Probabilistic insurance

decision making;insurance;probability

Are Individuals Fickle-Minded?

Game theory has been used to model large-scale social events — such as constitutional law, democratic stability, standard setting, gender roles, social movements, communication, markets, the selection of officials by means of elections, coalition formation, resource allocation, distribution of goods, and war — as the aggregate result of individual choices in interdependent decision-making. Game theory in this way assumes methodological individualism. The widespread observation that game theory predictions do not in general match observation has led to many attempts to repair game theory by creating behavioral game theory, which adds corrective terms to the game theoretic predictions in the hope of making predictions that better match observations. But for game theory to be useful in making predictions, we must be able to generalize from an individual’s behavior in one situation to that individual’s behavior in very closely similar situations. In other words, behavioral game theory needs individuals to be reasonably consistent in action if the theory is to have predictive power. We argue on the basis of experimental evidence that the assumption of such consistency is unwarranted. More realistic models of individual agents must be developed that acknowledge the variance in behavior for a given individual

Quantum phenomenology of conjunction fallacy

A quantum-like description of human decision process is developed, and a heuristic argument supporting the theory as sound phenomenology is given. It is shown to be capable of quantitatively explaining the conjunction fallacy in the same footing as the violation of sure-thing principle.Comment: LaTeX 8 pages, 2 figure

Reasons and Means to Model Preferences as Incomplete

Literature involving preferences of artificial agents or human beings often assume their preferences can be represented using a complete transitive binary relation. Much has been written however on different models of preferences. We review some of the reasons that have been put forward to justify more complex modeling, and review some of the techniques that have been proposed to obtain models of such preferences

Investing in Prevention or Paying for Recovery - Attitudes to Cyber Risk

The file attached to this record is the author's final peer reviewed version. The Publisher's final version can be found by following the DOI link.Broadly speaking an individual can invest time and effort to avoid becoming victim to a cyber attack and/or they can invest resource in recovering from any attack. We introduce a new game called the pre-vention and recovery game to study this trade-off. We report results from the experimental lab that allow us to categorize different approaches to risk taking. We show that many individuals appear relatively risk loving in that they invest in recovery rather than prevention. We find little difference in behavior between a gain and loss framing

Risk Attitudes and Decision Weights

To accommodate the observed pattern of risk-aversion and risk-seeking, as well as common violations of expected utility (e.g., the certainty effect), we introduce and characterize a weighting function according to which an event has greater impact when it turns impossibility into possibility, or possibility into certainty, that when it merely makes a possibility more or less likely. We show how to compare such weighting functions (of different individuals) with respect to the degree of departure from expected utility, and we present a method for comparing an individual's weighting functions for risk and for uncertainty

A Test of Rank-Dependent Utility in the Context of Ambiguity

Experimental investigations of non-expected utility have primarily concentrated on decision under risk (probability triangles). The literature suggests, however, that ambiguity is one of the main causes for deviations from expected utility (EU). This article investigates the descriptive performance of rank-dependent utility (RDU) in the context of choice under ambiguity. We use the axiomatic difference between RDU and EU to critically test RDU against EU. Surprisingly, the RDU model does not provide any descriptive improvement over EU. Our data suggest other framing factors that do provide descriptive improvements over EU

Map or Gantt? Which Diagram Helps Viewers Best in Spatio-Temporal Data Exploration Tasks?

In this paper we investigate the effectiveness and efficiency of two two-dimensional static visual representations of spatio-temporal data, a map-based and a Gantt-based diagram, in their support of various information retrieval tasks. The map-based diagram is characterized by a natural spatial arrangement of locations on a schematic map. The Gantt-based one represents time naturally as a linearly ordered set of time intervals from left to right. A within-subject empirical experiment has been conducted, in which participants were asked to verify queries about persons, locations, and time intervals. The formulation of the queries was based on (i) Bertin’s three reading levels, (ii) certain cognitive operations, and (iii) different syntactic orders of expressions denoting persons, locations and times. Response correctness and response time were recorded. With respect to response accuracy, both diagrams support viewers well in nearly all information retrieval tasks. Regarding efficiency, the map-based diagram elicited significantly faster response times than the Gantt-based one, except for queries with time in focus. The results suggest that map-based diagrams require less search and reasoning effort of viewers to retrieve the information asked for in the task types used in this study.</p

Classical Logical versus Quantum Conceptual Thought: Examples in Economics, Decision theory and Concept Theory

Inspired by a quantum mechanical formalism to model concepts and their disjunctions and conjunctions, we put forward in this paper a specific hypothesis. Namely that within human thought two superposed layers can be distinguished: (i) a layer given form by an underlying classical deterministic process, incorporating essentially logical thought and its indeterministic version modeled by classical probability theory; (ii) a layer given form under influence of the totality of the surrounding conceptual landscape, where the different concepts figure as individual entities rather than (logical) combinations of others, with measurable quantities such as 'typicality', 'membership', 'representativeness', 'similarity', 'applicability', 'preference' or 'utility' carrying the influences. We call the process in this second layer 'quantum conceptual thought', which is indeterministic in essence, and contains holistic aspects, but is equally well, although very differently, organized than logical thought. A substantial part of the 'quantum conceptual thought process' can be modeled by quantum mechanical probabilistic and mathematical structures. We consider examples of three specific domains of research where the effects of the presence of quantum conceptual thought and its deviations from classical logical thought have been noticed and studied, i.e. economics, decision theory, and concept theories and which provide experimental evidence for our hypothesis.Comment: 14 page

Probabilistic Insurance

Probabilistic insurance is an insurance policy involving a small probability that the consumer will not be reimbursed. Survey data suggest that people dislike probabilistic insurance and demand more than a 20% reduction in the premium to compensate for a 1% default risk. While these preferences are intuitively appealing they are difficult to reconcile with expected utility theory. Under highly plausible assumptions about the utility function, willingness to pay for probabilistic insurance should be very close to willingness to pay for standard insurance less the default risk. However, the reluctance to buy probabilistic insurance is predicted by the weighting function of prospect theory. This finding highlights the potential role of the weighting function to explain insurance