Are decisions under risk malleable?

Human decision making under risk and uncertainty may depend on individual involvement in the outcome-generating process. Expected utility theory is silent on this issue. Prospect theory in its current form offers little, if any, prediction of how or why involvement in a process should matter, although it may offer ex post interpretations of empirical findings. Well-known findings in psychology demonstrate that when subjects exercise more involvement or choice in lottery procedures, they value their lottery tickets more highly. This often is interpreted as an "illusion of control," meaning that when subjects are more involved in a lottery, they may believe they are more likely to win, perhaps because they perceive that they have more control over the outcome. Our experimental design eliminates several possible alternative explanations for the results of previous studies in an experiment that varies the degree and type of involvement in lottery procedures. We find that in treatments with more involvement subjects on average place less rather than more value on their lottery tickets. One possible explanation for this is that involvement interacts with loss aversion by causing subjects to weigh losses more heavily than they would otherwise. One implication of our study is that involvement, either independently or in interaction with myopic loss aversion, may help explain the extreme risk aversion of bond investors.