Changing plans: Dynamic inconsistency and the effect of experience on the reference point

This article presents a new test of a principle of decision making called d ynamic consistency. This principle was tested in an experiment in which par ticipants were asked to make decisions about a second gamble within a seque nce of two gambles. Participants were first asked to make a planned choice about the second gamble. The planned choice was made before the first gambl e was played and was conditioned on the anticipated outcomes of the first g amble. After the first gamble was played, the same participants were asked to make a final choice about the second gamble, conditioned on the experien ced outcome of the first gamble. The results showed that participants' fina l choices were frequently inconsistent with their plans, even when the anti cipated and experienced outcomes were identical. These inconsistencies occu rred in a systematic direction. Experiencing an anticipated gain resulted w ith a change toward risk aversion, and experiencing an anticipated loss res ulted in a change toward risk seeking. These results are explained in terms of the effect of actual experience on the reference point used for the eva luation of the decision problem.