The third in a series of excerpts from Minds, Models and Milieux: Commemorating the Centennial of the Birth of Herbert Simon. Gerd Gigerenzer Herbert Simon left us with an unfinished task: a theory of bounded rationality. Such a theory should make two contributions. For one, it should describe how individuals and institutions actually make decisions. Understanding this process would advance beyond “as-if” theories of maximizing expected utility. Second, the theory should be able to deal with situations of uncertainty where “the conditions for rationality postulated by the model of neoclassical economics are not met” (Simon, 1989, p. 377). That is, it should extend to situations where one cannot calculate the optimal action but instead has to “satisfice,” that is, find either a better option than existing ones or one that meets a set aspiration level. This extension would make decision theory particularly relevant to the uncertain worlds of business, investment, and personal affairs.
Spending money so that it increases your happiness and wellbeing is an art form in itself. People who spend more on things that fit with their personality traits are happier, new research finds. For example, extroverted people are happier spending money in a restaurant. In contrast, the introverted get more pleasure from spending money in bookshops. A better fit between spending and personality was linked to life satisfaction more than total wealth or total spending. In other words: it matters less how much you have or how much you spend — what really matters is what you spend it on.
Tutti attivano delle distorsioni cognitive quando si relazionano con gli altri e conoscere quali sono può aiutare ad esserne consapevoli.Nessuno di noi è immune dalle distorsioni cognitive, tuttavia, essere consapevoli della loro esistenza può aiutare; una generica componente delle distorsioni cognitive è presente infatti in qualsiasi giudizio, in quanto esso è legato ad un fattore percettivo e dunque ad una visione della realtà filtrata soggettivamente da chi valuta.
Abstract People tend to hold overly favorable views of their abilities in many social and intellectual domains. The authors suggest that this overestimation occurs, in part, because people who are unskilled in these domains suffer a dual burden: Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it. Across 4 studies, the authors found that participants scoring in the bottom quartile on tests of humor, grammar, and logic grossly overestimated their test performance and ability. Although their test scores put them in the 12th percentile, they estimated themselves to be in the 62nd. Several analyses linked this miscalibration to deficits in metacognitive skill, or the capacity to distinguish accuracy from error. Paradoxically, improving the skills of participants, and thus increasing their metacognitive competence, helped them recognize the limitations of their abilities.
Textual data from analysts’ reports to blog posts can help banks enhance their credit-risk models.
Most banks use credit-rating models to help them make decisions about lending to companies. Such models are indeed a requirement for banks using Basel II’s internal-ratings-based approach. But these models often have significant shortcomings. First, they are frequently backward-looking. Second, they rely on borrowers’ formal financial reporting, which means that data are always at least 6 months old; toward the end of the fiscal year, data are nearly 18 months old. Third, qualitative assessments of borrowers are often simplistic. And finally, many banks rely on their credit-rating models to provide both a current snapshot and a longer-term view, with the result that they do neither well. Textual information can help banks overcome some of these challenges and improve their credit-risk assessment, in particular their approach to qualitative assessment. This information includes professionally produced content such as analysts’ reports and business journalism, as well as informal texts such as blogs and posts on social networks. Compared with the financial information available about small and midsize enterprises (SMEs) or corporates, the amount of textual content about companies is immense and provides a wealth of information. News articles describe the latest developments of companies; analysts’ reports provide insightful analyses on companies’ strategies, competitive positioning, and outlook; product ratings on online-shopping sites provide unfiltered views of customer satisfaction; and microblogs such as Twitter distribute the latest news (and sometimes gossip) with unprecedented speed.
Abstract The present two studies examine how the participants (i.e., 150 managers) make trust-based employee selection in hypothetical situations, based on five cues of trustworthiness derived from previous surveys. In Study 1, each executive participant is presented with a pair of candidates with different cue profiles so that the choice would favor one of them based upon each of the four following heuristics: Franklin's rule, likelihood expectancy, take-the-best (TTB), and minimum requirement (MR). Study 2 adopting a within-subject design jointly compares the four heuristics. The results show that simple heuristics (MR and TTB) outperform the more complex strategies (Franklin's rule and likelihood expectancy) in their predictive accuracy. The MR heuristic, a heuristic tallying the frequency of passes against a set of minimal rather than optimal or satisfactory requirements, performs even better than the TTB heuristic, particularly when the number of the cues identified as MRs is small.
A good grasp of basic statistics will help us to make the right life choices, finds Omar Malik
Risk is integral with life. It ceases only when life ceases. If you manage risk badly, your exit may be sooner than you wish: a good reason for studying the subject carefully. Much of the literature of risk is excellent, and Gerd Gigerenzer – whose work Malcolm Gladwell drew on extensively in his best-selling book Blink: The Power of Thinking Without Thinking – is a leading contributor to this excellence. A very important paragraph is nearly the last in this book; it should have been the first. In it Gigerenzer explains why Risk Savvy is not an academic textbook: he wishes to give something back to the taxpayers who fund his research; he does not wish people to be further estranged from science; he seeks to enable readers to take more control of their lives by making more informed decisions. Would that these principles were compulsory throughout the academy.
A Course in Behavioral Economics is a concise and reader-friendly introduction to one of the hottest developments in social and behavioral science today. Covering all core areas of the subject, Erik Angner clearly lays out the theory and explains the intuitions behind it. A rich selection of applications from economics, management, marketing, political science, and public policy illustrate how useful behavioral economics can be. No advanced mathematics is required. This redesigned and updated second edition: * includes a brand new chapter on behavioral welfare economics and the nudge agenda; * contains new sections on overconfi dence, projection bias, and more; and * offers an expanded range of real-life examples and exercises, refl ecting the continued uptake of behavioral economics across the disciplines. It is an ideal textbook for students coming to behavioral economics from various fields, for general readers looking for a thorough and readable introduction to the subject, and for anyone who has been captivated by popular-science books on behavioral economics and wants to know more. Available to lecturers: access to a wealth of resources at http://www.palgrave.com/angner2, including sample syllabi, an instructor's guide, sample handouts and examinations, and PowerPoint slides.
People struggling to keep up with overly ambitious New Years’ resolutions may have found a solution: behavioral economics.
A recent study from the Perelman School of Medicine found that financial incentives for fitness were more effective when participants were faced with a loss rather than a gain — even when the monetary amounts were identical.
281 employees of the University were assigned to four treatment groups for 13 weeks and were told their goal was to walk at least 7,000 steps each day. Their progress was tracked using a smartphone app that they could use as a high-tech pedometer.
“More than 50 percent of adults in the United States don’t get enough physical activity,” lead author of the study, Mitesh Patel, said. Patel, an assistant professor in the Medical School and the Wharton School's Health Care Management Department, studies the effectiveness of technology on improving health and medical outcomes.
Abstract: We study an interactive framework that explicitly allows for nonrational behavior. We do not place any restrictions on how players’ behavior deviates from rationality. Instead we assume that there exists a probability p such that all players play rationally with at least probability p, and all players believe, with at least probability p, that their opponents play rationally. This, together with the assumption of a common prior, leads to what we call the set of p-rational outcomes, which we define and characterize for arbitrary probability p. We then show that this set varies continuously in p and converges to the set of correlated equilibria as p approaches 1, thus establishing robustness of the correlated equilibrium concept to relaxing rationality and common knowledge of rationality. The p-rational outcomes are easy to compute, also for games of incomplete information, and they can be applied to observed frequencies of play to derive a measure p that bounds from below the probability with which any given player chooses actions consistent with payoff maximization and common knowledge of payoff maximization.
The best comedians have the best timing. Just listen to Louis CK, or Woody Allen in his youth doing stand-up. Top performers – be they musicians or politicians – have an innate sense of timing.
For marketers, this is worth bearing in mind. While we might all understand the importance of timing, many of us tend to focus on the “what” and the “how” but not as much on the “when”. That’s especially true in the era of personalization that we’re entering, where data allows us to know so much about consumers. Knowing shoppers’ habits and preferences, their geography and social connections, gives us the opportunity to craft precisely, even uncannily, tailored messages.
But this can backfire for all sorts of reasons, and timing is one of them. I’ve spoken about how important this is in the context of the consumer decision journey, and how critical it is to be clear about what phase a shopper is in on that journey. New insights about two key consumer mindsets – abstract and concrete – show how a specifically tailored message delivered at the wrong time can actually reduce conversion rates compared to a generic message. You can get more details in the piece we recently published (Wired for impact), but the short of it is: when consumers are in abstract mindsets, they listen to broad and high-level appeals; when they are in concrete mindsets, they listen to specific and practical appeals. If the right message hits at the wrong time, at best it won’t be heard, wasting money; at worst, it could have adverse effects, making companies seem out of touch. (You can register for the Behavioral Economics Summit jointly hosted by Yale and McKinsey on October 21-22 will take a deeper look at this issue).
Psychologists and investment professionals have now identified over 100 separate biases, heuristics and cognitive quirks that cause us to make poor financial decisions. While this work is important, it is also unwieldy for the average investor who has a basic notion that behavior matters but is unable to track and protect against such a broad universe of potential error. Understanding that these 100+ errors are all undergird by a few common psychological tendencies, Nocturne Capital created this Behavioral Risk Taxonomy. The 5 general themes here encompass all of the individual errors but also provide a simple framework from which advisory and investment processes can be constructed that seek to overcome these tendencies. The ideas presented in the document linked below were instrumental in designing our investment process and we hope they are similarly instructive in your own efforts at compounding meaningful wealth. Behavioral Risk Taxonomy
Abstract: The study of brain dynamics currently utilizes the new features of nanobiotechnology and bioengineering. New geometric and analytical approaches appear very promising in all scientific areas, particularly in the study of brain processes. Efforts to engage in deep comprehension lead to a change in the inner brain parameters, in order to mimic the external transformation by the proper use of sensors and effectors. This paper highlights some crossing research areas of natural computing, nanotechnology, and brain modeling and considers two interesting theoretical approaches related to brain dynamics: (a) the memory in neural network, not as a passive element for storing information, but integrated in the neural parameters as synaptic conductances; and (b) a new transport model based on analytical expressions of the most important transport parameters, which works from sub-pico-level to macro-level, able both to understand existing data and to give new predictions. Complex biological systems are highly dependent on the context, which suggests a “more nature-oriented” computational philosophy. Nano-Modeling and Computation in Bio and Brain Dynamics. Available from: https://www.researchgate.net/publication/299566104_Nano-Modeling_and_Computation_in_Bio_and_Brain_Dynamics [accessed Apr 3, 2016].
Acts of terror promote economic uncertainty and financial anxiety in people, who instinctively react by reducing spending. A mere 5 percent reduction in personal consumption brought by fear of terrorism is enough to push the U.S. economy into the next recession by lowering Gross Domestic Product (GDP) by 3.5 percent. Acts of terror promote economic uncertainty and financial anxiety in people, who instinctively react by reducing spending. A 5 percent reduction in personal consumption, which makes up nearly 70 percent of the U.S. economy, will decrease Gross Domestic Product (GDP) by 3.5 percent or negative 1.4 percent based on the 2015 third quarter GDP of 2.1 percent. Terrorism impacts the economy in two distinct ways. The first is the immediate impact on commerce right after a terror attack. The November 2015 terror attack in Paris de facto paralyzed commerce in parts of Paris, and later on in the entire city of Brussels in Belgium, for a few days. Repeated economic disruptions like these can have severe economic impact on local and national economies.
We experimented with every aspect of making coffee. What we found surprised us.
Over here at Decision Science News, we like Engineering All The Things. Accordingly, in an obsessive coffee phase, we acquired: A Coffee Maker that lets us set the exact brewing temperature A Digital Thermometer that lets us measure drinking temperature A Digital Scale that lets us weigh the grams A Coffee Grinder that lets us set the coarseness of the grind If you want to experiment, knock yourself out. What the figure above shows is that something around 55 grams of coffee per liter of water is considered ideal, but you can play around in the 50 to 65 grams / liter range. It’s harder to set where you want to be on the red lines without expensive equipment, but generally as you grind the coffee finer and brew longer you move up and to the right.
Abstract Many studies have shown that decision makers have a tendency to choose the default or standard action among several possible actions. The article develops a model to explore under what conditions it is optimal for a firm facing a strategic decision problem to choose the default action without investing in obtaining more information that allows a more accurate decision. The model shows that the strategy to follow the default without additional information (“the default heuristic”) is more likely to be optimal when the cost of obtaining information is higher, and when the variation in possible outcomes is lower. The model also analyzes the optimal level of information search, showing that if the firm chooses to obtain information at all, it will invest in more accurate information when the cost of obtaining information is lower and when the variation in possible outcomes is lower.
Abstract Nearly a century ago, Frank Knight famously distinguished between risk and uncertainty with respect to the nature of decisions made in a business enterprise. He associated generating economic profit with making entrepreneurial decisions in the face of fundamental uncertainties. This uncertainty is complex because it cannot be reliably hedged unless it is reducible to risk. In making sense of uncertainty, the mathematics of probability that is used for risk calculations may lose relevance. Fast-and-frugal heuristics, on the other hand, provide robust strategies that can perform well under uncertainty. The present paper describes the structure and nature of such heuristics and provides conditions under which each class of heuristics performs successfully. Dealing with uncertainty requires knowledge but not necessarily an exhaustive use of information. In many business situations, effective heuristic decision-making deliberately ignores information and hence uses fewer resources. In an uncertain world, less often proves to be more.
By Jean Decety and Howard Nusbaum in Emotion and Social Cognition. Prior research has shown that perceived social isolation (loneliness) motivates people to attend to and connect with others but to do so in a self-protective and paradoxically
Abstract: Gneezy and Potters (1997) run an experiment to test the empirical content of Myopic Loss Aversion (MLA). They find that the attractiveness of a risky asset depends upon the investors' time horizon: consistently with MLA, individuals are more willing to take risks when they evaluate their investments less frequently. This paper shows that these experimental findings can be easily accommodated by the most standard version of Expected Utility Theory, namely a CRRA specification. Additionally, we use four different datasets to estimate a CRRA model and two alternative MLA versions, together with various mixture specifications of the two competing models. Our econometric exercise finds little evidence of subjects' loss aversion, which provides empirical ground for our theoretical claim.
It’s important to be open and honest when you communicate your feelings to others, but we also have to be careful not to turn ourselves into “emotional manipulators.”
Too often we believe that merely speaking our feelings (“That makes me angry!” or “That makes me sad!”) should be enough to change people’s behaviors and get what we want out of them.
However, when you communicate your feelings with the expectation that it should automatically change others, this is often a counter-productive approach and you are often setting yourself up for disappointment.
When feelings are used as tools for manipulation, and people believe that you are just expressing an emotion to get a certain response out of them, that can often have a “backfire effect” where the person becomes less willing to do what you want them to do.
In the classic book Nonviolent Communication: A Language of Life, psychologist Marshall B. Rosenberg shares his fantastic system for communicating our feelings and needs in a peaceful way that minimizes hostility and aggression.
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