Could risk aversion be from friend thresholds?

If you are going for a job that almost nobody is going to get, it’s worth trying to be unusual. Better that one in a hundred employers loves you and the rest hate you than all of them think you’re mediocre.

On the other hand, if you are going for a job that almost everybody who applies is going to get, best to be as close to normal as possible.

In general, if you expect to fall on the bad side of some important threshold, it’s good to increase your variance and maybe make it over. If you expect to fall on the good side, it’s good to decrease your variance and stay there. This is assuming you can change your variance without changing your mean too much.

This suggests people should be risk seeking sometimes, and risk averse other times, depending on where the closest or most important thresholds are for them.

Prospect theory and its collected evidence says that people are generally risk averse for gains, and risk seeking for losses. That is, if you offer them fifty dollars for sure or half a chance of a hundred, they’ll take the sure fifty. If you offer them minus fifty dollars for sure, or half a chance of minus one hundred, they’ll take the gamble. The proposed value function looks something like this:

The zero point is a ‘reference point’, usually thought to be something like expectations or the status quo. This means people feel differently about gaining fifty dollars vs. a fifty percent of one hundred, and being given one hundred then later offered minus fifty or a fifty percent chance of minus one hundred, even though these things are equivalent in payoffs.

Risk aversion in gains and risk seeking in losses is what you would expect if people were usually sitting right near an important threshold, regardless of how much they had gained or lost in the past. What important threshold might people always be sitting on top of, regardless of their movement?

One that occurs to me is their friends’ and acquaintances’ willingness to associate with them. Which I will explain in a minute.

Robin has suggested that people should have high variance when they are getting to know someone, to make it over the friend threshold. Then they should tone it down if they make it over, so they don’t fall back under again.

This was in terms of how much information a person should reveal. But suppose people take into account how successful your life is in deciding whether they want to associate with you. For a given friend’s admiration, you don’t have that much to gain by getting a promotion say, because you are already good enough to be their friend. You have more to lose by being downgraded in your career, because there is some chance they will lose interest in associating with you.

Depending on how good the friend is, the threshold will be some distance below you. But never above you, because I specified friends, not potential friends. This is relevant, because it is predominantly friends, not potential friends, who learn about details of your life. Because of this selection effect, most of the small chances you take run the risk of sending bad news to existing friends more than sending good news to potential friends.

If you think something is going to turn out well, you should be risk averse because there isn’t much to gain sending better news to existing friends, but there is a lot to lose from maybe sending bad news. If you think something is going to go a tiny bit badly, you still want to be risk averse, as long as you are a bit above the thresholds of all your acquaintances. But if you think it’s going to go more badly, a small chance of it not going badly at all might be more valuable than avoiding it going more badly.

This is less clear when things go badly, because the thresholds for each of your friends can be spread out in the space below you, so there might be quite a distance where losing twice as much loses you twice as many friends. But it is less clear that people are generally risk seeking in losses. They do buy insurance for instance. It’s also plausible that most of the thresholds are not far below you, if people try to associate with the best people who will have them.

Another feature of the prospect theory value function is that the loss region is steeper than the gain region. That also fits with the present theory, where mostly you just have things to lose.

In sum, people’s broad patterns of risk aversion according to prospect theory seem explicable in terms of  thresholds of association with a selection effect.

Can you think of a good way to test that?

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  • Daublin

    In addition to losing social capital–which I agree is surely important–getting less than your status quo target means you lose cognitive resources. If you have a status quo target and play it safe to get that target, then you can make plans contingent on that status quo coming to be. If you gain less than the status quo, all these contingent plans have to be reconsidered.

  • Traveler26

    To test this, you could use various scenarios where friends’ opinions are likely vs unlikely to be involved.  Knobs you could tweak might be
      -size of stakes (bigger -> more likely)
      -nature of stakes (harder to keep secret -> more likely)

    If this effect existed, more important friends would matter more than less important ones, and if their opinions differed, this might predict different behavior depending on which way the more important friends tilted.   For some people, parents or other family members might count as particularly important friends for this purpose.

    To the extent that I can trust introspection, I think that my risk aversion wrt losses is generally more driven by an endowment effect operating within my own skull, plus overweighting of short term happiness.  The opinion of others is secondary, and cuts in only when non-small stakes are in play.  Since reading Kahneman’s book of course I try even harder to minimize these effects.

  • Flynn

    Hmmm. This strikes me as being similar to being on vacation. You are either alone, or so secure in your friendship with the people you are with that you aren’t worried about embarrassing yourself. In this case, people seem to be inclined to act in a more risk seeking manner, seemingly in favor of this hypothesis. Granted, there are plenty of confounds here, and sending people on vacation isn’t a particularly good experience

    Off the cuff ideas
    - Measuring variance in expressed political views on anonymous vs. non-anonymous online forums (Difficult to quantify). This is based on the notion that more extreme political views are socially risky to hold.
    - Playing an economic game with a chance to email your strategy to a friend.
    - An economic game pitting two groups against each other. Subjects group will contain friends or not, and evaluating the strategy in either condition based on how risky it is.

    • Flynn

      *Typo above. Experience should be Experiment.

  • manwhoisthursday

    “Robin has suggested that people should have high variance when they are getting to know someone, to make it over the friend threshold.”
    Pick up artists suggest this too.  It is better to have one girl love you and one girl hate you, than to have two that are on the fence.

  • Michael Vassar

    Another way to think of this is that people are homeostatic with respect to their place in tribal status hierarchies.  This makes sense from a group perspective because status volatility produces intra-tribal conflict and is bad for the group, and the group is well positioned to punish it.

  • Arthur

    You record repeated interactions of a subject with other subjects.

    You compare the variance in words/concepts/stories (don’t know) across different interactions.

    If your theory is right, when they get friendly their wording, concepts talked about, or stories they use should get locked in. Also there should be a greater variance comparing interactions with different subjects than different interactions between the same subjects.

    And if they don’t like each other you wound’t observe this lock in of things.

    Maybe the difference in words used and words most common in English is relevant also. Really don’t know what you should measure.

  • Douglas Knight

    Is friendship such a binary property?

    • http://juridicalcoherence.blogspot.com/ srdiamond

       Whereas life and death surely is.

  • http://juridicalcoherence.blogspot.com/ srdiamond

    Why single out friendship as a scenario displaying threshold effects? If the primal situation was one where loss often meant death, you have a threshold to explain the adaptativeness of risk-seeking when you face loss and risk aversion for gains.

    Also, it’s not clear whether you are providing an evolutionary or psychological explanation.

    The argument depends on Robin’s assumption, “Whether you are above or below certain friend and enemy thresholds matters more than how far above or below those thresholds you are.” Is there independent evidence for this assumption–as opposed to there being a continuum without thresholds from acquaintanceship through friendship, etc.

    A problem for your hypothesis, if it’s intended to be psychological, is that loss aversion applies to groups large enough that friendship opportunities aren’t affected, for example, “entitlements.”

  • Robert Wiblin

    I blogged a similar idea a few years ago: http://robertwiblin.com/2010/04/26/thresholds-in-signalling/

    “This helps explains our caution in telling others about the things we apply for. If we fall on the bad side of the threshold we don’t want them to know we even tried. If we are risk averse with our reputations, this helps explain our reluctance to apply for jobs that we might not get or flirt with people who might reject us, even when we use only a little time and effort in the attempt. It probably contributes to the distress of a divorce or breakup; a marriage that is just short of a divorce can look OK from the outside but if your wife leaves you for all a distant onlooker knows you were a terrible husband. The less effort can substitute for underlying quality when we especially care about the signal we’re going to send, the more threatening a threshold.”

  • Ryan Carey

    Replace friends with prospective mating partners and you have a reasonably plausible ev-psych just-so story!

  • tigerthink

    I think this is could be accurate for most of the human population historically, but I’m not sure that the sort of intelligent, enlightened person who reads OB is that prone to ditching their friends as easily as this.  Just because two people have a friend-ish relationship with one another doesn’t mean they actually like each other or understand each other on a deep level.

    Heck, what if you were to go through Katja’s post and replace every instance of “friend” with “acquaintance”?  I think that would fit my model of human social interactions a bit better.

  • blink

    The theory rings true.  We expect reputation-based institutions (universities, religions, etc.) to be willing to take big risks to avoid small reputational losses but much less risk-taking for gains.  On the other hand, we expect undistingished students to large risks (cheating, etc.) since most will be rejected anyway.  The friendship threshold makes sense as well.

    • http://juridicalcoherence.blogspot.com/ srdiamond

      Your endorsement applies to prospect theory, not to Katja’s explanation for it.

  • Jonas

    I also think prospect theory has something to do with friends, but more in terms of promoting the taking of social risks to avoid the small loss of social status.  Most of the time, conformance and cooperation is risky for your individual well being.  If you were on the positive side of the curve, you might decide not to do it.  It’s a good thing that humans are structured to want to take risk to avoid small losses.  This is what greases everyday interactions and doing small favors for others.

  • Peter Gerdes

    Or some other quick possible explanations.

    1) It’s simple feels worse to think of yourself as failing/doing worse than it feels better to think of yourself as doing better.

    2) In contrast to bancruptcy cultures aren’t protected from bad results.  Rather, too many individual failings amount to complete social collapse and so evolution favors avoiding downside risk.

    —-

    Can you test it?  Almost certainly not.  No one thinks we shouldn’t be risk averse with our money since it’s well known happiness is sub-linear in wealth.  The question is whether we are genuienly risk averse and if so why.

    But one can easily prove that any Pareto optimal strategy can have a utility function perfectly fitted to it.  So short of a happiness/utility reader I despair of learning much about these questions beyond my priors by way of the usual economic experiments.
     

    • Stephen Diamond

      1) It’s simply feels worse to think of yourself as failing/doing worse than it feels better to think of yourself as doing better.

      This seems to be a redescription rather than an explanation.

      2) In contrast to bankruptcy, cultures aren’t protected from bad results.  Rather, too many individual failings amount to complete social collapse and so evolution favors avoiding downside risk.

      I think group-selectionist hypotheses are disfavored these days by evolutionary biologists.

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