: risk preference (curvature)

λ: loss-aversion
A B

$26.5 –$1.3
$5
– $7.50
$25.2 –$55.3
$10

A B 23
Heuristic Models

• Examples:
• To calculate the differences in payoffs
• To make a series of comparisons (e.g., which gamble has the biggest and
most likely outcome)
• To intentionally ignore (or simplify) available information

$26.5
$25.2 $1.3 $26.5
$29.50 $1.3

$26
$25.2 $55.3 $25.2
$30.50 $55.3

$55.3 vs 26, $1.3 vs 25.2 $26.5 $1.3

$5
$7.50
$30
Most likely: $1.3 vs 25.2 $25.2 $10
$55.3

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Neural Substrates of Risk

• Neural instantiations of …

• Chosen vs Unchosen options

• Outcome values
$26.5
$25.2 $1.3
• Outcome expectation
• Probability $26
$25.2 $55.3

• Risk in variance
• Coefficient of variation • Choice?

• Expected values
• Expected utilities
• Individuals’ risk attitudes

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 Voxels

https://depositphotos.com/68375965/stock-photo-voxel-human-brain-3d-render.html
http://miykael.github.io/nipype-beginner-s-guide/neuroimaging.html
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How do we measure?

(Christopoulos et al., 2009)

y ~ X x beta +e
Blood Oxygen Design Matrix
Level Dependent (BOLD) signal

27
How do we measure?
Simple Contrast
(Christopoulos et al., 2009)

y ~ X x beta +e
Low vs High risk trials

28
 Brain Responds to Events

Neural response

Event

Hemodynamic response function:

29
Event-Related Design & Contrast

= betapepper
+
betachocolate

30
Mass-univariate analysis: voxel-wise GLM
1 p 1 1
y = Xb + e
b
p e ~ N (0, s I ) 2

y ! X " e !"#$%&'(&()$*'+'$#&,-
./ 0$('12&3456'7&X
8/ 9((:3)5'"2(&4,":5&e

;<&2:3,$6&"+&(*42(
)<&2:3,$6&"+&
N N N 6$16$(("6(

=>$&#$('12&3456'7&$3,"#'$(&4%%&4?4'%4,%$&@2"A%$#1$&4,":5&
$7)$6'3$254%%-&*"256"%%$#&+4*5"6(&42#&)"5$25'4%&*"2+":2#(/
General linear model
General linear model
 Contrast Analyses Require Simple
Comparisons
• Test based on psychological hypotheses

Beta estimates
Option A Option B
(beta estimates)
Signal strength

Canonical ‘Hemodynamic response function’

Time

34
 Brain Responses Related to Risk

(Christopoulos et al., 2009)

Task:
dACC; dorsal anterior cingulate cortex

Choice of high risk > Choice of low risk

* BOLD responses at onset of the stimuli

* No-choice trials: participants were instructed to select a particular option

35
 Brain encodes value

Neural response

$5 $10 $15 Event

Parametric modulation

36
Brain Responses Related to Value (utility)

(Christopoulos et al., 2009)

Ventral striatum

Activity low risk, safe – Activity high risk, safe vs ‘two CE’

* BOLD responses at onset of the stimuli

* No-choice trials: participants were instructed to select a particular option

37
 Individual differences as a function of
risk preference; Regression
(Christopoulos et al., 2009)
U(V2)
subjective value

EU

U(V1)

$V1 CE EV $V2
objective value

CE = certainty equivalent

Inferior frontal gyrus

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 Neural Responses to Ambiguity vs Risk

Ambiguity > Risk >

Risk Ambiguity

Choosing a color to bet: $10 if Choosing a color to bet: $10 if the opponent picks different
win, $0 otherwise color, $0 otherwise (Hsu et al., 2005)

* Two regressors were used for each treatment; one for ambiguity trials and one for risky trials
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