Optimal Allocation of Time in Risky Choices under Opportunity Costs

When making decisions under risk, there is a fundamental trade-off between the time spent to make good decisions and the opportunity cost in terms of other rewarding activities. Theoretically, people should examine the utility difference between choice options in accordance with a drift diffusion model with collapsing boundaries when this difference is unknown and constant boundaries when it is known. Further, boundaries should move inwards when opportunity costs increase. Via simulations and two experiments, where participants rated and chose between risky lotteries, we found that decision maker did not use collapsing boundaries when it is optimal, thus spending too much time on choices with little utility to gain. Yet, participants moved boundaries inwards under higher opportunity costs in line with optimal models. We draw attention to the importance of trading-off decision time and quality and demonstrate the importance of measurement noise when analyzing risk taking behavior empirically.