Preferences under risk: content-dependent behavior and psychological processing

A common view in economics and psychology is that decision agents achieve their choices and express their respective preferences by computing probabilistic properties (probabilities and money) from a decisionmaking context (e.g., von Neumann and Morgenstern, 1947; Tversky and Kahneman, 1992; Starmer, 2000). In this computational processing, the main psychological mechanism requires that decision agents are able to integrate economic (contextual) attributes such as money and probabilities into subjective values; in other words people are able to construct and employ psycho-economic scales. Subsequently, when making a choice, decision agents are supposed to perform tradeoffs between the computed outputs (psycho-economic variables such as expected values) and certain monetary alternatives (see Kahneman and Tversky, 1979; Tversky and Kahneman, 1992

Which heuristics can aid financial-decision-making?

© 2015 Elsevier Inc. We evaluate the contribution of Nobel Prize-winner Daniel Kahneman, often in association with his late co-author Amos Tversky, to the development of our understanding of financial decision-making and the evolution of behavioural finance as a school of thought within Finance. Whilst a general evaluation of the work of Kahneman would be a massive task, we constrain ourselves to a more narrow discussion of his vision of financial-decision making compared to a possible alternative advanced by Gerd Gigerenzer along with numerous co-authors. Both Kahneman and Gigerenzer agree on the centrality of heuristics in decision making. However, for Kahneman heuristics often appear as a fall back when the standard von-Neumann-Morgenstern axioms of rational decision-making do not describe investors' choices. In contrast, for Gigerenzer heuristics are simply a more effective way of evaluating choices in the rich and changing decision making environment investors must face. Gigerenzer challenges Kahneman to move beyond substantiating the presence of heuristics towards a more tangible, testable, description of their use and disposal within the ever changing decision-making environment financial agents inhabit. Here we see the emphasis placed by Gigerenzer on how context and cognition interact to form new schemata for fast and frugal reasoning as offering a productive vein of new research. We illustrate how the interaction between cognition and context already characterises much empirical research and it appears the fast and frugal reasoning perspective of Gigerenzer can provide a framework to enhance our understanding of how financial decisions are made

Event-related functional magnetic resonance imaging of reward-related brain circuitry in children and adolescents

BACKGROUND: Functional disturbances in reward-related brain systems are thought to play a role in the development of mood, impulse, and substance abuse disorders. Studies in non-human primates have identified brain regions, including the dorsal / ventral striatum and orbital-frontal cortex (OFC), in which neural activity is modulated by reward. Recent studies in adults have concurred with these findings by observing reward-contingent blood oxygen level dependant (BOLD) responses in these regions during functional magnetic resonance imaging (FMRI) paradigms. However no previous studies indicate whether comparable modulations of neural activity exist in the brain reward systems of children and adolescents. METHODS: We used event-related FMRI and a behavioral paradigm modeled on previous work in adults to study brain responses to monetary gains and losses in non-psychiatric children and adolescents as part of a program examining the neural substrates of anxiety and depression in youth. RESULTS: Regions and time-courses of reward-related activity were similar to those observed in adults with condition-dependent BOLD changes in the ventral striatum, lateral and medial OFC; specifically, these regions showed larger responses to positive than to negative feedback. CONCLUSIONS: These results provide further evidence for the value of event-related FMRI in examining reward systems of the brain, demonstrate the feasibility of this approach in children and adolescents, and establish a baseline from which to understand the pathophysiology of reward-related psychiatric disorders in youth

Risk attitudes and Medicare Part D enrollment decisions

The new Medicare Part D program provides prescription drug coverage for older Americans through highly subsidized and tightly regulated plans offered by private insurance firms. For most eligible individuals without coverage from other sources, obtaining Part D coverage would be rational, but it requires active enrollment and plan choice decisions. We investigate if non-enrollment in Medicare Part D can partly be explained by risk aversion. Data are taken from a national online survey conducted just after the introduction Part D. The survey included a context-free and a context-related hypothetical lottery to measure an individual’s attitude towards risk. Respondents who are risk tolerant according to these measures were significantly less likely to enroll in Part D. We also illustrate that hypothetical choice questions designed to elicit risk attitudes are subject to reference-point effects. Even minor differences in the priming of respondents can result in potentially misleading conclusions about the role of risk aversion in the insurance decisions

In Search of Intuition

What are intuitions? Stereotypical examples may suggest that they are the results of common intellectual reflexes. But some intuitions defy the stereotype: there are hard-won intuitions that take d..

Overconfidence and Excess Entry: An Experimental Approach

Psychological studies show that most people are overconfident about their own relative abilities, and unreasonably optimistic about their futures (e.g., Neil D. Weinstein, 1980; Shelly E. Taylor and J. D. Brown, 1988). When assessing their position in a distribution of peers on almost any positive trait-like driving ability (Ola Svenson, 1981), income prospects, or longevity-a vast majority of people say they are above the average, although of course, only half can be (if the trait is symmetrically distributed)

Risk attitudes and Medicare Part D enrollment decisions

The new Medicare Part D program provides prescription drug coverage for older Americans through highly subsidized and tightly regulated plans offered by private insurance firms. For most eligible individuals without coverage from other sources, obtaining Part D coverage would be rational, but it requires active enrollment and plan choice decisions. We investigate if non-enrollment in Medicare Part D can partly be explained by risk aversion. Data are taken from a national online survey conducted just after the introduction Part D. The survey included a context-free and a context-related hypothetical lottery to measure an individual’s attitude towards risk. Respondents who are risk tolerant according to these measures were significantly less likely to enroll in Part D. We also illustrate that hypothetical choice questions designed to elicit risk attitudes are subject to reference-point effects. Even minor differences in the priming of respondents can result in potentially misleading conclusions about the role of risk aversion in the insurance decisions.Risk aversion; Medicare Part D; heterogeneous preferences; insurance demand; survey design

Premio Nobel de Economía del año 2002, Daniel Kahneman

Este Trabajo de Fin de Grado titulado Premio Nobel de Economía del año 2002, Daniel Kahneman; expone un estudio de la Teoría de la Utilidad Esperada y más concretamente de la Teoría Prospectiva expuesta por Daniel Kahneman y su compañero Amos Tversky. Este trabajo lo que pretende es mostrar las diferentes aportaciones de los autores en materia económica. Los Premios Nobel de Economía son un reconocimiento a todas aquellas personas que se han dedicado a estudiar, investigar y reflexionar durante buena parte de su vida a temas importantes de las distintas ramas de conocimiento. Concretamente D. Kahneman fue galardonado por dicho premio “por tener ideas integradas desde la investigación psicológica en la ciencia económica, especialmente sobre el juicio humano y la toma de decisiones bajo incertidumbre”.Departamento de Economía AplicadaGrado en Administración y Dirección de Empresa

Cognitive biases, heuristics and decision-making in design for behaviour change

Copyright @ 2012 Social Science Electronic PublishingMuch human behaviour can be seen as decision-making, and so understanding and influencing those decision-making processes could be an important component in design for behaviour change. This paper examines the 'heuristics and biases' approach to modelling decision-making, and attempts to extract insights which are relevant to designers working to influence user behaviour for social or environmental benefit -- either by exploiting biases, or helping to counter those which lead to undesirable behaviour. Areas covered include a number of specific cognitive biases in detail, and the alternative perspective of Gigerenzer and others, who contend (following Herbert Simon) that many heuristics potentially leading to biases are actually ecologically rational, and part of humans' adaptive responses to situations. The design relevance of this is briefly considered, and implications for designers are summarised

Betting on odds on Favorites as an Optimal Choice in Cumulative Prospect Theory

It is well known that the parametric version of Cumulative Prospect theory (CPT) proposed by Kahneman and Tversky (1979) and Tversky and Kahneman (1992) (KT) can explain gambling at actuarially unfair odds on long shots due to the over weighting of small probabilities. However betting on odds favorites appears problematic. We demonstrate using a parametric model of Cumulative Prospect Theory that nests that of Kahneman and Tversky that if agents are risk averse enough over gains and risk-seeking enough over losses then they will gamble on odds on chances at actuarially unfair odds even when there is no probability distortion. This previously unappreciated fact is interesting since many experimental results suggest that some respondents are very risk averse over gains.