Marie Curie fellow Matthias Wibral, associate professor at the Maastricht University (UM) School of Business and Economics (SBE), will be conducting research into how to encourage ‘broad bracketing’ when making decisions involving risk. As individuals become more and more responsible for their financial well-being, they are dealing with multiple decisions involving risk (e.g., how to invest retirement savings). Can people ‘learn’ to take a broader perspective on the risks they face?
“Broad-bracketing is basically how many decisions involving risk do you view in the same context,” Wibral explains. “If I tell you I am going to toss a coin two times and heads wins you 100 euro and tails costs you 50 euro, if you are broad-bracketing that means you think about it as a compound lottery, that means that you view the two tosses together. If you are narrow-bracketing, you see them in isolation, you think about each of the coin tosses in isolation. And depending on how you deal with losses, how you well you can tolerate them, that makes a difference in your decision making. So in terms of the research, the question is how can we get people to take a broader perspective on the many decisions involving risk that they face.”
Particularly in the context of retirement savings, this question of how people bracket their choices becomes important, Wibral explains. “There has been a recent trend in the EU and elsewhere to give people more financial responsibility,” he says. “That sounds good at first, but it basically means we are reforming our social security systems in a way that more of the responsibility falls on the individual.”
The question of bracketing can be applied to financial decision-making. “If you are thinking about whether you want to buy stock in a solar cell producer,” Wibral says, “it makes a big difference whether you already own, for example, stocks of an umbrella manufacturer—then it might make it a good idea, because it diversifies risk. But if you already have stocks of another solar cell producer, maybe it’s not such a good idea. So here, bracketing means do I look at each stock in my portfolio in isolation, or do I look at the portfolio as a whole.”
In his own research, Wibral will be focusing on a different type of bracketing, that is, bracketing over time. “Put simply,” he says, “do you see saving for retirement as a series of decision—“I am saving for one year, I am saving for one year, I am saving for one year”—or do you see it as “I am saving for twenty years”? That makes a big difference. If you look at the shorter time periods, stocks seem more risky. If you are really sensitive to losses and want to avoid them at all costs, the shorter your evaluation period, the less willing you will be to take risks.”
Wibral will be researching whether he can, by designing a decision-making environment in a certain way, “teach” people to change how they bracket their decisions, and whether this change in perspective will endure over time and in different decision-making environments. “And if we do see this kind of change,” he says, “we want to examine what exactly has occurred with people when they learn to see risks in a broader perspective. Do they feel less pain when they experience a loss, or do they evaluate the risk differently from the onset?” For this aspect of the research, Wibral plans to use a brain scanner on participants to see which changes in brain activity are associated with learning to bracket broadly.
This article is the second of a three-part series exploring the research projects of three SBE researchers who this year received Marie Curie grants. The award, named after the double Nobel Prize winning Polish-French scientist famed for her work on radioactivity, supports researchers working across all disciplines, from life-saving healthcare to ‘blue-sky’ science, are eligible for funding.