Rietz, Berg Discuss Risky Decisions and Rewards
Have you ever really thought about what drives the decisions you make? Do you go after what you truly value or do you settle for less?
Many things in life feel like a gamble. That's because most things have a certain amount of reward associated with the risk.
For instance, you take a risk going to college, hoping that investment will land you a good job, or playing the lottery, or paying for insurance in case your house burns down. Each decision has a certain return on investment.
Your head may be spinning over what feels like a constant guessing game: 'Am I making the right decisions?'.
"What we're really trying to understand at a basic level is how people make choices. Of course, in the business school, what we're trying to do is help people make better choices," says Thomas Rietz, finance professor at the University of Iowa.
That's why reserachers at the university's business school have pioneered studies about our economic decisions, like the study we call, "The Money Game."
Researchers pose two scenarios—high- and low-risk options—and ask participants how valuable each option was: a low-risk, low reward choice or high-risk, high reward choice.
"They'll say when they're looking at two choices, 'I prefer the less risky choice,' but when they're asked to price things, 'I'm going to price the more risky choice higher,'" says Joyce Berg, professor of economics and accounting.
For example, in one circle, you have a 25 percent chance to win $40, but there's a 75 percent chance you'll win nothing.
The opposite is a second, less-risky choice, where you have about a 10 percent chance of winning $14 overwhelming odds you'll win $15; either way, you're going home with something.
Most people choose the less-risky choice, but when asked, they assign a higher value to the more risky one.
Why would anyone choose an option they say has less value? Those trends changed when cold, hard cash was added to the game.
"We see pretty good decision-making, by and large, in situations where there's real money at stake," Rietz says.
When money was added, people's decisions made more sense: high-risk people valued the high risk choice, and low-risk people valued the low risk choice.
"When we add incentives into the situation, like you have when you go into the store to but a TV, what we see is that people are more consistent. They say they like something better; they're willing to pay more for it," Berg says.
So the next time you're sitting in life's casino wondering whether to gamble, the research shows you can't go wrong if you consistently place your chips on what matters most to you.
Luckily, there's no luck involved. The concept is supposed to come naturally.
"People do incredibly sophisticated economic tradeoffs when they look at choices they make about their careers, retirement savings and things," Rietz says.