79 research outputs found
Affective Decision Making: A Behavioral Theory of Choice
Affective decision-making is a strategic model of choice under risk and uncertainty where we posit two cognitive processes — the "rational" and the "emotional" process. Observed choice is the result of equilibirum in this intrapersonal game. As an example, we present applications of affective decision-making in insurance markets, where the risk perceptions of consumers are endogenous. We then derive the axiomatic foundation of affective decision making, and show that, although beliefs are endogenous, not every pattern of behavior is possible under affective decision making.Affective choice, Endogenous risk perception, Insurance, Variational preferences
Affective Decision Making and the Ellsberg Paradox
We characterize, in the framework for variational preferences, the affective decision making model of choice under risk and uncertainty introduced by Bracha and Brown (2007). This characterization (i) provides a rigorus decision-theoretic foundation for affective decision making, (ii) offers an axiomatic explanation for ambiguity-seeking in the Ellsberg Paradox and (iii) suggests a dual representation of ADM games in terms of the Legendre-Fenchel conjugate.Ellsberg paradox, Schmeidler's axiom, Affective decision making, Variational preferences, Legendre-Fenchel conjugate
Affective Decision Making and the Ellsberg Paradox
Affective decision-making is a strategic model of choice under risk and uncertainty where we posit two cognitive processes -- the "rational" and the "emotional" process. Observed choice is the result of equilibrium in this intrapersonal game. As an example, we present applications of affective decision-making in insurance markets, where the risk perceptions of consumers are endogenous. We derive the axiomatic foundation of affective decision making, and show that affective decision making is a model of ambiguity-seeking behavior consistent with the Ellsberg paradox.Affective choice, Endogenous risk perception, Insurance, Ellsberg paradox, Variational preferences, Ambiguity-seeking
Competitive incentives: Working harder or working smarter?
Almost all jobs require a combination of cognitive effort and labor effort. This paper focuses on the effect that competitive incentive schemes have on the chosen combination of these two types of efforts. We use an experimental approach to show that competitive incentives may induce agents to work harder but not necessarily smarter. This effect was stronger for women
Relative pay and labor supply
The authors use a labor supply; relative pay; experimental economics laboratory experiment to examine the impact of relative wages on labor supply. They test the hypothesis that, ceteris paribus, making a given wage high (low) relative to other wage levels will lead to an increase (decrease) in labor supply. They find that labor supply does respond significantly to relative pay, and in the expected direction. However, when a strong enough reason is given for the relative low pay, this difference disappears
How low can you go? Charity reporting when donations signal income and generosity
Consistent with nonprofit fundraising practices, donation visibility has been shown to increase giving. While concern for status is used to explain this response, the authors argue that this explanation relies on the assumption that giving signals only income or generosity. When giving signals both attributes overall status need not increase in donations, and donation-visibility may be harmful when individuals prefer to be perceived as poor-and-generous rather than rich-and-stingy. Using an experiment the authors find that both income-status and generosity-status concerns affect behavior. Furthermore, donation-visibility fails to increase contributions as low-income individuals select low donation amounts that are unlikely to be attributed to high-income individuals
Nudging credit scores in the field: The effect of text reminders on creditworthiness in the United States
In this paper we present evidence from a field experiment on the effect of text message reminders and credit card APR (annual payment rate) information on credit scores of low-to-moderate-income individuals. We find that individuals who initially had a low credit score benefited significantly from receiving the text reminders, while individuals who initially had a mid or high score did not. The positive effect on low-score individuals stems from the reduction of debt and better payment patterns. For mid-score individuals, we find a positive effect on payment patterns but no effect on credit scores; this may be because a better payment pattern is slower than a worse payment pattern to affect a credit score. For initially high-credit score individuals, we find a negative effect on credit scores, due to higher collection accounts. As for APR information, we find only sporadic effects: it helped reduce the number of inquiries for low-score individuals and reduce collection accounts of mid-score individuals, yet it contributed to greater past-due balances of high-score individuals
Affective Utilities: A Rational Theory of Optimistic Bias in Asset Markets
The equilibrium prices in asset markets, as stated by Keynes (1930): “…will be fixed at the point at which the sales of the bears and the purchases of the bulls are balanced.” We propose a descriptive theory of finance explicating Keynes’ claim that the prices of assets today equilibrate the optimism and pessimism of bulls and bears regarding the payoffs of assets tomorrow. This equilibration of optimistic and pessimistic beliefs of investors is a consequence of investors maximizing affective utilities subject to budget constraints defined by market prices and investor’s income. The set of affective utilities is a new class of non-expected utility functions representing the attitudes of investors for optimism or pessimism, defined as the composition of the investor’s attitudes for risk and her attitudes for ambiguity. Bulls and bears are defined respectively as optimistic and pessimistic investors
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