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The Empirical Evidence Against Utility Maximizatio

Current Economics Textbooks and Economists justify a theory of consumer behavior based on utility maximization on a priori grounds. This methodology follows Lionel Robbins’ idea that economic theory is based on logical deduction from postulates which are 'simple and indisputable facts of experience.' Strong evidence has emerged from many different lines of research that these 'simple and indisputable facts of experience' are contradicted by human behavior. In this article, we summarize some of main contradictions between predictions of utility theory and actual human behavior. Efforts to resolve these contradictions continue to be made within orthodox frameworks, but it appears likely that a paradigm shift is required.

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May we verify non existing dispersion free ensembles by application of quantum mechanics in experiments at perceptive and cognitive level?

Von Neumann in 1932 was the first to outline the possible non existence of dispersion free ensembles in quantum mechanics, and he used also such basic evidence to give a preliminary proof on incompatibility between quantum mechanics and (non-contextual) hidden variables theory. In the present paper we give a detailed theoretical elaboration on the manner in which such fundamental subject could be explored at perceptive and cognitive level in humans. We also discuss a general design of the experiment that we have in progress so to give direct indications to other researchers engaged in such field.

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On the Existence of Quantum Wave Function and Quantum Interference Effects in Mental States: An Experimental Confirmation during Perception and Cognition in Humans

We introduce the quantum theoretical formulation to determine a posteriori, if existing, the quantum wave functions and to estimate the quantum interference effects of mental states. Such quantum features are actually found in the case of an experiment involving the perception and the cognition in humans. Also some specific psychological variables are introduced and it is obtained that they characterize in a stringent manner the quantum behaviour of mind during such performed experiment.

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A general quantum information model for the contextual dependent systems breaking the classical probability law

There exist several phenomena (systems) breaking the classical probability laws. Such systems are contextual dependent adaptive systems. In this paper, we present a new mathematical formula to compute the probability in those systems by using the concepts of the adaptive dynamics and quantum information theory -- quantum channels and the lifting. The basic examples of the contextual dependent phenomena can be found in quantum physics. And recently similar examples were found in biological and psychological sciences. Our novel approach is motivated by traditional quantum probability, but it is general enough to describe aforementioned phenomena outside of quantum physics.
  
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A model of cognitive and operationa memory of organizations in changing worlds

This work analyzes and models the nature and dynamics of organizational memory, as such an essential ingredient of organizational capabilities. There are two sides to it, namely a cognitive side, involving the beliefs and interpretative frameworks by which the organization categorizes the states of the world and its own internal states, and an operational one, including routines and procedures that store the knowledge of how to do things. We formalize both types of memory by means of evolving systems of condition-action rules and investigate their performance in different environments characterized by varying degrees of complexity and non-stationarity. Broadly speaking, in simple and stable environments memory does not matter, provided it satisfies some minimal requirements. In more complex and gradually changing ones more memory is better. However there is some critical level of environmental instability above which forgetfulness is evolutionary superior from the point of view of long term performance. Moreover, above some (modest) complexity threshold stable and robust cognitive categorizations and routinized behavior emerge. 

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Self-Organization, Emergence, and Constraint in Complex Natural Systems

Self-Organization, Emergence, and Constraint in Complex Natural Systems | Bounded Rationality and Beyond | Scoop.it
Contemporary complexity theory has been instrumental in providing novel rigorous definitions for some classic philosophical concepts, including emergence. In an attempt to provide an account of emergence that is consistent with complexity and dynamical systems theory, several authors have turned to the notion ofconstraints on state transitions. Drawing on complexity theory directly, this paper builds on those accounts, further developing the constraint-based interpretation of emergence and arguing that such accounts recover many of the features of more traditional accounts. We show that the constraint-based account of emergence also leads naturally into a meaningful definition of self-organization, another concept that has received increasing attention recently. Along the way, we distinguish between order and organization, two concepts which are frequently conflated. Finally, we consider possibilities for future research in the philosophy ofcomplex systems, as well as applications of the distinctions made in this paper.
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Behavioral Economics of Education: Progress and Possibilities

Behavioral economics attempts to integrate insights from psychology, neuroscience, and sociology in order to better predict individual outcomes and develop more effective policy. While the field has been successfully applied to many areas, education has, so far, received less attention – a surprising oversight, given the field's key interest in long-run decision-making and the propensity of youth to make poor long-run decisions. In this chapter, we review the emerging literature on the behavioral economics of education. We first develop a general framework for thinking about why youth and their parents might not always take full advantage of education opportunities. We then discuss how these behavioral barriers may be preventing some students from improving their long-run welfare. We evaluate the recent but rapidly growing efforts to develop policies that mitigate these barriers, many of which have been examined in experimental settings. Finally, we discuss future prospects for research in this emerging field.

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Behavioral Economics

I

In recent years, behavioral economics has emerged as a bona fide subdiscipline of economics (cf. [Rabin, 2002, 657–658; Sent, 2004, 735–737]). At the time of writ-ing, virtually all top U.S. economics departments have behavioral economists onstaff. Behavioral papers appear in prime journals, and the number of doctoral dissertations, conferences, hirings, tenurings, etc. is increasing rapidly. Meanwhile,behavioral economists have been awarded the highest recognitions: MacArthur Fel-lowships, the John Bates Clark Medal, and most prominently, the Nobel MemorialPrize. Although a comparatively young field, it is possible to discern relativelydistinct phases in the development of behavioral economics. The first phase, whichwe will argue began in 1980, involved identifying anomalies — commonly observedeconomic phenomena that were inconsistent with standard theory — and explain-ing them in relatively loose psychological terms. The second, which began ap-proximately a decade later, incorporated behavioral assumptions into increasinglysophisticated, mathematically rigorous models of economic phenomena at boththe micro and the macro levels [Rabin, 2002, 658]. The third phase, once againunfolding approximately a decade later, has involved the systematic application of behavioral economics to issues of public policy (see, e.g., [McCaffery and Slemrod,2006; Diamond and Vartiainen, 2007]).

 

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Markets Hitting Highs: Unseen Contaminants to Rationality

Markets Hitting Highs: Unseen Contaminants to Rationality | Bounded Rationality and Beyond | Scoop.it
Categories: Alternative Investments, Behavioral Finance, Drivers of Value, Economics,Leadership, Management & Communication Skills, Portfolio Management, Standards, Ethics & Regulations (SER) Suddenly, proponents of the urban myth that our drinking water is poisoned seem to be correct. Scientists have discovered traces of the harmful and addictive drug cocaine in the United Kingdom’s water supply even after it had been intensively purified. According to one newspaper headline, “Cocaine Use in Britain Is So High It Has Contaminated Drinking Water.” But this is small fry compared to the scale of contamination of US drinking water. With 10% of Americans now taking antidepressantsand half on prescribed medications, “your tap water is probably laced with antidepressants” and harmful chemicals according to one report. Worse still, studies are blaming contaminated water for physical and behavioral changes, such as fish losing interest in their food, or even becoming “intersex” fish whereby male fish grow ovaries and start laying eggs. As markets hit new highs, we explore whether rational economic man, the bedrock of many financial theories and valuation models, is subject to unseen and adverse physiological influences.
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Neurogenesis: How To Grow New Brain Cells - PsyBlog

Neurogenesis: How To Grow New Brain Cells - PsyBlog | Bounded Rationality and Beyond | Scoop.it
Adults can still grow new brain cells -- neurogenesis -- but what are they for?

For a long time scientists believed that neurogenesis was impossible: adults had all the brain cells they were ever going to have.

Now we know that’s not true.

In fact, we continue to grow new brain cells into adulthood.

The race is on to find out what these brain cells are for and how we can grow more of them.

A new review of the scientific literature, published in the journal Trends in Cognitive Sciences, argues that the growth of new cells aids adaptation to the environment (Opendak & Gould, 2015).

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Probabilistic cost efficiency and bounded rationality in the newsvendor model

Abstract: In this paper we establish a link between probabilistic cost efficiency and bounded rationality in the newsvendor model. This establishes a framework where bounded rationality can be examined rigorously by statistical methods. The paper offers a relatively deep theoretical analysis of underorders/overorders in the newsvendor model. The theory is supported by empirical findings from our analysis of empirical data from laboratory experiments. In particular, we observe that underorders are systematically larger than overorders, an issue that our theoretical model explains. From statistical tests we conclude that all variability in our data can be explained by probabilistic cost efficiency and risk aversion.
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Decisions are reached in the brain by the same method used to crack the Nazi Enigma code

Decisions are reached in the brain by the same method used to crack the Nazi Enigma code | Bounded Rationality and Beyond | Scoop.it
The highlight of the award winning film, "The Imitation Game", is when Alan Turing and colleagues devise an ingenious statistical method that eventually helped decipher the Nazis' Enigma code. This breakthrough allowed Allied intelligence to read previously unavailable German military positions and actions, vastly shortening World War II. Interestingly, a team of neuroscientists at Columbia University found that more or less the same statistical method applied by Turing and co. is used by the brain to make any kind of decision, be it going left instead of right in an intersection or placing a higher bet during a high raise power game instead of folding.
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Why team bonuses are more effective

Why team bonuses are more effective | Bounded Rationality and Beyond | Scoop.it
Companies get it wrong when they think workers simply calculate the tradeoff between effort and money. 

When my kids were small, we participated in a neighborhood carpool. One morning, on my turn, my son had to stay at home due to an illness, and I was going to drive only the neighbors' children to school. The routine morning phone call to my mom ended with the following request: "Drive safely! Those are someone else's kids!"

Crazy as it sounded, my mom was conveying a commonly held moral concern—that I should be more respectful of things that are dear to my friend than dear to me. Most of us, surprisingly, share this stance. And it’s not necessarily because we are altruists, but because it serves us well from a social point of view.

Imagine, as another example, that you forget to pay your parking ticket and incur a $60 added fine. Now suppose instead that you forget to pay your friend's ticket (who has asked you to do so since he is away on vacation) and you incur that same fine for your friend. Which would make you feel worse?

 
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Design of an Experiment to Test Quantum Probabilistic Behavior of the Financial market

The recent crash demonstrated (once again) that the description of the financial market by present financial mathematics cannot be considered as totally satisfactory. We remind that nowadays financial mathematics is heavily based on the use of random variables and stochastic processes which are described by Kolmogorov's measure-theoretic model for probability ("classical probabilistic model"). I speculate that the present financial crises is a sign (a kind of experiment to test validity of classical probability theory at the financial market) that the use of this model in finances should be either totally rejected or at least completed. One of the best candidates for a new probabilistic financial model is quantum probability or its generalizations, so to say quantum-like (QL) models. Speculations that the financial market may be nonclassical have been present in scientific literature for many years. The aim of this note is to move from the domain of speculation to rigorous statistical arguments in favor of probabilistic nonclassicality of the financial market. I design a corresponding statistical test which is based on violation of the formula of total probability (FTP). The latter is the basic in classical probability and its violation would be a strong sign in favor of QL behavior at the market.

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Quantum dynamics of human decision-making

Abstract: A quantum dynamic model of decision-making is presented, and it is compared with a previously established Markov model. Both the quantum and the Markov models are formulated as random walk decision processes, but the probabilistic principles differ between the two approaches. Quantum dynamics describe the evolution of complex valued probability amplitudes over time, whereas Markov models describe the evolution of real valued probabilities over time. Quantum dynamics generate interference effects, which are not possible with Markov models. An interference effect occurs when the probability of the union of two possible paths is smaller than each individual path alone. The choice probabilities and distribution of choice response time for the quantum model are derived, and the predictions are contrasted with the Markov model.

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The quantum-like description of the dynamics of party governance in the US political system

This paper is devoted to the application of the mathematical formalism of quantum mechanics to social (political) science. By using the quantum dynamical equations we model the process of decision making in US elections. The crucial point we attempt to make is that the voter's mental state can be represented as a superposition of two possible choices for either republicans or democrats. However, reality dictates a more complicated situation: typically a voter participates in two elections, i.e. the congress and the presidential elections. In both elections he/she has to decide between two choices. This very feature of the US election system requires that the mental state is represented by a 2-qubit state corresponding to the superposition of 4 different choices (e.g. for republicans in the congress; for the president as a democrat). The main issue of this paper is to describe the dynamics of the voters' mental states taking in account the mental and socio- political environment. What is truly novel in this paper is that instead of using Schr\"odinger's equation to describe the dynamics in an absence of interactions, we here apply the quantum master equation. This equation describes quantum decoherence, i.e., resolution from superposition to a definite choice.
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Alzheimer's Protein Appears At This Incredibly Young Age - PsyBlog

Alzheimer's Protein Appears At This Incredibly Young Age - PsyBlog | Bounded Rationality and Beyond | Scoop.it

The young age at which amyloid protein, a hallmark of Alzheimer’s, begins to appear in the brain.

 

Amyloid protein, which is a hallmark of Alzheimer’s disease, has been detected in people as young as 20, a new study finds.

This is much earlier than any scientists previously thought.

Amyloid protein is strongly associated with Alzheimer’s disease.

It eventually forms in clumps outside the neurons.

Professor Changiz Geula, who led the study, said:

“Discovering that amyloid begins to accumulate so early in life is unprecedented.

This is very significant.

We know that amyloid, when present for long periods of time, is bad for you.”

 

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The leadership of emergence - A complex systems leadership theory of emergence at successive organizational levels

The leadership of emergence - A complex systems leadership theory of emergence at successive organizational levels | Bounded Rationality and Beyond | Scoop.it

Complexity science reframes leadership by focusing on the dynamic interactions between all individuals, explaining how those interactions can, under certain conditions, produce emergent outcomes. We develop aLeadership of Emergence using this approach, through an analysis of three empirical studies which document emergence in distinct contexts. Each of these studies identifies the same four “conditions” foremergence: the presence of a Dis-equilibrium state, Amplifying actions, Recombination/“Self-organization”, and Stabilizing feedback. From these studies we also show how these conditions can be generated through nine specific behaviors which leaders can enact, including: Disrupt existing patterns through embracing uncertainty and creating controversy, Encourage novelty by allowing experiments and supporting collective action, Provide sense-making and sense-giving through the artful use of language and symbols, and Stabilize the system by Integrating local constraints. Finally, we suggest ways for advancing a meso-model of leadership, and show how our findings can improve complexity science applications in management.

 
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Experimental Economics in Virtual Reality

Recent developments in virtual reality (VR) technology have the potential to revolutionize the way economists do experimental research. With Oculus’ light and affordable head mounted display (HMD) human subjects can literally move and use objects in virtual spaces and interact with others. This technology as well as surround-screen projection systems like CAVEs (Cruz-Neira et al. 1994), allow the experimenter to observe economically relevant behavior and social interaction in a highly immersive and at the same time tightly controlled virtual environment. More than other disciplines, economics focuses on the evaluation of counterfactual scenarios which help to analyze strategic decisions and their efficiency effects. In this note, by means of three examples, we illustrate how experiments in highly IVEs can add value to experimental economics and benefit economic research.

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Aswath Damodaran: The Most Reliable Investment Valuations Balance Numbers and Narratives

Aswath Damodaran: The Most Reliable Investment Valuations Balance Numbers and Narratives | Bounded Rationality and Beyond | Scoop.it

When it comes to valuing stocks, the most reliable valuations come from imaginative number crunchers and disciplined storytellers, says Aswath Damodaran. And too often pure “numbers” people drift off into what he calls “spreadsheet nirvana.” Similarly, investors who focus purely on the narrative of a potential investment run the risk of quickly “veering from reality to fantasy.”

Damodaran, who teaches valuation and corporate finance at the Stern School of Business at New York University (NYU), made these remarks at the recent CFA Institute Equity Research and Valuation Conference 2014 inBoston, where he urged attendees to bridge the gap between numbers and narratives, insisting that the best valuations are not just “a collection of numbers, but a story connected to numbers.”

Damodaran acknowledged the critical role that numbers play in the valuation process, but he warned that they should be used judiciously. Due to mission creep, he thinks accounting statements have become increasingly difficult to navigate and fair value accounting has become an oxymoron, allowing for bias and the illusion of objectivity in valuations. Similarly, the emergence of Big Data as an input into sophisticated valuation models driven by “Excel Ninjas,” and the accompanying notion that “more is better,” has its limits. Adding an extra decimal place to your model’s projected operating profit margin conveys a false sense of precision with no meaningful improvement in outcomes.

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How Does Your Ego Impact Your Decision Making?

How Does Your Ego Impact Your Decision Making? | Bounded Rationality and Beyond | Scoop.it
Do you know of anyone who has suppressed bad news to preserve their career or reputation?Or told the boss what they wanted to hear instead of the truth?Or overlooked a red flag to preserve the sense of harmony in the workplace?Most often ego is catalogued as 'good' or 'bad', but what if it's simply about your relationship with yourself? At the heart of the matter your ego, your self-esteem, self-worth and personal sense of security, chaperons your decision-making. Does the business culture have an impact on your ego?It’s absurd to pretend that the business culture doesn’t have an
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Empirical test of a quantum probability model for question order effects found in survey research

Abstract This article develops and empirically tests a quantum probability model for question order effects observed in survey research. First, the general theoretical assumptions are  presented; second, an exact parameter free prediction is derived; third, the results from four surveys and one experiment are used to empirically test the prediction; fourth, a new index is derived to measure similarity between questions; finally, we describe the main conditions under which order effects are predicted to occur. In conclusion, quantum theory, initially invented to explain order effects on measurements in physics, provides a powerful explanation for order effects of survey questions too

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Social Nudges: Their Mechanisms and Justification

In this paper I argue that the use of social nudges, policy interventions to induce voluntary cooperation in social dilemma situations, can be defended against two ethical objections which I call objections from coherence and autonomy. Specifically I
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Trust, Cooperative Behavior And Economic Success: When Trust Is The Capital Of The Person?

Abstract: This article presents the results of study dedicated to the interrelation of trust, cooperative behavior and the size of the winning prize in the multi-way decision modified prisoners’ dilemma. The experiment was organized using a specially designed computer program. The study involved six groups of participants and each group consisted of 7 players. The experiment consisted of a series of 15 rounds and included preliminary and final testing. The study found that cooperative behavior within the members in the group had fallen during 11 rounds, but there was a tendency to improve it. The trust level of an individual and his/her choice of cooperative strategy in the first series of the experiment are interrelated. Generalized trust is a rather stable construct, but it does not remain unchanged with an actual reduction of cooperative behavior. 
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Yes, You’re Irrational, and Yes, That’s OK - Issue 21: Information - Nautilus

Yes, You’re Irrational, and Yes, That’s OK - Issue 21: Information - Nautilus | Bounded Rationality and Beyond | Scoop.it

It’s all about leveraging the unconscious factors that drive 95 percent of consumer decision-making.

It has created a large and growing list of ways that humans diverge from economic rationality. Researchers have found that all sorts of logically inconsequential circumstances—rain, sexual arousal (induced and assessed by experimenters with Saran-wrapped laptops), or just the number “67” popping up in conversation—can alter the value we assign to things. For example, with “priming effects,” irrelevant or unconsciously processed information prompts people to assign value by association (seeing classrooms and lockers makes people slightly more likely to support school funding). With “framing effects,” the way a choice is presented affects people’s evaluation: Kahneman and Tversky famously found that people prefer a disease-fighting policy that saves 400 out of 600 people to a policy that lets 200 people die, though logically the two are the same. While mainstream economists are still wrestling with these ideas, outside of academe there is little debate: The behaviorists have won.

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