593,489 research outputs found
Arbitrage from a Bayesian's Perspective
This paper builds a model of interactive belief hierarchies to derive the
conditions under which judging an arbitrage opportunity requires Bayesian
market participants to exercise their higher-order beliefs. As a Bayesian, an
agent must carry a complete recursion of priors over the uncertainty about
future asset payouts, the strategies employed by other market participants that
are aggregated in the price, other market participants' beliefs about the
agent's strategy, other market participants beliefs about what the agent
believes their strategies to be, and so on ad infinitum. Defining this infinite
recursion of priors -- the belief hierarchy so to speak -- along with how they
update gives the Bayesian decision problem equivalent to the standard asset
pricing formulation of the question. The main results of the paper show that an
arbitrage trade arises only when an agent updates his recursion of priors about
the strategies and beliefs employed by other market participants. The paper
thus connects the foundations of finance to the foundations of game theory by
identifying a bridge from market arbitrage to market participant belief
hierarchies
Preference Based Subjective Beliefs
We test the empirical content of the assumption of preference dependent beliefs using a behavioral model of strategic decision making in which the rankings of individuals over final outcomes in simple games influence their beliefs over the opponentâs behavior. This approachâ by analogy with Psychological Game Theoryâallows for interdependence between preferences and beliefs but reverses the order of causality. We use existing evidence from a multi-stage experiment in which we first elicit distributional preferences in a Random Dictator Game, then estimate beliefs in a related 2Ă2 effort game conditional on these preferences. Our structural estimations confirm our working hypothesis on how social preferences shape beliefs: subjects with higher guilt (envy) expect others to put less (more) effort, which reduces the expected difference in payoffs.Financial support from the Spanish Ministry of Economic Development (ECO2015-65820-P) and Generalitat Valenciana (Grupos 3/086) is gratefully acknowledged
Self-referential thinking and equilibrium as states of mind in games: fMRI evidence
Sixteen subjects' brain activity were scanned using previous termfMRInext term as they made choices, expressed beliefs, and expressed iterated 2nd-order beliefs (what they think others believe they will do) in eight games. Cingulate cortex and prefrontal areas (active in âtheory of mindâ and social reasoning) are differentially activated in making choices versus expressing beliefs. Forming self-referential 2nd-order beliefs about what others think you will do seems to be a mixture of processes used to make choices and form beliefs. In equilibrium, there is little difference in neural activity across choice and belief tasks; there is a purely neural definition of equilibrium as a âstate of mind.â âStrategic IQ,â actual earnings from choices and accurate beliefs, is negatively correlated with activity in the insula, suggesting poor strategic thinkers are too self-focused, and is positively correlated with ventral striatal activity (suggesting that high IQ subjects are spending more mental energy predicting rewards)
Poverty and aspirations failure
We develop a model of internal constraints to show that a greater degree of initial disadvantage
results in a higher likelihood of low aspirations and low achievement. Our model and
results are supported by evidence from anthropology, sociology and social psychology. Our
analysis suggests that internal constraints are a key ingredient in perpetuating poverty traps.
We show that a poor person will choose to restrict her cognitive window (the set of other individuals
who are her role models) and study the conditions under which a role model could
alter her aspirations and achievement. We show how enodgenously chosen cognitive windows
interact with the inital distribution of status to determine whether or not a society is connected,
and hence the transmission of aspirations across individuals in that society. Our work provides
a normative justification for programs that aim at empowering disadvantaged individuals by
directly shocking their aspirations
Optimistic versus Pessimistic--Optimal Judgemental Bias with Reference Point
This paper develops a model of reference-dependent assessment of subjective
beliefs in which loss-averse people optimally choose the expectation as the
reference point to balance the current felicity from the optimistic
anticipation and the future disappointment from the realisation. The choice of
over-optimism or over-pessimism depends on the real chance of success and
optimistic decision makers prefer receiving early information. In the portfolio
choice problem, pessimistic investors tend to trade conservatively, however,
they might trade aggressively if they are sophisticated enough to recognise the
biases since low expectation can reduce their fear of loss
Directing the studentsâ mind games : A game theoretical view of the learning process
Experimental data consistently shows that the studentsâ beliefs about their own academic ability have a significant effect on their performance and their level of engagement. The aim of this paper is to offer an original game-theoretical model that supports and explains such empirical data: the student is modelled as being engaged in a game, in which his/her decisions on how much to study are affected by his/her self-efficacy beliefs or self-confidence. It is argued that if game theory is used to analyse such games, it is possible to gain insights that might otherwise be missed. One of the implications for practice is that the tutor is in a position to intervene in the interaction involving the student and the studentâs own beliefs. Attempting to enhance the studentâs self-confidence levels through feedback is likely to result in greater engagement and better performance, even in cases where the studentâs current performance does not inspire very encouraging feed-backPeer reviewedFinal Published versio
Fair social decision under uncertainty and belief disagreements
This paper aims to address two issues related to simultaneous aggregation of utilities and beliefs. The first one is related to how to integrate both inequality and uncertainty considerations into social decision making. The second one is related to how social decision should take disagreements in beliefs into account. To accomplish this, whereas individuals are assumed to abide by Savage modelâs of subjective expected utility, society is assumed to prescribe, either to each individual when the ex ante individual well-being is favored or to itself when the ex post individual well-being is favored, acting in accordance with the maximin expected utility theory of Gilboa and Schmeidler (J Math Econ 18:141â153, 1989). Furthermore, it adapts an ex ante Pareto-type condition proposed by Gayer et al. (J Legal Stud 43:151â171, 2014), which says that a prospect Pareto dominates another one if the former gives a higher expected utility than the latter one, for each individual, for all individualsâ beliefs. In the context where the ex ante individual welfare is favored, our ex ante Pareto-type condition is shown to be equivalent to social utility taking the form of a MaxMinMin social welfare function, as well as to the individual set of priors being contained within the range of individual beliefs. However, when the ex post individual welfare is favored, the same Pareto-type condition is shown to be equivalent to social utility taking the form of a MaxMinMin social welfare function, as well as to the social set of priors containing only weighted averages of individual beliefs
- âŚ