An Empirical Study on the Effects of Expected Benefits and Risk Perception on Decision-Making Attitudes

Purpose: Many alternative theories have been studied due to many empirical evidences questioning the validity of the expected utility theory, which was used as the dominant paradigm of decision-making theory, as a descriptive model. This paper investigated the decision-making attitudes of decision-makers in Korea based on the prospect theory, which was suggested as an alternative theory to the expected utility theory, by using a hypothetical choice problem targeting students and professional workers to investigate their preference patterns. Research design, data, and methodology: In order to explain the characteristics of expected utility theory and prospect theory among the theories of decision-making under risk and to identify similarities and differences, a hypothetical choice problem was used to collect empirical preference pattern data. In using the hypothetical choice problem, it was assumed that respondents knew how they would act in an actual choice situation and that respondents did not have any special reasons to hide their preferences. In addition, in the absence of a special alternative to solve these problems, the hypothetical choice problem was used as a possible method to empirically verify the decision-making process. Results: The analysis results showed that certainty effect was found in decision makers in Korea, and it was more prominent in problems that included certain alternatives or alternatives with high probability than in problems that only consisted of risky alternatives, and the reflection effect also showed the same pattern. However, compared to foreign countries, decision makers in Korea were found to have somewhat risk aversion in the gain area and weak risk seeking in the loss area. Implications: The weighting function claimed in prospect theory is more convex, and the overweight is stronger for Koreans than for foreigners. In addition, occupation and status were found to have a greater impact on decision-making attitudes than age or income.