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Thinking, Fast and Slow: A New Way to Think About Thinking

Thinking, Fast and Slow: A New Way to Think About Thinking | Bounded Rationality and Beyond | Scoop.it
Beneath the biases of intuition, or how your experiencing self and your remembering self shape your life.

Via Philippe Vallat, Thomas Menk
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Statistics Economics & Neuroscience: DECISION MAKING PROCESS: COMPONENTS AND TIME EFFECT

Statistics Economics & Neuroscience: DECISION MAKING PROCESS: COMPONENTS AND TIME EFFECT | Bounded Rationality and Beyond | Scoop.it
We have seen [here] that the decision making activates a circuit, where the evaluation of the alternative solutions to a given problem and the choice of the best one would give rise to a learning mechanism for error reduction.  Now let's talk about the main components which influence the decision making (see Figure 1). 

We can consider the combination of three factors over the decision making process:

the decision environment;the quantity of information;the decision stream.

 

Figure 1. The components of decision making and the role of the time

Decision making is a process which requires the definition of the informative set (environment) by which select and implement the best solution to a given problem. During the decisional process the quantity of information is cumulated until a certain time (t') beyond which the gathering of more information overload the decision maker. That is, the quantity of the "effective" information does not grow indefinitely, but will decrease from a certain time on. The existence of a time contraint enables the decision maker to get a decision. Decisions may have effect not only at the time when  they have been taken, but also may enter successive decisional processes, i.e., they may feed the decision environment of the same decision maker (or of other decision makers when we consider the social dynamics) in successive times. This flow of information forms the decision stream.   

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A Two-Layered Diffusion Model Traces the Dynamics of Information Processing in the Valuation-and-Choice Circuit of Decision Making

A Two-Layered Diffusion Model Traces the Dynamics of Information Processing in the Valuation-and-Choice Circuit of Decision Making | Bounded Rationality and Beyond | Scoop.it
Computational Intelligence and Neuroscience is a forum for the interdisciplinary field of neural computing, neural engineering and artificial intelligence, where neuroscientists, cognitive scientists, engineers, psychologists, physicists, computer scientists, and artificial intelligence investigators among others can publish their work in one periodical that bridges the gap between neuroscience, artificial intelligence and engineering.
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ADMA Unplugged: Paul Zak, Center for Neuroeconomics Studies - YouTube

Paul Zak and Brian Frost explore the neurochemistry of brand love in this ADMA Unplugged online interview. Paul J. Zak is the founding Director of the Center for Neuroeconomics Studies and Professor of Economics, Psychology and Management at Claremont Graduate University. Brian Frost is a creative at Innocean USA.
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People are not “rational”: An empirical study of th deviation between actual and shortest travel time path

Abstract

Few empirical studies of revealed route characteristics have been reported in the literature. This study challenges the widely applied shortest path assumption by evaluating routes followed by residents of the Minneapolis - St. Paul metropolitan area, as

measured by the GPS Component of the 2011 Twin Cities Travel Behavior Inventory. It nds that most travelers used paths longer than the shortest path. Some reasons for this are conjectured.

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Ecological Rationality

 Which city has more inhabitants: Detroit or Milwaukee? If you don’t know the correct answer, you are not alone. In a study, we asked this question to German and US students and students from neither country knew that the answer was Detroit. However, German students intuitively gave the correct answer much more often than students in the US did. Why? German students were able to rely on a simple, intuitive rule of thumb, the so-called recognition heuristic:If you only recognize one of two objects, then infer that the recognized object has a higher value (in this case more inhabitants).This rule of thumb works well as long as we don’t know too much about a topic. Having heard about both cities many times before, the U.S. students could not apply the recognition heuristic and selected the right answer less often.© Max-Planck-Institut für Bildungsforschung 

Note: Impact of quality: High-quality objects are mentioned more frequently in the media than low-quality objects. Impact of publicity: Objects more frequently mentioned in the media are more likely to be recognized. Recognition validity: Objects that are recognized more often are thus more often of higher quality (cf.Goldstein & Gigerenzer, 2002).

Ecological rationality studies humans in real-world domains and explores which heuristics are promising in which environment. For example, the recognition heuristic works only if there is a correlation between recognition of an object (name of a city) and quality of the object (size of the city) – for instance, that bigger cities appear more often in the media than smaller ones – and if only one of the two objects is recognized (as did the German students but not the U.S. students).

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The psychology and economics of reverse mortgage attitudes: evidence from the Netherlands

Il centro è il primo centro di ricerca in Italia specificatamente dedicato allo studio dell'economia delle pensioni e dell'invecchiamento.

Abstract

This paper presents the results from a survey on the attitudes toward reverse mortgages of homeowners aged 45 and over in the Netherlands. We find that there is substantial potential interest in reverse mortgages, especially for the purpose of being able to live more comfortably and not worry about money until death, or to be able to spend a large sum of money upon retirement on hobbies, home improvements or traveling. A similar study has been done for Italy, where results differ from those related to the Netherland. For Italian households a reverse mortgage is primarily seen as a last resort. We use two different frames for suggestions on the use of the loan – own consumption versus bequest - and find that the latter significantly raises interest in reverse mortgages of people with a bequest wish. We interpret this as evidence that people are unaware of the potential of reverse mortgages to optimize the timing of bequests. Women are less interested, while demand is highest among those around retirement age, depends positively on the ratio of housing wealth over income and on the perceived riskiness of future pensions, and negatively on the expected replacement ratio. We find a counterintuitive result for bequest timing, as people are more interested if the age difference with the oldest child is larger.

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Solar Flares and Risk Management for Investors

Solar Flares and Risk Management for Investors | Bounded Rationality and Beyond | Scoop.it

On 1 September 1859, the sun emitted a large solar flare releasing approximately 6 × 1025 joules of energy (i.e., a massive amount). Telegraph systems all over the world — which were connected by copper wires — failed, in some cases giving telegraph operators electric shocks; in other cases, cascades of sparks spontaneously erupted from telegraph lines. Amazingly, some telegraph equipment that wasn’t plugged in continued to receive messages. In the days that followed the solar storm, which came to be known as the Carrington Event, auroras were seen around the world — including as far south as the Caribbean and Ecuador. Fireballs were spotted in the sky. Equipment connected to this “Victorian internet” caught fire. What might happen to today’s internet if the sun were to emit another solar flare? What does this mean for risk management?

On 23 July 2012, there was a similar coronal mass ejection (CME) released by the sun, only this time the CME narrowly missed Earth. Had the CME occurred just seven days earlier, it would have directly hit planet Earth. According the the US Geological Survey, such an event has a 6%–7% chance of happening in the next 10 years. NASA scientist Daniel Baker calculates that there is a 12% chance that the earth will encounter another Carrington Event within the next 10 years.

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Tips for Building Relational Equity (Video)

Tips for Building Relational Equity (Video) | Bounded Rationality and Beyond | Scoop.it
Networking is one of the most essential career management strategies, and it seems our readers agree, as proven by the popularity of networking content. In this recent Career Conversation with Seattle-based career coach Paula Fitzgerald Boos, we consider the topic further and discuss the real aim of networking — building relational equity.
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Stirling Behavioural Science Blog : Lecture on Rationality, Utility, Value and Decision Making

Stirling Behavioural Science Blog : Lecture on Rationality, Utility, Value and Decision Making | Bounded Rationality and Beyond | Scoop.it
 am currently giving a set of lectures as part of a module "Behavioural Economic: Concepts and Theories" in Stirling. I am posting brief informal summaries of some of these lectures on the blog to generate discussion.

Today's lecture was on Rationality, Utility, Value and Decision-making. The lecture consisted of six sections (Fig. 1): (i) concepts of rationality; (ii) rational choice in conditions of certainty; (iii) rational choice in conditions in conditions of uncertainty; (iv) challenges to rational choice (v) loss aversion and the endowment effect; and (vi) implications of rationality assumptions and threats to their validity for policy. 

(i) Concepts of rationalityThe main point of this lecture is to give a working definition of what we mean by rationality in Economics. This is a complex construct with many potential meanings across a wide range of literatures. In Economics we generally tend to mean that decision makers are consistent in their behaviour rather than to question their motivations. The basic microeconomic models of the consumer generally assume rational utility maximising behaviour.
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How the Brain Makes Sense of Spaces

How the Brain Makes Sense of Spaces | Bounded Rationality and Beyond | Scoop.it

When an animal encounters a new environment, the neurons in its brain that are responsible for mapping out the space are ready for anything. So says a new study in which scientists at the Howard Hughes Medical Institute’s Janelia Research Campus examined neuronal activity in rats as they explored an unusually large maze for the first time.

The researchers found that neurons in the brain’s hippocampus, where information about people, places, and events is stored, each contribute to an animal’s mental map at their own rate. Some neurons begin to associate themselves with the new space immediately, while others hold back, contributing only if the space expands beyond a size that can be represented by the first-line neurons. Similar mechanisms may be at play as the human brain records a new experience, says Janelia group leader Albert Lee, who led the study. Lee, graduate student Dylan Rich, and Hua Peng-Liaw, a technician in Lee’s lab, published their findings in the August 15, 2014, issue of the journal Science.

 
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The Duration Heuristic

The duration heuristic refers to the tendency to evaluate services based on their duration rather than on their content. We propose that consumers rely on the duration heuristic because it simplifies the evaluation process. In particular, the duration heuristic is most likely to be seen when the duration of the service experience is evaluable relative to other features and when duration is considered

in relation to price. Across four experiments and a field study, we (a) provide demonstrations of the duration heuristic, (b) illustrate the biases that result as a consequence of its use, and (c) identify conditions under which consumers are more likely to use the heuristic

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Behavioural Economics in Action

Behavioural Economics in Action | Bounded Rationality and Beyond | Scoop.it
Learn to use principles and methods of behavioural economics to change behaviours, improve welfare and make better products and policy.
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Over Time, Buddhism and Science Agree

Over Time, Buddhism and Science Agree | Bounded Rationality and Beyond | Scoop.it

Even inanimate objects that appear solid and persistent are revealed by modern physics to be in a constant state of flux. An iron bar is mostly empty space, and even the ostensibly solid, sub-atomic particles occupying that space are either moving so rapidly as to be unimaginable or, alternately, exist as clouds of probability rather than as stationary monuments to permanence.

With living things, the world is even less fixed. As Yeats observed: “O body swayed to music, O brightening glance / How can we know the dancer from the dance?” Biologists as well as Buddhists know that living stuff is always dancing, constantly replenished by, and created from, nonliving components. At every moment, our existence takes place only on the instantaneous, knife-edge of Now, which can never be captured and held immobile.

The story goes that as a young man, the Buddha sought to overcome the imperfections of the real world—sickness, old age, and death—by following the path of traditional Hindu asceticism, mortifying the flesh and nearly starving himself. His eventual enlightenment, however, is said to have involved recognition that all things are temporary, ever-changing, and impermanent. Unlike Christ, who promises eternal life, the last words of the Buddha reportedly began, “Decay is inherent in all things.”

 
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Statistics Economics & Neuroscience: A Two-Layered Diffusion Model Traces the Dynamics of Information Processing in the Valuation-and-Choice Circuit of Decision Making

Statistics Economics & Neuroscience: A Two-Layered Diffusion Model Traces the Dynamics of Information Processing in the Valuation-and-Choice Circuit of Decision Making | Bounded Rationality and Beyond | Scoop.it

The evolution of the response-to-stimulus map is thus modeled by two linked diffusive modules (2LDM) representing the neuronal populations involved in the valuation-and-decision circuit of decision making (Figure 1). Diffusion models are naturally appropriate for describing accumulation of evidence over the time [see here]. This allows the computation of the response times (RTs) in valuation and choice, under the hypothesis of ex-Wald distribution. A nonlinear transfer function integrates the activities of the two layers. The input-output map based on the infomax principle makes the 2LDM consistent with the reinforcement learning approach. Results from simulated likelihood time series indicate that 2LDM may account for the activity-dependent modulatory component of effective connectivity between the neuronal populations. Rhythmic fluctuations of the estimate gain functions in the delta-beta bands also support the compatibility of 2LDM with the neurobiology of DM.

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Paving the Cow-Paths: The Demise of Idealism and the Pathway to Pragmatism

Paving the Cow-Paths: The Demise of Idealism and the Pathway to Pragmatism | Bounded Rationality and Beyond | Scoop.it

Here’s an example: assuming that my book is sold by two shops. Shop A pays me royalties of 70% of the price of sales. Shop B gives me 100% of the price in royalties. Assuming both shops sell the book for the same price, my interest is to get as many sales as possible through shop B. However, Shop A(mazon) is more popular with the potential clients. Essentially I have two options. First, I can direct all my promotion effort to get sales through shop B and let whoever wants to buy from shop A to do so. Second, I could pave the cow-path and direct my promotion effort to encouraging people to buy from shop A, thus hoping that the higher volume of sales generated would compensate the lower percentage in royalties I get from each sale.

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CFA level III - Behavioral Finance Perspective (Curriculum reading #7) - YouTube

Overview :
Traditional v/s Behavioral Finance
Risk aversion
Challenges to traditional finance
Utility theory and decision theory
Bounded rationality
Prospect theory
- Editing
- Evalution
Capital markets and portfolio construction
- Traditional finance perspective
- Behavioral finance perspective
CFA Level III Behavioral Finance Perspective Part 1CFA level III - Behavioral Finance Perspective (Curriculumn reading #7)
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Understanding Fear of Failure in Entrepreneurship: A Cognitive Process Framework

Abstract: There is a broadly held assumption within the entrepreneurship literature that fear of failure is always and only an inhibitor of entrepreneurial behavior. However, anecdotal evidence and psychological theory suggest that this assumption is flawed. If fear stimulates greater striving in some cases or situations, then perhaps it can be a friend as much as a foe. The motivating value of fear may have consequences for the reactions, decisions, health and well-being of the entrepreneur. Unfortunately, a lack of rigorous conceptualization of the construct is a barrier to understanding such consequences. We present a grounded theoretic framework of the antecedents, moderators and consequences of fear of failure with significant implications for theory and future research.

 
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Neuroscientists watch imagination happening in the brain | neuroscientistnews.com

Neuroscientists watch imagination happening in the brain | neuroscientistnews.com | Bounded Rationality and Beyond | Scoop.it
"You may say I'm a dreamer, but I'm not the only one," sang John Lennon in his 1971 song Imagine. And thanks to the dreams of a Brigham Young University (BYU) student, we now know more about where and how imagination happens in our brains. Stefania Ashby and her faculty mentor devised experiments using MRI technology that would help them distinguish pure imagination from related processes like remembering. "I was thinking a lot about planning for my own future and imagining myself in the future, and I started wondering how memory and imagination work together," Ashby said. "I wondered if they were separate or if imagination is just taking past memories and combining them in different ways to form something I've never experienced before." There's a bit of scientific debate over whether memory and imagination truly are distinct processes. So Ashby and her faculty mentor devised MRI experiments to put it to the test. - See more at: http://www.neuroscientistnews.com/research-news/neuroscientists-watch-imagination-happening-brain#sthash.Bv6SlA1Y.dpuf
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Investor Behavior By the Book

Investor Behavior By the Book | Bounded Rationality and Beyond | Scoop.it
As you might imagine, people send me more books to review than I can possibly read.

And, truthfully, despite their hype, many don't offer much in the way of useful information for advisors. Occasionally, though, I’ll get an email from a publisher about a new book that looks interesting. This was the case with “Investor Behavior: The Psychology of Financial Planning and Investing,” a collection of articles compiled by H. Kent Baker, professor of finance at American University's Kogod School of Business, and Victor Ricciardi, assistant professor of financial management at Goucher College.

My interest was piqued by my long fascination with the relatively new discipline of behavioral finance and its even newer cousin, behavioral economics. For those who have been in a coma for the past 20 years, back in the late 1980s, some economists became uncomfortable with the general economic assumption that people tend to act rationally when it comes to their finances. (I know, financial planners have been aware of this fallacy since the early ‘70s; academics tend to catch on more slowly.) Some of them thought it might be interesting to study what investors actually do in given situations; when it turned out that most of us are far less rational than previously thought, a new area of study was born.

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Daniel McFadden: Understanding better how people really make choices

Daniel McFadden: Understanding better how people really make choices | Bounded Rationality and Beyond | Scoop.it

The way our brains work is key to understanding how consumers really make choices, argues Nobel Laureate Daniel McFadden.

Some consumers suffer from “agoraphobia” or a fear of markets according to new research presented by Nobel laureate Daniel McFadden that throws doubt on the classical idea that people are driven by relentless and consistent pursuit of self-interest to maximise their well-being.
Professor McFadden entitled his paper The New Science of Pleasure, to purposefully play on a phrase coined by Anglo-Irish political economist Francis Edgeworth some 130 years ago.

He told the audience of young economists and fellow laureates at the 5th Lindau Meeting on Economic Sciences on 22 August that new studies of consumer behaviour that drew on psychology, sociology, biology and neurology gave economists a deeper understanding of how consumers made choices.
Rational analysis says that we should relish choice and the opportunities offered by markets. “Yet we are in fact challenged by choice and we use all kinds of ways such as procrastination to avoid having to make choices. One of the reasons is that there are risks associated with making choices,” he said.

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Anchoring or Loss Aversion? Empirical Evidence from Art Auctions

Abstract: We find evidence for the behavioral biases of anchoring and loss aversion. We find that anchoring is more important for items that are resold quickly, and we find that the effect of loss aversion increases with the time that a painting is held. The evidence in favor of anchoring and loss aversion with this large dataset validates previous results and adds to the empirical evidence a finding of increasing loss aversion with the length a painting is held. We do not find evidence that investors can take advantage of these behavioral biases.

 
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Cash versus debit card: the role of budget control

Abstract: Due to the financial crisis, an increasing number of households face financial problems. This may lead to an increasing need for monitoring spending and budgets. We demonstrate that both cash and the debit card are perceived as helpful in this respect. We show that, on average, consumers responsible for the financial decision making within a household find the debit card more useful for monitoring their household finances than cash. Individuals differ in major respects, however. In particular, low earners and the liquidity-constrained prefer cash as a monitoring and budgeting tool. Finally, we present evidence that at an aggregated level, such preferences strongly affect consumer payment behaviour. We suggest that the substitution of cash by cards may slow down because of the financial crisis. Also, we show that cash still brings benefits that electronic alternatives have been unable to match. This suggests that inclusion of enhanced budgeting and monitoring features in electronic payment instruments may encourage consumers to use them more frequently.

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The Psychology of Writing and the Cognitive Science of the Perfect Daily Routine

The Psychology of Writing and the Cognitive Science of the Perfect Daily Routine | Bounded Rationality and Beyond | Scoop.it

How to sculpt an environment that optimizes creative flow and summons relevant knowledge from your long-term memory through the right retrieval cues.

Reflecting on the ritualization of creativity, Bukowski famously scoffed that “air and light and time and space have nothing to do with.”Samuel Johnson similarly contended that “a man may write at any time, if he will set himself doggedly to it.” And yet some of history’s most successful and prolific writers were women and men of religious daily routines and odd creative rituals. (Even Buk himself ended up sticking to a peculiar daily routine.)

Such strategies, it turns out, may be psychologically sound and cognitively fruitful. In the altogether illuminating 1994 volume The Psychology of Writing (public library), cognitive psychologist Roland T. Kellogg explores how work schedules, behavioral rituals, and writing environments affect the amount of time invested in trying to write and the degree to which that time is spent in a state of boredom, anxiety, or creative flow. Kellogg writes:

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A Practitioner’s Guide T Nudging

Nudge: Improving Decisions about Health, Wealth, and Happiness is the title of a 2008 book written by Professors Richard Thaler and Cass Sunstein1. The book introduces the notion of choice architecture and draws on findings from behavioural economics. 

Consider two cafeterias that want to help students consume less junk food. One cafeteria decides to attack the problem by placing a “tax” on junk foods or by banning the sale of junk foods altogether2. The other cafeteria decides to change their food display so that junk foods will less likely be cho-sen. Junk foods will be placed on higher, harder-to-reach shelves while healthy foods will be placed at eye level and within arm’s reach. Both cafeterias are trying to influence the behaviour but are using two entirely different methods. The first cafeteria is influencing behaviour by either financially in-centivizing students to choose healthier options or restricting their options and thus, their freedom of choice altogether3. The second cafeteria does neither but uses a nudging strategy: 

“A nudge is any aspect of the choice architecture that alters people’s behaviour in a predictable way without forbidding any options or significantly changing their eco-nomic consequences. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting fruit at eye level [to attract atten-tion and hence increase likelihood of getting chosen] counts as a nudge. Banning junk food does not.” 

#nudge #Neuroeconomics

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The Psychology of Your Future Self and How Your Present Illusions Hinder Your Future Happiness

The Psychology of Your Future Self and How Your Present Illusions Hinder Your Future Happiness | Bounded Rationality and Beyond | Scoop.it

Philosopher Joshua Knobe recently posed a perplexing question in contemplating the nature of the self: If the person you will be in 30 years — the person for whom you plan your life now by working toward career goals and putting money aside in retirements plans — is invariably different from the person you are today, what makes that future person “you”? What makes them worthy of your present self’s sacrifices and considerations? That’s precisely what Harvard psychologist Daniel Gilbertexplores in this short and pause-giving TED talk on the psychology of your future self and how to avoid the mistakes you’re likely to make in trying to satisfy that future self with your present choices. Picking up from his now-classic 2006 book Stumbling on Happiness (public library), Gilbert argues that we’re bedeviled by a “fundamental misconception about the power of time” and a dangerous misconception known as “the end of history illusion” — at any point along our personal journey, we tend to believe that who we are at that moment is the final destination of our becoming. Which, of course, is not only wrong but a source of much of our unhappiness.

 
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