Endogenous risk attitudes

In a model inspired by neuroscience, we show that constrained optimal perception encodes lottery rewards using an S-shaped encoding function and over-samples low-probability events. The implications of this perception strategy for behavior depend on the decision-maker’s understanding of the risk. The strategy does not distort choice in the limit as perception frictions vanish when the decision-maker fully understands the decision problem. If, however, the decision-maker underrates the complexity of the decision problem, then risk attitudes reflect properties of the perception strategy even for vanishing perception frictions. The model explains adaptive risk attitudes and probability weighting as in prospect theory and, additionally, predicts that risk attitudes are strengthened by time pressure and attenuated by anticipation of large risks

Globalization, Peace & Stability, Governance, and Knowledge Economy

A previous analysis of the impact of formal institutions on the knowledge economy of 22 Middle-Eastern and Sub-Sahara African countries during the 1996-2010 time period concluded that formal institutions were necessary, but inadequate, determinants of the knowledge economy. To extend that study, this paper claims that globalization induces peace and stability, which affects governance and through governance the knowledge economy. The claim addresses one weakness of previous research that did not consider the effects on the knowledge economy of globalization. We model the proposition as a three-stage process in four hypotheses, and estimate each hypothesis using robust estimators that are capable of dealing with the usual statistical problems without sacrificing economic relevance and significance. The results indicate that globalization has varying effects on peace and stability, and peace and stability affect governance differently depending on what kind of globalization induces it. For instance, the effects on governance induced by globalization defined as trade are stronger than those resulting from globalization taken to be foreign direct investment. Hence, we conclude that foreign direct investment is not a powerful mechanism for stimulating and sustaining the knowledge economy in our sample of countries. However, since globalization-induced peace and stability have both positive and negative effects on governance simultaneously, we also conclude that while the prospect for knowledge economy in African countries is dim, it is still realistic and attainable as long as these countries continue to engage in the kind of globalization that does indeed induce peace and stability. We further conclude that there is a need for a sharper focus on economic and institutional governance than on general governance as one possible extension of this paper