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# Stirling Behavioural Science Blog : Lecture Summary: Judgement, Heuristics and Biases

What are heuristics?
This article by Kahneman and Tversky (1974) is still a classic description of the main heuristics that people use to judge probability and frequency. Heuristics can be thought of as mental 'rules of thumb' that people employ for all kinds of judgements. For example, if you want to share a cake among 5 people, rather than optimize the size of each slice depending on each person's unique preferences, level of hunger, etc you might employ a 1/n heuristic and give everyone an equal 1/5th slice. Or if you see dark clouds forming on your way to work, you might decide to bring a raincoat. To paraphrase Kahneman & Tversky, "People rely on heuristic principles to reduce the complex tasks of assessing probabilities to simpler judgmental operations." I'll briefly discuss some experiments and examples about the three heuristics from this paper.

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# Bounded Rationality and Beyond

News on the effects of bounded rationality in economics and business, relationships and politics
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## New Theory of How the Brain Generates Our Perceptions of the World | Neuroscience News

New research out of the University of Pennsylvania is filling in gaps between two prevailing theories about how the brain generates our perception of the world.

One, called the Bayesian decoding theory, says that to best recognize what’s in front of us, the brain combines the sensory signals it receives, a scene we’re looking at, for example, with our preconceived notions. Experience says that a school bus is typically yellow, so logically the one in front of us is more likely yellow than blue.

The second theory, called efficient coding, explains that, for sensory input resources like neurons in the brain and retinas in the eyes to efficiently do their jobs, they process and store more precise information about the most frequently viewed objects. If you see a yellow bus every day, your brain encodes an accurate picture of the vehicle so on next viewing you’ll know its color. Conversely, the brain won’t expend many resources to remember a blue bus.

Alan Stocker, an assistant professor in the psychology and the electrical and systems engineering departments, and Xue-Xin Wei, a psychology graduate student, combined these two concepts to create a new theory about how we perceive our world: How often we observe an object or scene shapes both what we expect of something similar in the future and how accurately we’ll see it.

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## Scaling in topological properties of brain networks

The organization in brain networks shows highly modular features with weak inter-modular interaction. The topology of the networks involves emergence of modules and sub-modules at different levels of constitution governed by fractal laws. The modular organization, in terms of modular mass, inter-modular, and intra-modular interaction, also obeys fractal nature. The parameters which characterize topological properties of brain networks follow one parameter scaling theory in all levels of network structure which reveals the self-similar rules governing the network structure. The calculated fractal dimensions of brain networks of different species are found to decrease when one goes from lower to higher level species which implicates the more ordered and self-organized topography at higher level species. The sparsely distributed hubs in brain networks may be most influencing nodes but their absence may not cause network breakdown, and centrality parameters characterizing them also follow one parameter scaling law indicating self-similar roles of these hubs at different levels of organization in brain networks.

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## Quantum cognition: a new theoretical approach to psychology - ResearchGate

Publication » Quantum cognition: a new theoretical approach to psychology.
ABSTRACT
What type of probability theory best describes the way humans make judgments under uncertainty and decisions under conflict? Although rational models of cognition have become prominent and have achieved much success, they adhere to the laws of classical probability theory despite the fact that human reasoning does not always conform to these laws. For this reason we have seen the recent emergence of models based on an alternative probabilistic framework drawn from quantum theory. These quantum models show promise in addressing cognitive phenomena that have proven recalcitrant to modeling by means of classical probability theory. This review compares and contrasts probabilistic models based on Bayesian or classical versus quantum principles, and highlights the advantages and disadvantages of each approach.
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## On Some Explanations and Analysis of the Basic Foundations of Quantum Cognition :Comments ona Paper by Pothos,Busemeyer and Trueblood (PDF Download Available)

ABSTRACT
The aim of such paper is to explain in detail the foundations of quantum cognition and to evidence the manner in which our pioneering experiments on quantum interference in humans should be correctly interpreted in the framework of a correct quantum mechanical elaboration. Often, studies on quantum cognition are elaborated from some authors evidencing that presently we have empirical evidence that the application of quantum rules gives better results respect to classical ones. Consequently, such studies are delineated as empirical tentatives. It is not true. Quantum cognition is a scientific realization structured about robust quantum foundations and this is the reason because it gives such important results. Consequently, we discuss the esigence to correctly explain the foundations of this emerging discipline. In order to reach this objective we analyze the fundamental role of the abstract entity that is called quantum mechanical wave function. Soon after we describe the manner in which quantum operators must be entered in cognition studies by using the projectors that represent logic statements and thus relate directly our cognitive functions. We also discuss in detail the logical origins of quantum mechanics outlining that it does not represent a physical theory looking at the matter at microscopic level but a God Giano two faces looking simultaneously to material and to mental reality. We also discuss results establishing the nature of our consciousness and the unquestionable result that it obeys to the basic rules of quantum mechanics. We also give a further and pressing indication:that in quantum cognition studies the quantum wave function must be intended as reconstructed experimentally a posteriori in our cognitive studies and cannot be confused with the standard examining elaboration that is used in usual textbooks of quantum mechanics. Also the question of the order effect is analyzed in detail using the important notion of Reaction Time (RT)of psychology. In substance, we give a total reformulation of the current quantum cognition studies evidencing that previous elaborations finalized to present the corrent status of this discipline as empirical tentatives to characterize a quantum cognitive modelling result to be only approximate, uncorrect and confusing prospects that damage the information about the robust structure of quantum cognition and therefore need to be rejected.

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## Disentangling two causes of biased probability judgment: Cognitive skills and perception of randomness

Abstract: This experimental study investigates the interaction of two influential factors of biased probability judgments. Results provide new insights on the preconditions for an application of either the gambler's fallacy or its exact opponent, the hot hand fallacy. The first factor is cognitive ability, measured in a cognitive reflection test. The second one is the level of perceived randomness in the observed outcomes. Probability judgments are found to vary significantly across salience of randomness treatments as well as across subgroups with high or low cognitive abilities. Like in previous research, subjects with higher cognitive skills are more likely to engage the gambler's fallacy, yet only if perception of sequential randomness is low. In a setting where randomness is very salient the exact opposite can be observed. Similarly surprising insights are revealed when controlling for cognitive abilities in the analysis of salience treatments. Past results are only confirmed for a subgroup with lower cognitive skills, while their peers' beliefs are completely opposite.
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## Subliminal Influence on Generosity

Abstract: We experimentally prime subjects subliminally prior to charity donation decisions by showing words that have connotations to prosocial values for a very short duration of time (17ms). Our main finding is that, compared to a baseline condition, the prosocial prime increases donations with about 10–17 percent among subjects with strong prosocial preferences. A similar effect is also found in our data when interacting the prime with the personality characteristic of BigFive agreeableness. We also contribute with providing an arguably better method for testing for "sublimity". The method reveals that some subjects are capable of recognizing some of the prime words, and the results are overall weaker when we control for this capacity.

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## Facebook-to-Facebook: Online Communication and Economic Cooperation

Abstract: Communication is often critical for economic cooperation and enhancement of trust. Traditionally, direct face-to-face communication has been found to be more effective than any form of indirect, mediated communication. We study whether this is still the case given that many people routinely use texting and online social media to conduct economic transactions. In out laboratory experiment, groups of participants communicate either (i) face-to-face, (ii) through the most popular online social network – Facebook, or (iii) using text messaging, before participating in a public goods or a trust game. While people talk significantly more under traditional face-to-face, discussion through Facebook and text messages prove as effective as face-to-face communication in enhancing cooperation and increasing trust. For all three media, discussions that focus on the game of use more positive emotion words are correlated with enhanced trust. It appears that young American adults are now just as adept at communicating and reducing social distance online as they are in person.

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## Do individuals’ risk and time preferences predict entrepreneurial choice?

Abstract: This study seeks to estimate whether individuals’ risk and time preferences are predictive of self employment status and entry. Prior Work: The low risk aversion of those who are self employed is well established in theory and empirical evidence, there is less evidence however on whether risk seeking in existing employees predicts future self employment entry and virtually no empirical research on the links between time preference and self employment. Approach: This study uses a quantitative approach by estimating a series of statistical models that estimate the relationship between an individuals’ risk and time preferences and whether they are (or subsequently become) self employed using a national longitudinal dataset. Results: We find that the self employed are more likely to have low risk aversion. When restricting our analysis to those who are initially employees we find that , low risk aversion combined with a preference for short term gains are most predictive of a transition into self employment. Implications and Value: This study informs the general question as to whether entrepreneurship is linked to personality traits with new evidence on the link between risk and time preference and self employment entry, in doing so it points towards attitudes toward risk and time preference that need to be encouraged if entrepreneurship is to be developed within countries and firms.
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## Using behavioral science to improve the customer experience | McKinsey & Company

By guiding the design of customer interactions, the principles of behavioral science offer a simple, low-cost route to improved customer satisfaction. A McKinsey Quarterly article.

Service operations seem a natural setting for the ideas of behavioral science. Every year, companies have thousands, even millions, of interactions with human beings—also known as customers. Their perceptions of an interaction, behavioral scientists tell us, are influenced powerfully by considerations such as its sequence of painful and pleasurable experiences. Companies care deeply about the quality of those interactions and invest heavily in effective Web sites and in responsive, simplified call centers.

Yet the application of behavioral science to service operations seems spotty at best. Its principles have been implemented by relatively few companies, such as the telecommunications business, which found that giving customers some control over their service interactions by allowing them to schedule field service visits at specific times could make them more satisfied, even when they had to wait a week or longer. Many more companies ignore what makes people tick. Banks, for example, often disturb the customer experience by altering the menus on ATMs or the interactive-voice-response (IVR) systems in call centers. They fail to recognize the psychological discomfort customers experience when faced with unexpected changes.

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## The Dark Side of How We Think Without Thinking: Malcolm Gladwell on Amadou Diallo (2005) - YouTube

The author describes the main subject of his book as "thin-slicing": our ability to gauge what is really important from a very narrow period of experience. In other words, this is an idea that spontaneous decisions are often as good as—or even better than—carefully planned and considered ones. Gladwell draws on examples from science, advertising, sales, medicine, and popular music to reinforce his ideas. Gladwell also uses many examples of regular people's experiences with "thin-slicing."

The book argues that intuitive judgment is developed by experience, training, and knowledge. For example, Gladwell claims that prejudice can operate at an intuitive unconscious level, even in individuals whose conscious attitudes are not prejudiced. An example is in the halo effect, where a person having a salient positive quality is thought to be superior in other, unrelated respects. Gladwell uses the 1999 killing of Amadou Diallo, where four New York policemen shot an innocent man on his doorstep 41 times, as another example of how rapid, intuitive judgment can have disastrous effects.

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## Richard Thaler, "Misbehaving" - YouTube

Many people first heard the term “behavioral economics” when Thaler, Chicago professor of behavioral science and economics, and co-author Cass Sunstein published Nudge in 2008. Thaler’s new book retraces the thinking behind that bestselling paradigm shift, showing how he came to understand human miscalculations not as negligible to, but instrumental in, markets and systems, from national budgets to household spending to NFL drafts.

Founded by Carla Cohen and Barbara Meade in 1984, Politics & Prose Bookstore is Washington, D.C.'s premier independent bookstore and cultural hub, a gathering place for people interested in reading and discussing books. Politics & Prose offers superior service, unusual book choices, and a haven for book lovers in the store and online. Visit them on the web at http://www.politics-prose.com/

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## Behavioural economics for better decisions - All In The Mind - ABC Radio National (Australian Broadcasting Corporation)

Humans 'misbehave'—we're irrational, indecisive and passionate, yet conventional economics assumes that we will always act logically. Can using a more realistic understanding of human behaviour nudge us to change our way of thinking? Olivia Willis reports.
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## Risk Behavior, Risk Perception and Online Shopping: An Experimental Approac

Abstract: In this paper, we analyze and link self-reported risk perception data obtained from surveys and experimentally elicited risk parameters and use them to explain online shopping behavior. We find that self-reported risk data turn out to be not correlated with the actual risk parameters. Although risk perceptions do not play a significant role in explaining binary online shopping behavior, risk parameters of the subjects elicited via a new hybrid experimental methodology play a very important role. The data also reveals that actually risk-averse subjects tend to report themselves to be just as risk-loving as the ones who exhibit risk-loving behavior.
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## PLOS ONE: Emotional Dynamics in the Age of Misinformation

According to the World Economic Forum, the diffusion of unsubstantiated rumors on online social media is one of the main threats for our society. The disintermediated paradigm of content production and consumption on online social media might foster the formation of homogeneous communities (echo-chambers) around specific worldviews. Such a scenario has been shown to be a vivid environment for the diffusion of false claim. Not rarely, viral phenomena trigger naive (and funny) social responses—e.g., the recent case of Jade Helm 15 where a simple military exercise turned out to be perceived as the beginning of the civil war in the US. In this work, we address the emotional dynamics of collective debates around distinct kinds of information—i.e., science and conspiracy news—and inside and across their respective polarized communities. We find that for both kinds of content the longer the discussion the more the negativity of the sentiment. We show that comments on conspiracy posts tend to be more negative than on science posts. However, the more the engagement of users, the more they tend to negative commenting (both on science and conspiracy). Finally, zooming in at the interaction among polarized communities, we find a general negative pattern. As the number of comments increases—i.e., the discussion becomes longer—the sentiment of the post is more and more negative.
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## Libraries/UnivArchives: Herbert Simon Collection [Carnegie Mellon Libraries]

Welcome to the full-text digital archive of Herbert Simon, winner of the 1978 Nobel Prize in Economics. Simon earned an international reputation as one of the founders of artificial intelligence. Dr. Simon's research extended from computer science to such areas as cognitive psychology, administration and economics.

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## What Is Quantum Cognition, and How Is It Applied to Psychology? - ResearchGate

Publication » What Is Quantum Cognition, and How Is It Applied to Psychology?.

Quantum cognition is a new research program that uses mathematical principles from quantum theory as a framework to explain human cognition, including judgment and decision making, concepts, reasoning, memory, and perception. This research is not concerned with whether the brain is a quantum computer. Instead, it uses quantum theory as a fresh conceptual framework and a coherent set of formal tools for explaining puzzling empirical findings in psychology. In this introduction, we focus on two quantum principles as examples to show why quantum cognition is an appealing new theoretical direction for psychology: complementarity, which suggests that some psychological measures have to be made sequentially and that the context generated by the first measure can influence responses to the next one, producing measurement order effects, and superposition, which suggests that some psychological states cannot be defined with respect to definite values but, instead, that all possible values within the superposition have some potential for being expressed. We present evidence showing how these two principles work together to provide a coherent explanation for many divergent and puzzling phenomena in psychology.

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## How to be a good economist | The Enlightened Economist

It has been difficult to resist writing about Dani Rodrik’s new book, Economics Rules: The Rights and Wrongs of the Dismal Science, before the embargo date, but at last I’m free to say how terrific it is. Rodrik is of course one of the most eminent public intellectual economists, engaged with policy and the ‘real world’, and a natural communicator. I’m completely in sympathy with his dual aim of aiming the correct criticisms at economics while defending it others: “I have long been critical of my fellow economists for being narrow minded, taking their models too literally and paying inadequate attention to social processes. But I felt that many of the criticisms coming from outside the field missed the point.” This might sound defensive but it matters to get the criticisms right: some of the old chestnuts (too mathematical, all about selfishness etc) give economists a free pass because they allow them to ignore the more troubling issues.

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## An empirical investigation into the propensity of reckless decision making within the high pressure environment of Deal or No Deal

Abstract: This paper discusses human attitudes towards risk and the development of expected utility models, laying the foundations for the creation of prospect theory in 1979. It proceeds to analyse the decisions of contestants on the popular TV game show Deal or No Deal to attempt to observe any evidence of differing levels of risk aversion under losses and gains as predicted by prospect theory. The results reveal some evidence of decreased risk aversion in the domains of losses and gains, with contestants displaying behaviour consistent with the break-even and house-money effects. We conclude there may be enough evidence of variable reference points to warrant further investigation, and propose suggestions for further research
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## Science Isn’t Broken | FiveThirtyEight

If you follow the headlines, your confidence in science may have taken a hit lately. Peer review? More like self-review. An investigation in November uncovered a scam in which researchers were rubber-stamping their own work, circumventing peer review at five high-profile publishers.

People often joke about the herky-jerky nature of science and health headlines in the media — coffee is good for you one day, bad the next — but that back and forth embodies exactly what the scientific process is all about. It’s hard to measure the impact of diet on health, Nosek told me. “That variation [in results] occurs because science is hard.” Isolating how coffee affects health requires lots of studies and lots of evidence, and only over time and in the course of many, many studies does the evidence start to narrow to a conclusion that’s defensible. “The variation in findings should not be seen as a threat,” Nosek said. “It means that scientists are working on a hard problem.”

The scientific method is the most rigorous path to knowledge, but it’s also messy and tough. Science deserves respect exactly because it is difficult — not because it gets everything correct on the first try. The uncertainty inherent in science doesn’t mean that we can’t use it to make important policies or decisions. It just means that we should remain cautious and adopt a mindset that’s open to changing course if new data arises. We should make the best decisions we can with the current evidence and take care not to lose sight of its strength and degree of certainty. It’s no accident that every good paper includes the phrase “more study is needed” — there is always more to learn.

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## An empirical investigation into the propensity of reckless decision making within the high pressure environment of Deal or No Deal

Abstract: This paper discusses human attitudes towards risk and the development of expected utility models, laying the foundations for the creation of prospect theory in 1979. It proceeds to analyse the decisions of contestants on the popular TV game show Deal or No Deal to attempt to observe any evidence of differing levels of risk aversion under losses and gains as predicted by prospect theory. The results reveal some evidence of decreased risk aversion in the domains of losses and gains, with contestants displaying behaviour consistent with the break-even and house-money effects. We conclude there may be enough evidence of variable reference points to warrant further investigation, and propose suggestions for further research
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## Understanding decision neuroscience: A multidisciplinary perspective and neural substrates - ResearchGate

Publication » Understanding decision neuroscience: A multidisciplinary perspective and neural substrates.

Abstract
The neuroscience of decision making is a rapidly evolving multidisciplinary research area that
employs neuroscientific techniques to explain various parameters associated with decision
making behavior. In this chapter, we emphasize the role of multiple disciplines such as
psychology, economics, neuroscience, and computational approaches in understanding the
phenomenon of decision making. Further, we present a theoretical approach that suggests
understanding the building blocks of decision making as bottom-up processes and integrate
these with top-down modulatory factors. Relevant neurophysiological and neuroimaging
findings that have used the building-block approach are reviewed. A unifying framework
emphasizing multidisciplinary views would bring further insights into the active research
area of decision making. Pointing to future directions for research, we focus on the role of
computational approaches in such a unifying framework.
Key

Understanding decision neuroscience: A multidisciplinary perspective and neural substrates. Available from: https://www.researchgate.net/publication/234132861_Understanding_decision_neuroscience_A_multidisciplinary_perspective_and_neural_substrates [accessed Oct 2, 2015].

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## Stochastic Optimal Growth Model with Risk Sensitive Preferences

Abstract: This paper studies a one-sector optimal growth model with i.i.d. productivity shocks that are allowed to be unbounded. The utility function is assumed to be non-negative and unbounded from above. The novel feature in our framework is that the agent has risk sensitive preferences in the sense of Hansen and Sargent (1995). Under mild assumptions imposed on the productivity and utility functions we prove that the maximal discounted non-expected utility in the infinite time horizon satisfies the optimality equation and the agent possesses a stationary optimal policy. A new point used in our analysis is an inequality for the so-called associated random variables. We also establish the Euler equation that incorporates the solution to the optimality equation.

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## Richard Thaler with Malcolm Gladwell on Misbehaving - YouTube

Behavioral economist Richard Thaler talks to bestselling author Malcolm Gladwell on the implications of behavioral economics on how we think about the world, from our personal lives to business to society.

They will have you retooling your grocery list and retirement strategies, and lead managers to rethink every aspect of their business.

Recorded May 19, 2015 at 92nd Street Y.

Subscribe for more videos like this: http://bit.ly/1GpwawV
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## Richard Thaler and Hal Varian: Behavioral Economics - YouTube

Richard Thaler, Behavioral Science and Economics Professor, University of Chicago; Author, Misbehaving: The Making of Behavioral Economics; Twitter @R_Thaler
Hal Varian, Chief Economist, Google; Twitter @halvarian
George Anders, Contributing Writer, Forbes; Twitter @GeorgeAnders – Moderator

Traditional economics assumes rational actors. Our lived experiences, however, tell us otherwise: real people are often error-prone individuals rather than Spock-like automatons. Whether buying concert tickets or applying for a mortgage, we all make decisions that deviate from assumed rationality standards. We misbehave, and our misbehavior has serious consequences. Dismissed at first by economists as an amusing sideshow, the study of human miscalculations and their effects on markets now drives efforts to make smarter decisions in our personal lives, our businesses and our governments. Thaler and Varian, economists of the information age, discuss the intersection of economics and psychology, and offer innovative strategies to approach an increasingly complex world.

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## Behavioural biases among real estate investment decision makersHas anyone seen my neo-cortex? I'm sure I left it here somewhere

Abstract: Purpose – To examine whether investors in commercial real estate exhibit some important behavioural biases, namely: anchoring, herding, framing/nudging, loss aversion and over-confidence. If so, are there steps that investors and their agents ( fund managers and advisors) could take (a) to temper the effects of their own biases and (b) to exploit the presence of such biases in other market participants? Design/methodology/approach – Analysis of historic data sources at asset and market levels and over different time periods, with focus on identifying the specific biases listed above, singly and in combination Findings – Understanding of behavioural bias merits greater attention. Research limitations/implications – Reliance on inferences from historic data Practical implications – May help develop clearer understanding of market drivers and improved decision-making for market participants. Originality/value – New research within the real estate industry that could help investors understand the highly cyclical nature of commercial real estate investment markets Keywords: behavioural biases – anchoring – herding – framing - loss aversion – over-confidence Article Classification: Viewpoint

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