Abstract: This paper examines the risk externalities stemming from the size of institutions. Assuming (conservatively) that a firm risk exposure is limited to its capital while its external (and random) losses are unbounded we establish a condition for a firm to be too big to fail. In particular, expected risk externalities’ losses conditions for positive first and second derivatives with respect to the firm capital are derived. Examples and analytical results are obtained based on firms’ random effects on their external losses (their risk externalities) and policy implications are drawn that assess both the effects of “too big to fail firms” and their regulation.
Abstract: How does costly communication affect organizational coordination? This paper develops a model of costly communication based on the weakest-link game and boundedly rational agents. Solving for the stochastically stable states, we find that communication increases the possibilities for efficient coordination compared to a setting where agents cannot communicate. But as agents face a trade-off between lowering the strategic uncertainty for the group and the costs of communication, the least efficient state is still the unique stochastically stable one for many parameter values. Simulations show that this is not just a long run phenomena, the stochastically stable state is the most frequent outcome also in the short run. Making communication mandatory induces efficient coordination, whereas letting a team leader handle communication increases efficiency when the leader expects others to follow and has enough credibility. The results are broadly consistent with recent experimental evidence of communication in weakest-link games.
Abstract: As behavioural sciences are unearthing the complex cognitive framework in which people make decisions, policymakers seem increasingly ready to design behaviourally-informed regulations to induce behaviour change in the interests of the individual and society. After discussing what behavioural sciences have to offer to administrative law, this paper explores the extent to which administrative law may accommodate their findings into the regulatory process. After presenting the main regulatory tools capable of operationalizing behavioural insights, it builds a case for integrating them into public policymaking. In particular, this paper examines the challenges and frictions of behavioural regulation with regard both to established features of administrative law, such as the principle of legality, impartiality and judicial oversight and more innovative control mechanisms such as the use of randomized control trials to test new public policies. This analysis suggests the need to develop a legal framework capable of ensuring that behavioural considerations may inform the regulatory process while at the same time guaranteeing citizens' constitutional rights and freedoms vis-à-vis the Regulatory State.
It is commonly believed that information spreads between individuals like a pathogen, with each exposure by an informed friend potentially resulting in a naive individual becoming infected. However, empirical studies of social media suggest that individual response to repeated exposure to information is far more complex. As a proxy for intervention experiments, we compare user responses to multiple exposures on two different social media sites, Twitter and Digg. We show that the position of exposing messages on the user-interface strongly affects social contagion. Accounting for this visibility significantly simplifies the dynamics of social contagion. The likelihood an individual will spread information increases monotonically with exposure, while explicit feedback about how many friends have previously spread it increases the likelihood of a response. We provide a framework for unifying information visibility, divided attention, and explicit social feedback to predict the temporal dynamics of user behavior.
Anhedonia refers to the reduced ability to experience pleasure, and has been studied in different neuropsychiatrie disorders. Anhedonia is nevertheless considered as a core feature of major depressive disorder, according to DSM-IV criteria for major depression and the definition of melancholic subtype, and regarding its capacity to predict antidepressant response. Behavioral, electrophysiological, hemodynamic, and interview-based measures and selfreports have been used to assess anhedonia, but the most interesting findings concern neuropharmacological and neuroanatomical studies. The analyses of anhedonic nonclinical subjects, nonanhedonic depressed patients, and depressed patients with various levels of anhedonia seem to favor the hypothesis that the severity of anhedonia is associated with a deficit of activity of the ventral striatum (including the nucleus accumbens) and an excess of activity of ventral region of the prefrontal cortex (including the ventromedial prefrontal cortex and the orbitofrontal cortex), with a pivotal, but not exclusive, role of dopamine.
Behavioral Economics is the combination of psychology and economics that investigates what happens in markets in which some of the agents display human limitations and complications. We begin with a preliminary question about relevance. Does some combination of market forces, learning and evolution render these human qualities irrelevant? No. Because of limits of arbitrage less than perfect agents survive and influence market outcomes. We then discuss three important ways in which humans deviate from the standard economic model. Bounded rationality reflects the limited cognitive abilities that constrain human problem solving. Bounded willpower captures the fact that people sometimes make choices that are not in their long-run interest. Bounded self-interest incorporates the comforting fact that humans are often willing to sacrifice their own interests to help others. We then illustrate how these concepts can be applied in two settings: finance and savings. Financial markets have greater arbitrage opportunities than other markets, so behavioral factors might be thought to be less important here, but we show that even here the limits of arbitrage create anomalies that the psychology of decision making helps explain. Since saving for retirement requires both complex calculations and willpower, behavioral factors are essential elements of any complete descriptive theory.
What parts of the brain are activated when we make a gut decision?
Dr. Dan Siegel, clinical professor of psychiatry at the UCLA School of Medicine, explained the complex process of how our minds and bodies formulate and respond to a hunch for my video series Leadership: A Master Class.
“There are networks of neurons that serve as information processors. They’re like little computers arranged in a spider web-like network called a parallel distributed processor. Unlike the linear computers we have, these parallel processors can actually learn and think.
We have this spider web-like set of connections in our skull, which we usually refer to as the brain. But we also have neural net processors around the heart and intestines that process information in very complex ways.
These information processors of the internal organs of the body, called viscera, are not rational or logical. But it is processing information and sending signals up from the body itself, to the spinal cord in a layer called Lamina I.
Abstract The aim of our study was to see if there is a correlation between declared consumption of a food product and the activation of specific brain regions measured with fMRI when consumers are presented images with package of their preferred product. The study included 50 participants divided into approximately equal age groups and sex categories. We found that hemodynamic changes in the precuneus area of the brain were found to be positively correlated with whether or not participants consumed a certain brand, suggesting the brand triggered personal relevance. Also we found that there was a significant association between cerebral activations in the caudate nucleus and participants’ responses on the consumption questionnaire, proving the brand’s capacity to generate emotions. Our study is consistent with data indicating striatum activation as a brain correlate for consumption and/or preference. In addition, activation found in precuneus is a confirmation of the involvement of this brain area in the recollection and processing of self-relevant information and can be used for evaluating the personal relevance of a commercial, or other marketing-related stimuli. Neuromarketing tools demonstrate that can provide critical inputs to marketers and decision makers.
What drives our desire to behave morally? Neuroeconomist Paul Zak shows why he believes oxytocin (he calls it "the moral molecule") is responsible for trust, empathy and other feelings that help build a stable society. Oxytocin infusion increases generosity in unilateral monetary transfers by 80 percent [and] increases donations to charity by 50 percent.
he British philosopher Derek Parfit espoused a severely reductionist view of personal identity in his seminal book, Reasons and Persons: It does not exist, at least not in the way we usually consider it. We humans, Parfit argued, are not a consistent identity moving through time, but a chain of successive selves, each tangentially linked to, and yet distinct from, the previous and subsequent ones. The boy who begins to smoke despite knowing that he may suffer from the habit decades later should not be judged harshly: “This boy does not identify with his future self,” Parfit wrote. “His attitude towards this future self is in some ways like his attitude to other people.”
Parfit’s view was controversial even among philosophers. But psychologists are beginning to understand that it may accurately describe our attitudes towards our own decision-making: It turns out that we see our future selves as strangers. Though we will inevitably share their fates, the people we will become in a decade, quarter century, or more, are unknown to us. This impedes our ability to make good choices on their—which of course is our own—behalf. That bright, shiny New Year’s resolution? If you feel perfectly justified in breaking it, it may be because it feels like it was a promise someone else made.
Abstract This study examines the effects of ﬁscal austerity, among other socioeconomic variables, on suicide rates in Greece over the period 1968-2011. Our results suggest that ﬁscal austerity, higher unemployment rates, negative economic growth and reduced fertility rates, signiﬁcantly increase suicide rates in Greece, while increased alcohol consumption and divorce rates do not exert any signiﬁcant inﬂuence on suicide rates. Interestingly, the effects of ﬁscal austerity and economic growth are gender-speciﬁc, as ﬁscal austerity measures and negative economic growth signiﬁcantly increase male suicide rates, while no signiﬁcantly effects of ﬁscal austerity and negative economic growth on female suicide rates could be identiﬁed. Finally, the effects of ﬁscal austerity on suicide rate are also age-speciﬁc, affecting mostly the population between the ages of 45 and 89 years. These results have important implications for policy makers, and for the creation and implementation of specialised suicide prevention programs in Greece by national health agencies.
A common explanation for biases in judgment and choice has been to postulate two separate processes in the brain: a “System 1” that generates judgments automatically, but using only a subset of the information available, and a “System 2” that uses the entire information set, but is only occasionally activated. This theory faces two important problems: that inconsistent judgments often persist even with high incentives, and that inconsistencies often disappear in within-subject studies. In this paper I argue that these behaviors are due to the existence of “implicit knowledge”, in the sense that our automatic judgments (System 1) incorporate information which is not directly available to our reflective system (System 2). System 2 therefore faces a signal extraction problem, and information will not always be efficiently aggregated. The model predicts that biases will exist whenever there is an interaction between the information private to System 1 and that private to System 2. Additionally it can explain other puzzling features of judgment: that judgments become consistent when they are made jointly, that biases diminish with experience, and that people are bad at predicting their own future judgments. Because System 1 and System 2 have perfectly aligned preferences, welfare is well-defined in this model, and it allows for a precise treatment of eliciting preferences in the presence of framing effects.
Abstract: We provide a mathematical definition of fragility and antifragility as negative or positive sensitivity to a semi-measure of dispersion and volatility (a variant of negative or positive “vega”) and examine the link to nonlinear effects. We integrate model error (and biases) into the fragile or antifragile context. Unlike risk, which is linked to psychological notions such as subjective preferences (hence cannot apply to a coffee cup) we offer a measure that is universal and concerns any object that has a probability distribution (whether such distribution is known or, critically, unknown).
We propose a detection of fragility, robustness, and antifragility using a single “fast-and-frugal”, model-free, probability free heuristic that also picks up exposure to model error. The heuristic lends itself to immediate implementation, and uncovers hidden risks related to company size, forecasting problems, and bank tail exposures (it explains the forecasting biases). While simple to implement, it outperforms stress testing and other such methods such as Value-at-Risk.
Si è più volte detto della necessità che la stimolazione didattica sia organizzata in scansioni che prevedano ad un certo punto del loro dispiegarsi una sorta di picco emozionale che conferisca all’unità didattica assunta potere formativo e non solo informativo (Aprile 2012).
Ma formativo di che? E come può realizzarsi un tale esito? Ci si riferisce sia agli aspetti tecnico culturali specifici dell’argomento, sia alla comprensione più profonda del suo nucleo centrale o dei suoi nuclei policentrici; e a anche alla possibilità di una educazione ad una vita emozionale equilibrata. Questo è il limitato oggetto del presente scritto. Si devono intanto dare per intesi i sentieri avviati da Damasio (2000, 2012) su Emozione e Coscienza, ma anche alle propaggini sul Sé e la Mente; da Rossi (2011) sulla Didattica Enattiva e da Rivoltella (2012) sulla Neurodidattica che costituiscono lo sfondo teorico di questi segmenti. Il recente libro di Davidson ne costituisce invece l’ossatura centrale.
One of the strategies to free Italy from its legendary bureaucracy may lie in a new approach towards policy-making says Alberto Alemanno in an Op-Ed published in Il Sole 24 Ore. He proposes the Italian government to establish an Italian Nudge Unit called 'Italy Be-Have'.
Recent times have witnessed a rising interest by regulators, administrative agencies as well as public administrations towards a better understanding of human behavior based on the results that decades of experimental research have produced. Behavioral research, by showing that individuals deviate in predictable ways from neoclassical assumptions of rationality, may have implications for regulatory policy and is potentially set to revolutionize the way in which policies are formulated and implemented. Thus, placing an emoticon (sad face) or a set of information about average consumption on a prohibitive energy bill has the potential to nudge consumers towards less energy consumption. Rearranging the display of food makes it more likely that the healthy option is chosen. “Opt-out” mechanisms for deeming consent for automatic registration processes increases considerably the number of users registered in a certain program (e.g. organ donation or tax schemes). In a wide-range of policy fields such as energy, health, financial services, transport, experimental findings in behavioural research can be used by the Administrative and Regulatory State in connection with the traditional regulatory tools to produce behavioural change. As a result, policy makers may design effective, low-cost, choice-preserving approaches to societal problems.
The truth is, we all lie - and by "we," we mean everyone!
Our film “(Dis)Honesty – The Truth About Lies” examines the human tendency to be dishonest. From rampant plagiarism in our schools, to drug use in sports, to marital infidelity, to financial schemes destabilizing the global economy, dishonesty seems to be a regular part of the world we live in and the news we read. But the truth is that beneath the surface of the scandalous headlines, cheating is not just happening on a newsworthy scale, it’s happening in small ways everywhere.
When it comes to dishonesty, rational economic theory suggests that we consider the costs and benefits of our decision: i.e. what we can gain, the probability of getting caught, and the consequences we will face if caught. However, behavioral economics tells a different story and experiments show that cheating behavior falls within a grey zone where we can cheat and still feel good about ourselves — otherwise known as "the fudge factor." And while some influences can shrink the fudge factor to get us to behave more honestly, others expand the grey zone and help us rationalize dishonest behavior.
The film looks at dishonesty through multiple angles with personal tales of dishonesty ranging from the most trivial white lies to devastating lies that destroy lives. These stories are interwoven with insights from Dan Ariely based on years of behavioral research. The film will also include expert opinions by leaders in fields such as neuroscience, the arts and law, and archival footage that provides a deeper 360 cultural and historical context for dishonesty. The film presents the complicated ethical landscape we all navigate.
Music has been present in all human cultures since prehistory [1,2], although it is not associated with any apparent biological advantages (such as food, sex, etc.) or utility value (such as money). Nevertheless, music is ranked among the highest sources of pleasure , and its important role in our society and culture has led to the assumption that the ability of music to induce pleasure is universal. However, this assumption has never been empirically tested. In the present report, we identified a group of healthy individuals without depression or generalized anhedonia who showed reduced behavioral pleasure ratings and no autonomic responses to pleasurable music, despite having normal musical perception capacities. These persons showed preserved behavioral and physiological responses to monetary reward, indicating that the low sensitivity to music was not due to a global hypofunction of the reward network. These results point to the existence of specific musical anhedonia and suggest that there may be individual differences in access to the reward system.
Simple test of logic produces surprising win for 4 and 5-year-olds over college students.
Preschoolers can outsmart college students because they are less biased and more flexible than adults, a new study finds.
The conclusion comes from research published in the journal, Cognition, which put 170 college undergrads up against 106 four and five-year-olds in a test of learning and reasoning (Lucas et al., 2014).
L'analyse économique repose sur un postulat faux : la rationalité des acteurs. La nouvelle norme est celle du chaos perpétuel. Même le FMI a avoué qu'il avait beaucoup de mal à analyser avec les outils « classiques » de l'économie l'enchaînement de crises qui se succèdent depuis 2008 dans le monde. Deux économistes de renom, Vivien Levy-Garboua, « senior adviser » de BNP Paribas, et Gérard Maarek, conseiller scientifique de l'Edhec, prennent acte de ce constat d'impuissance dans ce nouveau livre qui propose ni plus ni moins une sorte de révolution pour leur discipline. Le problème, expliquent les deux auteurs, l'un et l'autre praticiens aguerris des modèles économétriques, c'est que ces modèles reposent sur l'hypothèse de rationalité de l'homo oeconomicus, de moins en moins pertinente pour analyser les évolutions convulsives de notre économie financiarisée et mondialisée. « Depuis quelques décennies, observent-ils, le psychisme de l'homme moderne s'est profondément modifié et, avec lui, celui des groupes constitués, familles, entreprises, peuples, dans lesquels il s'insère. »
In this short talk, psychologist Dan Ariely tells two personal stories that explore scientific conflict of interest: How the pursuit of knowledge and insight can be affected, consciously or not, by shortsighted personal goals. When we're thinking about the big questions, he reminds us, let's be aware of our all-too-human brains.
"........ The most difficult thing, of course, is to recognize that sometimes we too are blinded by our own incentives. And that's a much, much more difficult lesson to take into account. Because we don't see how conflicts of interest work on us. When I was doing these experiments, in my mind, I was helping science. I was eliminating the data to get the true pattern of the data to shine through. I wasn't doing something bad. In my mind, I was actually a knight trying to help science move along. But this was not the case. I was actually interfering with the process with lots of good intentions. And I think the real challenge is to figure out where are the cases in our lives where conflicts of interest work on us, and try not to trust our own intuition to overcome it, but to try to do things that prevent us from falling prey to these behaviors, because we can create lots of undesirable circumstances. ..."
Psychologist Barry Schwartz takes aim at a central tenet of western societies: freedom of choice. In Schwartz's estimation, choice has made us not freer but more paralyzed, not happier but more dissatisfied.
Early studies of intuitive judgment and decision making conducted with the late Amos Tversky are reviewed in the context of two related concepts: an analysis of accessibility, the ease with which thoughts come to mind; a distinction between effortless intuition and deliberate reasoning. Intuitive thoughts, like percepts, are highly accessible. Determinants and consequences of accessibility help explain the central results of prospect theory, framing effects, the heuristic process of attribute substitution, and the characteristic biases that result from the substitution of nonextensional for extensional attributes. Variations in the accessibility of rules explain the occasional corrections of intuitive judgments. The study of biases is compatible with a view of intuitive thinking and decision making as generally skilled and successful.