Aversion to Emotional Insurance: Costly Reluctance to Hedge Desired Outcomes
Presenter: Carey Morewedge, Professor, Boston University
5101 Tolman Hall
We examine whether people reduce the impact of negative outcomes through emotional hedging—betting against the occurrence of desired outcomes. We find substantial reluctance to bet against the success of preferred U.S. presidential candidates and Major League Baseball, National Football League, National Collegiate Athletic Association (NCAA) basketball, and NCAA hockey teams. This reluctance is not attributable to optimism or a general aversion to hedging. Reluctance to hedge desired outcomes stems from identity signaling, a desire to preserve an important aspect of the bettor’s identity. Reluctance to hedge occurrs when the diagnostic cost of the negative self-signal that hedging would produce outweighs the pecuniary rewards associated with hedging. Participants readily accept hedges and pure gambles with no diagnostic costs. They also more readily accept hedges with diagnostic costs when the pecuniary rewards associated with those hedges are greater. Reluctance to hedge identity-relevant outcomes produces two anomalies in decision making, risk seeking and dominance violations. More than 45% of NCAA fans in two of our studies, for instance, turn down a “free” real $5 bet against their team. The results elucidate anomalous decisions in which people exhibit disloyalty aversion, forgoing personal rewards that would conflict with their loyalties and commitments to others, beliefs, and ideals.