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A Pedagogical Note on Risk Framing

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  • Michael M. Barth
  • John J. Hatem
  • Bill Z. Yang

Abstract

This article presents several classroom games that help illustrate the effect of risk framing on choices under uncertainty. These games are presented in the context of Kahneman and Tversky's prospect theory that is an alternative to the traditional expected utility theory. Expected utility theory is a prescriptive model of decision making that explains how people should react to risk, while prospect theory is a descriptive model that explains how people actually do react to risk. These classroom games can be used in introductory risk management courses, insurance courses, and financial risk management courses to help students to understand the effect of context on choices made under uncertainty. Although results from actual classroom experiments are included, these results are not meant to be indicative of normal results but are rather illustrative of the type of results that may arise when alternative framing contexts are used.

Suggested Citation

  • Michael M. Barth & John J. Hatem & Bill Z. Yang, 2004. "A Pedagogical Note on Risk Framing," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 7(2), pages 151-164, September.
    • Handle: RePEc:bla:rmgtin:v:7:y:2004:i:2:p:151-164
    DOI: j.1098-1616.2004.00042.x
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    File URL: https://doi.org/10.1111/j.1098-1616.2004.00042.x
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    References listed on IDEAS

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    1. John C. Hershey & Howard C. Kunreuther & Paul J. H. Schoemaker, 1982. "Sources of Bias in Assessment Procedures for Utility Functions," Management Science, INFORMS, vol. 28(8), pages 936-954, August.
    2. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    3. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1039-1061.
    4. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56(4), pages 279-279.
    5. Richard E. Stewart & Barbara D. Stewart, 2001. "The Loss of the Certainty Effect," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 4(2), pages 29-49, September.
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    Cited by:

    1. John Garvey & Patrick Buckley, 2011. "Using Technology to Encourage Critical Thinking and Optimal Decision Making in Risk Management Education," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 14(2), pages 299-309, September.
    2. Kevin C. Ahlgrim & James R. Jones, 2014. "Insurance Rating Games: Strikes, Spares, and Bags," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 17(2), pages 297-313, September.

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