Gain/Loss Asymmetry in Risky Intertemporal Choice

Abstract Managers′ reports of their own reactions to risk suggest that decision makers may feel they can control both the likelihood and the magnitude of future potential losses (March & Shapira, 1987). As a consequence, delayed losses appear much less intimidating than immediate losses because delayed losses are heavily discounted. However, if decision makers discount losses more heavily than gains, or if future loss seems less credible than gain, decision makers will make more risky choices when outcomes are delayed than when they are immediate. These are the ideas explored in this study. The questions addressed are: (1) Do decision makers discount gain and loss asymmetrically, with higher loss than gain rates, and (2) is the uncertainty (implicit risk) associated with future loss outcomes greater than that associated with gain outcomes? Lottery ratings were used to fit three intertemporal choice models, each of which represents a particular time-discounting or implicit-risk hypothesis. The resulting time and implicit risk parameter estimates were used to test hypotheses about discounting asymmetries. A significant number of subjects discount loss faster than gain. Both implicit risk and time discount rates were higher for loss than gain. Thus, the asymmetry detected in this study is in the direction that would induce greater risk tolerance with delay as predicted in Miller′s (1959) conflict theory. The results also reflect managers′ optimistic view of the future and their belief in their eventual mastery of it.