Abstract

Using a representative sample of the UK (N = 1000), we document risk taking in mixed gain-loss choices to be strongly stake-dependent: while our respondents are risk seeking for mean-preserving spreads around zero for moderate stakes, they become increasingly risk averse as stakes increase. Such patterns are predicted by recent models of adaptive behaviour based on ‘noisy sampling’ and ‘noisy cognition’. We test the two adaptive models against each other and against traditional accounts based on diagnostic treatments for which they make opposite predictions. Prospect theory cannot account for the adaptive patterns we document. The evidence further supports the noisy cognition model over the sampling-based account. The reason is that the former is grounded in an optimization framework, whereas the latter is based on psychological intuition, which we show to be at the origin of the predictive differences between the two models.