Translation of Gambles and Aspiration Level Effects in Risky Choice Behavior

Two recent models of risky decision making developed by Fishburn (Fishbijrn, P. C. 1977. Mean-risk analysis with risk associated with below-target returns. Amer. Econ. Rev. 67 116--126.) and by Kahneman and Tversky (Kahneman, D., A. Tversky. 1979. Prospect theory: an analysis of decisions under risk. Econometrica 47 262--291.) have emphasized the importance of a target return or a reference point in determining preferences and choices among gambles. Target returns and reference points represent variations on the concept of an aspiration level, an old idea in theories of decision making. Additional evidence on the need to incorporate such a concept in the analysis of risky choice behavior is presented in this paper. In three experiments, the relationship of pairs of gambles to an assumed reference point was varied by adding or subtracting a constant amount from all outcomes. The results demonstrate that such translations of outcomes can result in the reversal of choice within pairs of gambles. The effect of such translations on choice depended on whether the size of the translation was sufficient to insure that one gamble in a pair had outcome values either all above or all below the reference point, while the other gamble had outcome values both above and below the reference point. A model of the effects of a reference point on risky choice behavior is presented and the results are also discussed in terms of the Fishburn and Kahneman-Tversky models, as well as other theories of risky decision making.