Variance-seeking for positive (and variance-aversion for negative) experiences

Variance-seeking for positive (and variance-aversion for negative) experiences

by Jolie Mae Martin

Part of Working paper / Harvard Business School -- 08-070

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About
In contrast to research which has conflated losses with negative experiences and gains with positive experiences, we argue that because reference points are set by memories of extremely good and bad experiences, most outcomes are seen as losses in positive domains and as gains in negative domains. Utility is thus concave across outcomes in negative but convex in positive domains, inducing variance-aversion in negative and variance-seeking in positive domains. Prevention-focused and older individuals - who engage in processing that shifts reference points to less extreme instances - show a decreased sensitivity to variance. We discuss the marketing implications of preferences for variance.

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  1. 1

    How does the author's argument that "most outcomes are seen as losses in positive domains and as gains in negative domains" change the way you traditionally think about risk and reward?

  2. 2

    Can you recall a personal experience in a positive domain where you actively sought out variance or unpredictability, and looking back, did this align with the book's premise?

  3. 3

    The text suggests that memories of extremely good and bad experiences set our reference points; how do you think our personal nostalgia or past traumas actively distort our current decision-making?

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