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 dynamic consistency. This principle was tested in an experiment in which participants were asked to make decisions about a second gamble within a sequence of two gambles. Participants were first asked to make a planned choice about the second gamble. The planned choice was made before the first gamble was played and was conditioned on the anticipated outcomes of the first gamble. After the first gamble was played, the same participants were asked to make a final choice about the second gamble, conditioned on the experienced outcome of the first gamble. The results showed that participants' final choices were frequently inconsistent with their plans, even when the anticipated and experienced outcomes were identical. These inconsistencies occurred in a systematic direction. Experiencing an anticipated gain resulted with a change toward risk aversion, and experiencing an anticipated loss resulted 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 evaluation of the decision problem.