Effect of Choice Bracketing on Risk Aggregation in Repeated-Play Gambles With No Feedback

Abstract

Aggregating the risk of a series of decisions reduces the overall risk compared to when each decision is considered individually—the logic behind diversified investment strategies. Most experimental research on a series of risky decisions provides participants with immediate feedback for each individual choice before presenting the subsequent gamble—a task-structure that inhibits the possibility of risk aggregation. In real-life business decisions, feedback is usually not seen until a significant delay with many more business decisions made in the interim. This decision-making sequence has the potential for systematic risk aggregation. However, it is unclear how people determine what decisions cluster together such that those decisions’ risks become aggregated. In the current work, we presented experimental participants a series of scenarios describing potential investments and investigated multiple ways to support clustering or bracketing choices together. We found that showing a distribution of outcome probabilities without inter-trial feedback reduced risk aversion. Further, we found mixed evidence for an effect of similarity of projects, and found only minimal evidence that viewing projects together and awareness of the number of projects encourages aggregation. These results suggest that risk aggregation is hard to facilitate, at least in laypeople, without first aggregating the options for them.