As companies and governments move away from traditional defined benefit pension plans toward defined contribution plans, the role of the financial adviser has gained greater importance. The work of Harry Markowitz and the birth of modern portfolio theory have given finance professionals a framework for creating the optimal portfolio. Even though numerous models exist for constructing portfolios, it can be difficult to persuade lay investors to make rational choices. Their seemingly irrational decisions can arise from a lack of knowledge or from psychological barriers that prevent them from behaving rationally.
In Investor Behavior: The Psychology of Financial Planning and Investing, H. Kent Baker of American University's Kogod School of Business and Victor Ricciardi of Goucher College have assembled a collection of 30 articles written by more than three dozen scholars in the field of behavioral finance. The articles encompass a wide range of topics in the psychology of investing, focusing on academic work on financial planning. Even readers who are somewhat familiar with the literature on behavioral finance will benefit because the book addresses a number of topics not usually covered in the mainstream behavioral finance literature.
In psychology and neuroscience, and in other disciplines studying decision- making mechanisms, it is often assumed that optimal decision-making means statistical optimality. This is attractive because statistically optimal decision procedure sare known,can be simply implemented in biologically-plausible models, and because such models have been show into give good fits to behavioural as well as neural data. Here we question when statistical optimality is the kind of optimality we should expect natural selection to aim towards, by considering what kind sof loss function should be optimised under different behavioural scenarios. In laboratory settings subjects are often reward edonly on making a correct choice, so optimisation of a zero-one loss function is appropriate, and this is achieved by implementing a statistically- optimal decision procedure that gives the best compromise between speed and accuracy of decision-making. Many naturalistic decisions may also be described by such a loss function; however others, such as selecting food items of potentially different value, appear to be different since the animalis rewarded by the value of the item it chooses regard less of whether it was the best available. We argue that most naturalistic decisions are value-based. Mechanisms that optimise speed-accuracy trade-offs need to be parameterised, using information about the decision problem, in order to deal with value-based decision- making. Mechanisms for value-sensitive decision-making have been described, how ever, which adaptively change between decision-making strategies with out the need for continual reparameterisation.
Over a quarter of a century has passed since the 1987 publication of Paul A. Samuelson’s historiographical manifesto ‘Out of the closet: A program for the Whig history of economic science’, summarising arguments that had developed during a 16-year debate provoked by his 1971 Journal of Economic Literature article on the Marxian transformation problem. Samuelson’s intervention marked a defining turning point in the evolution of contemporary economic thought.
In the wake of the economic turmoil that opened with the 2007 financial crash, 20 years after Samuelson’s manifesto, criticisms of the quality of economic thought have multiplied. This special issue of Cambridge Journal of Economics offers a timely re-appraisal of the impact of the Whig-historical programme on the economic thinking and practices that have become the target of today’s critics.
The term ‘Whig history’ was originally coined by the English historian Herbert Butterfield (1981 ) to refer to what Peter Boettke (2005)describe as ‘history as written by those perceived to have been the intellectual victors of key debates’. Butterfield’s largely successful purpose was to discredit and eliminate the practice, amongst historians, of presenting the past and its ideas as nothing more than an imperfect form of the present. Since then, awareness of the dangers of such reductionism and the necessity of what Bagchi (2014) calls a ‘contextual’ approach to social knowledge has spread through most of the social sciences.
Pur basandosi sulla tecnologia al silicio, il nuovo chip "TrueNorth" riesce a offrire prestazioni cento volte superiori a quelle di un microprocessore standard e, cosa ancora più importante, con un consumo energetico 176.000 volte inferiore. Il risultato è stato ottenuto grazie a un'architettura che imita da vicino quella dei circuiti cerebrali . Un chip dotato di un'architettura ispirata a quella del cervello e in grado di eseguire compiti sofisticati in tempo reale consumando pochissima energia è stato messo a punto da un gruppo di ricercatori della IBM e della Cornell University diretti da Dharmendra S. Modha nell'ambito del progetto SyNAPSE (Systems of Neuromorphic Adaptive Plastic Scalable Electronics) sponsorizzato dalla DARPA (Defense Advanced Research Projects Agency). Il chip apre la strada alla progettazione di dispositivi informatici adatti a compiti che i chip dei computer convenzionali non sono in grado di eseguire in modo efficiente.
Studiare l’irrazionalità in modo scientifico, empirico e sperimentale: conoscere dove ci portano le nostre emozioni e quale area del cervello si attiva anche in quei contesti in cui sarebbe meglio prendere decisioni meditate. L’intervento di Matteo Motterlini, filosofo e neuroeconomista, speaker life a #bDf14. Guarda l’intervista a Matteo Motterlini >
Lord Adair Turner delivers the opening keynote speech of the Rethinking Economics 2014 conference at UCL.
The 2014 Rethinking Economics NYC conference is an entirely student-run conference in New York City from September 12-14 at The New School, Columbia University and NYU.
It is organized by Rethinking Economics in partnership with The Modern Money Network.
Rethinking Economics is a global movement to create fresh economic narratives that challenge and enrich the predominant narratives in economics. The movement unites all who support new ways of thinking. We believe that the mainstream approach to understanding our economy, while definitely valuable, is far too narrow. We value pluralism: the belief that economics should be a more interdisciplinary subject that embraces useful ideas from various schools of thought and subject fields.
The Modern Money Network is a trans-disciplinary learning hub, dedicated to improving the function, design, operations and legal regulation of money. It is student-conceived and student-run, and combines insights from a range of fields, including law, political economy, finance, history, sociology, anthropology, technology and systems theory.
Economic predictions depend on figuring out what generates economic activity. Since the turn of the 20th century, economists have struggled to grasp what drives various parts of the economy, from consumer goods to commodities to housing. Yet the underlying causes of financial events remain elusive.
Scientists at University College London, however, appear to be finally making some headway. A team of researchers at the Centre for the Study of Decision-Making Uncertainty led by professor David Tuckett, one of London’s leading psychoanalysts, is studying the psychological moods of market participants to decipher what drives economic activities.
The team is using a large database of financial news stories from the mid-1990s until today, scanning articles for various words and phrases. The selected terms are then divided into fear or anxiety words and optimistic or happiness words. The balance between these two divisions generates what the team is calling the animal spirits measure — a Keynesian term used to describe the psychological state of investors that drives economic activity in spite of market uncertainties.
When the system finds a lot of anxiety words in the financial press, the researchers say it is an indication that the market under study is about to sink. When the software returns a lot of optimistic keywords, the market might be on an upward swing. During a recent discussion, Tuckett refused to provide details on the specific words and phrases the researchers are targeting, but he noted that the terms were carefully selected on the basis of interviews and extensive psychological investigation.
To make a decision, a system must assign value to each of its available choices. In the human brain, one approach to studying valuation has used rewarding stimuli to map out brain responses by varying the dimension or importance of the rewards. However, theoretical models have taught us that value computations are complex, and so reward probes alone can give only partial information about neural responses related to valuation. In recent years, computationally principled models of value learning have been used in conjunction with noninvasive neuroimaging to tease out neural valuation responses related to reward-learning and decision-making.We restrict our review to the role of these models in a new generation of experiments that seeks to build on a now-large body of diverse reward-related brain responses. We show that the models and the measurements based on them point the way forward in two important directions: the valuation of time and the valuation of fictive experience.
Although plants are generally immobile and lack the most obvious brain activities of animals and humans, they are not only able to show all the attributes of intelligent behaviour but they are also equipped with neuronal molecules, especially synaptotagmins and glutamate/glycine-gated glutamate receptors.
Recent advances in plant cell biology allowed identification of plant synapses transporting the plant-specific neurotransmitter-like molecule, auxin. This suggests that synaptic communication is not limited to animals and humans but seems to be widespread throughout plant tissues. Root apices seated at the anterior pole of the plant body show many features which allow us to propose that they, especially their transition zones, act in some way as “brainlike”
command centres. The opposite posterior pole harbours sexual organs and is specialized for plant reproduction. Last but not least, we propose that vascular tissues represent highways for plant nervous activity allowing rapid exchange of information between the growing points of above-ground organs and the “brain-like” zones in the root apices.
Equity fund managers are underperforming their benchmarks again this year, continuing a trend that started sometime shortly after the Big Bang. As it often does, the year began with the promise of a “stock picker’s market,” a thinly-veiled and empirically lacking pitch for active management. But with the finish line in sight, nearly 80% of large cap fund managers in the US find themselves trailing the S&P 500 Index. Some of these fund managers may be tempted to break free of their index-hugging ways in an effort to overtake their benchmarks in the remaining months of the year. They would do well to heed the warning of Oaktree Capital’s (OAK) Howard Marks, CFA, who thinks investor behavior has “entered the zone of imprudence.”
Mark’s thoughtful “Memos from the Chairman” are widely considered required reading for serious investors and his latest missive, “Risk Revisited,” is no exception. While he believes that today’s market conditions “are creating a degree of risk for which there is no commensurate risk premium,” Marks is an advocate for risk control rather than risk avoidance, which he likens to “return avoidance.” To this end, he warns of the risk of over-diversification, whereby a portfolio has so many positions the impact of any one stock is so muted as to be inconsequential. Warren Buffett, an admitted fan of Marks, has said that you can get all the diversification you need in six businesses, adding “very few people have gotten rich on their seventh best idea.” Of course, given its enormous size, Buffett’s Berkshire Hathaway by necessity owns more than seven stocks — it owned 46 at last count — but its top seven positions constituted over 75% of its portfolio at the end of June. It’s a concentrated portfolio by almost any measure.
This Special Issue of the Journal of Economic Methodology brings together a selection of papers presented at the Conference Neuroeconomics: Hype or Hope?, which was hosted by the Erasmus Institute for Philosophy and Economics (EIPE) in November 2008 in Rotterdam. The conference speakers comprised ardent advocates and practitioners of neuroeconomics, outspoken critics and skeptics, and philosophers and methodologists taking a stance somewhere in between these extremes. The central question was whether neuroeconomics is a flimsy fad that is likely to pass without leaving a discernible trace in economics, or a promising new field with the potential to enrich and improve economic theory. Neuroeconomics is hot. Over the last few years, all over the world many leading universities have started their own lab or centre for euroeconomics. Papers explicitly presented under the banner of neuroeconomics frequently appear in leading science journals such as Nature and Science. Neuroeconomics has also received quite some attention in the popular press. Not surprisingly, economists have started to reflect on neuroeconomics and its relevance for economics. To date, the paper by Gul and Pesendorfer (2008) is perhaps the staunchest denial of any potential relevance of neuroscientific findings for economics. Gul and Pesendorfer argue that economists should keep their focus on observable choice behavior and retain their agnosticism about decision-making processes. Since neuroscientific data are about decision-making processes, they should be completely disregarded in empirical assessments of economic theories
A worth reading article by Dara O’Rourke today well explains why it’s time “we move beyond surveys, and simultaneously commit to avoiding invasive tracking and manipulative marketing, in order to really understand what consumers want and need, and to help them connect their values and actions for sustainability. A new set of tools and technologies has emerged over the last several years to measure the behaviours of consumers. These tools, if used responsibly, transparently, and without violating people’s privacy, hold important potential for better understanding consumer behavior with respect to sustainability”.
We all want customized experiences and products -- but when faced with 700 options, consumers freeze up. With fascinating new research, Sheena Iyengar demonstrates how businesses (and others) can improve the experience of choosing. Do you know how many choices you make in a typical day? Do you know how many choices you make in typical week? I recently did a survey with over 2,000 Americans, and the average number of choices that the typical American reports making is about 70 in a typical day. There was also recently a study done with CEOs in which they followed CEOs around for a whole week. And these scientists simply documented all the various tasks that these CEOs engaged in and how much time they spent engaging in making decisions related to these tasks. And they found that the average CEO engaged in about 139 tasks in a week. Each task was made up of many, many, many sub-choices of course. 50 percent of their decisions were made in nine minutes or less. Only about 12 percent of the decisions did they make an hour or more of their time. Think about your own choices. Do you know how many choices make it into your nine minute category versus your one hour category? How well do you think you're doing at managing those choices?
Many people question about the way to define EI instruments and objectives in a clear and unambiguous manner. Often, indeed, this skepticism hides the refuse to acknowledge the paramount importance of the economic and financial issues into the global world of intelligence. Many Intelligence scholars, in fact, continue to reject the “globalization” of the Intelligence, as the enlargement of both its spectrum of interest (going from the traditional military and political aspects, to the economical and financial ones, and in perspective towards the medical, physical and astronomical ones), and the geographical areas relevant for the national security (proceeding from the East-West dichotomy to each micro-angles of the world).Due to the global recession, economy and finance constraints “bind” everywhere – in industrialized and developing countries – any public and private functions. Today, in the sovereign and corporate world, the debt stock contracted in the past, and the more and more moderate flow of income seriously limit the exertion of both the full state sovereignty and the management of an optimized business.
What impact is behavioural science having on politics and business? Simplified disclosure, default rules, social norms, and ‘choice architecture’ are all being used to steer people in specific directions. Are these ‘nudges’ improving our decisions? Are they offsetting irrational behaviour? Cass Sunstein, author of Nudge and the previous Administrator of the White House Office of Information and Regulatory Affairs in the Obama administration will discuss these new policies and the question they raise about freedom of choice.
Cass Sunstein (@CassSunstein) is the Robert Walmsley University Professor at Harvard Law School.
Tutti - più o meno - sappiamo che una volta approvata dal parlamento una legge è necessario stenderne il regolamento attuativo, compito affidato alla burocrazia ministeriale - funzionari e alti dirigenti. Senza regolamento, la legge rimane una mera affermazione di principi, un cattivo regolamento può rendere inapplicabile una legge e far impazzire i cittadini. Come molti giornalisti hanno ripetutamente messo in evidenza, citiamo per tutti il duo Rizzo-Stella, l'Italia è un paese soffocato da troppe leggi e dalla burocrazia ministeriale: non c'è stato da noi né un presidente Ronald Regan né un presidente Barack Obama, che - pur appartenendo a concezioni politiche diametralmente opposte - hanno promosso in modo bipartisan la semplificazione: "l'uso di un linguaggio comprensibile; la riduzione degli adempimenti burocratici; la stesura di riassunti leggibili per normative particolarmente complesse; e l'abolizione di adempimenti costosi e ingiustificati".
Queste sono "spinte gentili" (nudges): approcci semplici e poco costosi che fanno riferimento ai principi della behavioral economics e fanno sperare in benefici economici e nel miglioramento della vita sociale, lavorativa e nella salute delle persone. Questo è esattamente ciò che serve al nostro paese per tentare di uscire dalla palude, per innescare quel cambiamento culturale di cui si parla molto ma per cui si fa ancora poco, perché manca un metodo basato su principi scientifici e quindi valutabili in termini di efficacia, sull'analisi costi-benefici, per fare in modo che, spiega Sunstein, "gli atti del governo si fondino su dati di fatto e prove chiare, non su intuizioni, aneddoti, dogmi o sulle idee di potenti gruppi d'interesse".
While behavioral finance identifies and describes cognitive errors, it provides few remedies. In fact, when Daniel Kahneman was asked what could be done to overcome behavioral biases, he told delegates at CFA Institute’s 2012 Annual Conference: “Very little; I have 40 years of experience with this, and I still commit these errors. Knowing the errors is not the recipe to avoiding them.”
The major behavioral biases stem from a lack of conscious awareness of how our minds function. The good news is that attaining consciousness is a hallmark of a meditation practice. Moreover, a recent INSEAD/Wharton research paper demonstrated that a mindfulness practice is a successful antidote to “sunk cost” bias.
Here is a guide to behavioral finance’s major biases and how meditation may help to overcome them.
Much is known about how people make decisions under varying levels of probability (risk). Less is known about the neural basis of decision-making when probabilities are uncertain because of missing information (ambiguity). In decision theory, ambiguity about probabilities should not affect choices. Using functional brain imaging, we show that the level of ambiguity in choices correlates positively with activation in the amygdala and orbitofrontal cortex, and negatively with a striatal system. Moreover, striatal activity correlates positively with expected reward. Neurological subjects with orbitofrontal lesions were insensitive to the level of ambiguity and risk in behavioral choices. These data suggest a general neural circuit responding to degrees of uncertainty, contrary to decision theory.
Magnetic stimulation of a brain area involved in "executive function" affects cravings for and consumption of calorie-dense snack foods, reports a study in the September issue of Psychosomatic Medicine: Journal of Biobehavioral Medicine, the official journal of the American Psychosomatic Society. The journal is published by Lippincott Williams & Wilkins, a part of Wolters Kluwer Health. After stimulation of the dorsolateral prefrontal cortex (DLPFC), young women experience increased cravings for high-calorie snacks -- and eat more of those foods when given the opportunity, according to the study by researchers at University of Waterloo, Ont., Canada. "These findings shed a light on the role of the DLPFC in food cravings (specifically reward anticipation), the consumption of appealing high caloric foods, and the relation between self-control and food consumption," the researchers write. The senior author was Peter Hall, PhD. Brain Stimulation Affects Cravings and Consumption for 'Appetitive' Snacks The study included 21 healthy young women, selected because they reported strong and frequent cravings for chocolate and potato chips. Such "appetitive," calorie-dense snack foods are often implicated in the development of obesity. - See more at: http://www.neuroscientistnews.com/research-news/your-brain-snacks-brain-stimulation-affects-craving-consumption#sthash.GENRJhPs.dpuf
This paper is about the emerging field of #neuroeconomics, which seeks to ground economic theory in details about how the brain works. This approach is a sharp turn in economic thought. Around the turn of the century, economists made a clear methodological choice, to treat the mind as a black box and ignore its details for the purpose of economic theory (13). In an 1897 letter Pareto wrote It is an empirical fact that the natural sciences have progressed only when they have taken secondary principles as their point of departure, instead of trying to discover the essence of things. ... Pure political economy has therefore a great interest in relying as little as possible on the domain of psychology (quoted in Busino, 1964, p. xxiv (14)). Pareto’s view that psychology should be ignored was reflective of a pessimism of his time, about the ability to ever understand the brain. As William Jevons wrote a little earlier, in 1871