The role of curiosity in economic decision making : differences for men and women

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University of Amsterdam

The role of curiosity in economic

decision making

Differences for men and women

By: Josine Janssen

10004673

Supervisor: Simin He

Date: 30/06/2014

Abstract

Faculty of Economics and Business

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In this paper the emphasis is on the visceral factor curiosity. It is discussed if there is gender difference in the influence of curiosity in the decision making process. An economic experiment is conducted to test whether this gender difference exist. No significant results based on gender differences are found during the experiment. However, there is significant result in relation between curiosity and the choice individuals make. The more curious one is, the more likely one will choose for the unknown object. It is interesting to do extended experiments about this correlation.

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Preface

I was inspired by a Dutch book, it is called Rondom Tan vrouwen, written by Humberto Tan. Henriette Prast, the professor of personal financial planning at Tilburg University, is one of the 10 women being interviewed by Humberto Tan. Her expertise is behavioral economics and its policy implications. She mentioned a research about the behavior of people when mentioning what other people did. The research was about using towels in a hotel. When they asked the people using a towel twice in favor for the environment, no significant change was observed. When they informed people in the hotel that 75% of the guests used their towel twice, there was a huge reduction in the daily use of “new” towels. These people used their towel twice just like “the other 75%”. This is one of many examples she discussed. But this example fascinated me, I was surprised and I guess that it would have worked for me as well.

I’m interested in the decision making of people, especially in the behavior why they make their decisions. That is the main reason why I want to write my thesis about behavioral economics. Behavioral economics is based on enormous aspects. The most familiar aspect is risk aversion. In short, risk aversion is about people that are afraid to lose and prefer a safe choice. There are many studies on risk aversion that take a close look at what influence this risk attitude. I want to do something different. I read some papers about behavioral economics and found another aspect, namely curiosity. I enjoyed this aspect right away because for me curiosity plays an important role in decision making. For example trying a new product, visiting a new restaurant or exploring a new country on vacation.

I want to take a close look at the role of curiosity in economic decision making. There is a considerably amount of literature about the meaning of curiosity. In this study I focus on curiosity as the desire to know. Furthermore, I am also interested in the influence of curiosity between genders.

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Chapter 1: Introduction

What is the influence of curiosity in decision making of individuals? Within this research I want to explore the difference between male and female in the influence of curiosity. Previous research by Zeelenberg and van Dijk (2006), tested curiosity based on the information gap theory. The information gap theory is about the gap in someone’s knowledge. Loewenstein (1994) argued that the more we know the more we want to know. Zeelenberg and van Dijk (2006) tested the difference in choice with additional information about the content and without any information about the content. The subjects have to choose between €15 or a sealed package. In the first experiment people didn’t receive additional information. Of the 30 participants, 10 participants chose the sealed package. In the second experiment, with additional information about the box, 20 out of 30 participants chose the sealed package. They observed difference significant based on the information gap theory. (Zeelenberg & van Dijk, 2006).

Recently behavioural economists identified psychological and emotional factors that influence the economic decision making process (Camerer & Loewenstein, 2005). Loewenstein (1996) found out a new visceral factor, namely curiosity. In this paper the focus is on the role of curiosity in economic decision making and the difference between men and women. To investigate in the drive behind their choice, the motivation of their choice is asked. An economic experiment is conducted to test the influence of curiosity in decision making. This experiment will be explained in chapter 3.

First, in Chapter 2, the literature review, theories and all relevant studies will be discussed. In Chapter 3, the experimental design, hypothesis and procedure will be discussed. In Chapter 4, the data and the results of the experiment will be analysed. In chapter 5 the discussion of this paper is discussed and after the discussion a conclusion will follow.

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Chapter 2: Literature review

2.1: Descriptive model of decision making: Expected Utility theory

2.1.1: What is the Expected Utility theory?

Human decision making is hard to predict. Expected Utility theory is one of the theories trying to investigate in human decision making. For the analysis of the process of decision making, the Expected Utility Theory is generally accepted as a normative model of rational choice (Keeney & Raiffa, 1976). Furthermore this theory is commonly applied as a descriptive model of economic behaviour (Schoemaker, 1982).

2.1.2: Purposes of the Expected Utility function

There are essentially two approaches for modelling human decision making, either the outcome oriented approach or the process oriented approach (Zeleny, 1982).

For the outcome oriented approach, the essence of this approach is the correct prediction of the decision outcome. If the prediction of the outcome is correct than the decision process is obviously known. This analysis is called a normative decision analysis. Normative decision analysis is an analysis that tries to capture how “ideal” people might behave (Bell et al., 1988). The concern of focusing on “ideal” people is overlooking cognitive worries of real people. They might face anxiety, regret, a shift in their values or other real life movements.

For the process oriented approach the centre of this approach is the understanding of the decision process. If the understanding of the process is correct, you will be able to correctly predict the outcome. This approach is basically descriptive, which means it describes how people think, why people think and why they act the way they do (Bell et al., 1988). Occasionally descriptive analysis may include mathematical modelling and sophisticated statistical analysis. This analysis is highly empirical. However, this approach includes prescriptive and normative features as well (Zeleny, 1982). Prescriptive analysis focusses on the “real” people in contrast to the normative analysis which focusses on “ideal” people.

2.1.3: The origin of the Expected Utility function

The origin of the expected utility theory begins with the mathematical form of this theory. As Schoemaker (1982) mentioned in his paper “The mathematical form of expected utility theory goes back as far as Gabriel Cramer (1728) and Daniel Bernoulli (1738), who sought to

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explain the so-called Petersburg paradox.” They discuss the results of an experiment with an infinitely monetary expected outcome. Bernoulli suggests that people maximize their expected utility instead of maximizing the expected monetary value (Schoemaker 1982).

2.1.4: Limitations of the Expected Utility theory

Many studies demonstrate predictive failures of the expected utility theory in simple situations in which participants of the experiment can earn money dependent on their choices. (Camerer & Loewenstein, 2005). Several alternative theories try to explain violations of the expected utility theory. Kahneman and Tversky (1979) composed a paper which presents a critique of the expected utility theory and developed an alternative theory, so-called prospect theory. (Kahneman & Tversky, 1979)

2.2: An analysis of decision making under risk: Prospect theory

2.2.1 what is prospect theory?

The prospect theory is an alternative theory for modelling human decision making. The prospect theory represents a great improvement over the expected utility theory. Many violations of the expected utility theory could be clarified by the prospect theory (Plous, 1993).

2.2.2 The origin of the prospect theory

“Prospect theory was developed by Daniel Kahneman and Amos Tversky (1979), and it differs from expected utility theory in a number of important respects” (Plous 1993, p.95). Kahneman and Tversky (1979) found significant evidence for certain effects, they divide these effects into 3 effects: certainty effect, reflection effect and the isolation effect. To compensate for those violations of the expected utility theory, Kahneman and Tversky (1979) developed the so called prospect theory. In this theory they incorporate their findings.

2.1.3: Limitations of the prospect theory

The reflection effect is the effect of a reversed outcome in the experiment, a gain is replaced by loss (Kahneman & Tverksy, 1979). Hershey and Schoemaker (1980) discusses the shape of the value function and the probability weighting function. Significant evidence implies a discussion of the shape of the value function (Hershey and Schoemaker, 1980).

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2.3: Risk & Ambiguity

2.3.1: description

A gamble with a known payoff and clear probability distribution is called “risky” (Ellsberg, 1961). In contrast, a gamble with a known payoff and not a clear probability distribution is called “ambiguous” (Smith et al., 2002). For instance, this is the change picking a black ball from an urn with an unknown proportion of red and black balls.

2.3.2: The relation between risk & ambiguity

Risk and ambiguity are distinctive factors. For risk, psychological processes are related to it, in contrast to ambiguity. Therefore risk aversion and ambiguity aversion differ from each other (Borghans et al., 2009)

2.3.3: Discovered by who & how?

Daniel Ellsberg (1961) revealed how ambiguity could influence a decision making process. Subjects often prefer a bet with known probabilities. Numerous researchers empirically tested Ellsberg’s hypothesis and found significant results for this hypothesis. The researchers Slovic and Tversky (1974) and MacCrimmon and Larsson (1979) found significant evidence for Ellsberg’s hypothesis. Becker and Brownson (1964) tested and confirmed to extensions to Ellsberg’s hypothesis.

2.4: Curiosity as factor in decision making

2.4.1: why could this be a factor?

People might act differently to what they expect based on their self-interest. They might feel being out of control. Loewenstein (1996) calls this a visceral factor. A visceral factor differs from emotions in several ways. Emotions are triggered by beliefs, felt to a person or circumstance and emotions are accompanied by hormonal changes (Loewenstein, 1996). A visceral factor could be the driving force for having the desire to buy a product. (Thomas et al., 2011). Due to the fact that this factor has an unexpected effect on behaviour, the effects of a visceral factor are often underestimated. Curiosity, “the desire to know”, is a visceral factor (Loewenstein, 1994). This desire could lead to behaviour going against the best interest of the person.

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2.4.3: Earlier experiments

Zeelenberg and van Dijk (2006), tested curiosity based on the information gap theory. The information gap theory is about the gap in someone’s knowledge. Loewenstein (1994) argued that the more we know the more we want to know. They tested the difference in choice with additional information about the content and without any information about the content. They found significant differences based on the information gap theory (Zeelenberg & van Dijk, 2006).

In this paper the focus is purely on curiosity, to check whether it is only curiosity that influences the decision making. Participants are asked to give their motivation about the choice they make. In the experiment the value of the content is the same as the other choice, €3. Zeelenberg and van Dijk (2006), didn’t give additional information about the value of the content inside the box. Further focus is on difference between genders.

2.5: Gender differences in decision making, due to different preferences

Croson and Gneezy (2009) review experimental evidence about preferences and their difference between gender. They focus on three factors: risk preferences, social preferences and reaction to competition.

Risk preferences differs between gender. Many studies discovered women being more risk averse than men. Economist as well as psychologists report the same result in their experiments. There is significant gender difference in risk aversion in a variety of tasks (Croson & Gneezy, 2009). This significant gender difference in risk aversion is due to several factors. One of the explanation for this difference is the emotional reaction of a risky situation. Previous studies illustrate women experiencing emotions stronger than men. (Harshman & Paivio, 1987). Another explanation, for gender difference in risky situations, is based on overconfidence. Both men and women are regularly overconfident, in general men are more overconfident about their success in an uncertain situation compared to women (Lundeberg et al., 1994). One more explanation is in the interpretation a risky situation. Men interpret a risky situation as a challenge, which ask them to participate in it. Women interpret a risky situation as a threat, which ask them to avoid this situation (Arch, 1993).

For social preferences, women’s behaviour depends on the context. Women are more sensitive for the design of an experiment, setting, other participants and teamwork (Croson & Gneezy, 2009). They might act different if they have to work with a man or a woman for

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example.

In reaction to competition a significant gender difference is discovered. Men’s performance improve when competition is involved. Gneezy et al (2003) asked men and women to solve a maze, on a computer, in 15 minutes. They did the experiment in two designs. In the first design the pay-off was based on their performance. In the second design the pay-off only the winner of all participants was being paid. In the first design, men performed slightly better, not significant. In the second design men’s performance increased significant, while women’s performance statistically remains the same.

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Chapter 3: Experimental Design

3.1 Design

The experiment aims at testing how curiosity influences the decision, with the emphasis on the difference between genders. The experiment takes place in an experimental environment on the University of Amsterdam. This is due to the fact that in an experimental environment the subjects could be controlled, contrarily to an experiment via internet (Anderhub et al., 2001). This way decisions made by a group, instead of individually, are excluded. Moreover it is ensured that participants participate seriously.

Unaccompanied students are approached to make sure that they make a decision on their own. This implies that there is no “group influence”. If a group of friends participate in an experiment. The rest might find out what the experiment is about. Further, with the group comes group influence. In laboratory research the effect of the group turned out to be as a negative influence for the individual’s decision. It is shown that the group limit, constrain and distort the individual response (Milgram, 1965).

The decision they have to make is a real decision Many studies debate about real versus hypothetically decision situations (Kühberger et al., 2002). Kühberger et al, show a difference in outcome for hypothetical and real decision making experiment. This experiment is a real decision making experiment.

3.2: Hypothesis

Hypothesis 1: Women chose the €3 more often than men.

Many studies discovered women being more risk averse than men. Economist as well as psychologists report the same result in their experiments. There is significant gender difference in risk aversion in a variety of tasks (Croson & Gneezy, 2009). Considering the box as a risky decision and the €3 as safe decision.

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3.3 Procedure

In total 40 participants participate in the experiment at the University of Amsterdam. All participants are students. The field of study differs across the students. The composition of the test group exists of 20 men and 20 women on purpose. The average age of the test group is 23.35. In this experiment a subject choose between €3 or a box with an unknown object with a market value round €3. It has to be confidential what the object is inside the box. After their choice, the subjects are asked to give a short explanation for their choice. I did not expect that curiosity would be the factor. Therefore I conducted this experiment including a question about their motivation to find out the real factor that influenced their decision. Is it curiosity or is there another reason?

The last question on the questionnaire is about curiosity they experience in their lives. The subjects need to give themselves a mark for curiosity on a scale 1 to 7. The scale is designed that 1 represents no curiosity at all and 7 really curious. In the middle of this scale 4 represent the neutral choice.

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3.3.1 Instructions for participant

The participant receives a printed instruction with a questionnaire on the back of the instructions. The instructions are as followed:

Thank you for participating in today's experiment. Please read the following instructions carefully.

This experiment will take about 5 minutes including decision making and a short

questionnaire. Please do not talk with other people during the experiment. The payoff of this experiment depends on your choice.

There is a box and €3 in front of you. There is an unknown object inside the box. You can choose between €3 or the box. The market value of the object inside the box is around €3.

Please indicate your choice (€3 or the box):

After you make your decision, you can take either the €3 or the box with you. If you choose the €3, you will leave the experiment without learning any information of the object. If you choose the box, you can open the box and take the object with you.

Finally, please take you time to answer the short questionnaire. Your answers will remain confidential.

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3.3.2 Questionnaire for participant

1: Age:______years 2: Gender: Female/Male 3: Field of study:

4: Please describe briefly why you chose for: The €3:

The box:

5: Curiosity, the gap between what we know and what we want to know. What mark will you give your curiosity?

Not curious Neutral Curious

1 2 3 4 5 6 7

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Chapter 4: Data and results

In this chapter the data, obtained via the economic decision making experiment, is analysed and the results are reviewed. First we will emphasize on the effect of curiosity, in the choice the subjects made. After this analysis we discuss the comparison between men and women and their choice.

4.1: Data

The table below give a summary of the data observed during the experiment. A total of 40 subjects participate in the experiment, 65% of the participants choose the box. The other 35% choose the amount of money, €3.

Background Box € 3 Total

Participants # of participants 26 14 40 Gender # male 13 7 20 # female 13 7 20 Age Average age 24.04 22.08 23.06 Curiosity mark

Average curiosity mark 5.85 5.14 5.5

Field of study

# Economics 13 10 23

# Social science 9 3 12

# other 4 1 5

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4.2: Results

4.2.1: Aggregate results

Focusing on the choice, you see a difference in the mark of curiosity. The average mark of curiosity of the people who choose the box is 5.85, for the €3 the average mark of curiosity is 5.14.

A two-sample T-test is used to test whether the difference in the average curiosity mark is higher in case of choosing the box (5.85) than for choosing the €3 (5.14). This test shows a t-value of 2.0916 with a t-value of 0.0216. Based on a 95% confidence level the observed p-value of 0.0216 is smaller than 0.025. We reject the null-hypothesis, no difference in the average curiosity mark for men and women. We accept the alternative hypothesis that in case of the box the curiosity mark is higher. Statistically speaking there is significant difference in the average curiosity mark between the choice of a box or €3. In this research participants chose the box due to curiosity. My finding is that curiosity is a factor in decision making.

0 2 4 6 m ea n of c u rio s it y Box €3 17

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4.2.2: results based on gender:

Box € 3 Total Gender

# male 13 (65%) 7 (35%) 20 (100%) # female 13 (65%) 7 (35%) 20 (100%)

No difference in gender is observed in the choice people make. Curiosity might reduce the feeling of risk. There is no difference in the choice between men and women. For men as well as for women 65% choose the box and 35% choose the €3. Remarkably the curiosity mark for women is slightly higher than for men.

A two-sample T-test is used to test whether the difference in the average curiosity mark is higher for women (5.75) than for men (5.45). This test shows a t-value of 0.8950 with a p-value of 0.3764. This p-p-value is too high to support the difference in curiosity for men and women. Statistically speaking there is no difference in curiosity mark for men and women. If you observe the choice in the experiment risk is involved. If you chose the unknown object you might not like it. If you chose €3 you are sure it has value to you. Although gender differences exist in risk aversion, it seems in this experiment that curiosity as a visceral factor might overcome risk.

0 2 4 6 m ea n of c u rio s it y Women Men 18

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Chapter 5: Discussion & Conclusion

Based on the findings of this research, curiosity is the factor of decision making. The more curious, the more you chose the box. Overall, this paper fails to find a gender difference in the influence of curiosity in decision making. Previous research showed significant gender difference in risk aversion in a variety of tasks (Croson & Gneezy, 2009). It might be possible that curiosity reduces the feeling of risk.

The obtained results are interesting. The amount of money was relatively small. There might be a relation in the amount of money and the curiosity for people. In this experiment a majority of the subjects motivate their choice for box mainly by: it is “only” €3. But in fact, €3 is real money, and the market value of the object inside the box has the same value. So €3 and an unknown value about €3, curiosity wins. It is not like you can win an impressive high valued object. This study could be extended to test the relation between the amount of money and the curiosity. It is interesting for example which amount of money beats the curiosity?

Besides a gender difference in curiosity we also had a look at the choice in general. We found significant evidence of the role of curiosity in the choice the subjects made. The mark of curiosity was significant higher choosing the box than the mark for curiosity in choosing the €3. This implies the more curious, the more you chose the box.

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The role of curiosity in economic decision making : differences for men and women

University of Amsterdam