Final answer:
Participants were more likely to gamble when the scenario was framed as a potential loss ('Lose 30 or gamble') rather than a potential gain ('Keep 20 or gamble'), which is in line with the principle of loss aversion described by behavioral economists Daniel Kahneman and Amos Tversky. The correct answer is option (2).
Step-by-step explanation:
In a loss vs. gain framing study examining decision-making and risk behaviors, participants displayed different propensities to gamble depending on whether the scenario was presented as a gain or a loss. Behavioral economics provides insight into these behaviors, with the principle of loss aversion playing a key role. Loss aversion suggests that the pain of a loss is psychologically more powerful than the pleasure of a gain.
According to research by behavioral economists like Daniel Kahneman and Amos Tversky, a $1 loss is felt 2.25 times more than a $1 gain. This tendency can lead individuals to make decisions that avoid losses rather than pursuing equivalent gains, which is relevant in various domains, including investing where people might react more strongly to financial losses than gains. Therefore, in a choice between 'Keep 20 or gamble' and 'Lose 30 or gamble,' participants are more likely to gamble in the loss frame due to the strong desire to avoid the certain loss of 30, even if it involves taking on risk.
Emphasizing on loss aversion and behavioral responses in financial contexts can explain why participants were more inclined to gamble when faced with the prospect of a sure loss. Traditional economists who anticipate rational decision-making based on numerical equivalence may find such behavior puzzolingly inconsistent. However, when understanding the complex nature of the human psyche, as explained by behavioral economists, such actions are consistent with common human behavior where emotions and psychological biases shape our decisions.