Impact of Assumptions in Economic Analysis on Policy
This presentation examines the impact of economic assumptions on policy decisions. Economic analysis of targets for sustainable buildings by the Queensland Competition Authority (QCA) and the Rainwater Harvesting Association of Australia (RHAA) is examined as a case study. Contested points include which costs and benefits are inside or outside the boundaries of legitimate and recognised consideration. This presentation refers to those differences as boundary conditions and considers how these assumptions affect the outcome of analysis and government policy. Setting of boundary conditions (what was included, what was excluded and assumptions) in engineering and economic analysis dominates outcomes of decisions about government policy. The investigations outlined in this paper were combined to create an enhanced version of a systems analysis of a policy for setting targets for water savings on all new dwellings. It was established, using appropriate boundary conditions, that a 40% target for water savings is feasible for South East Queensland and provides a cost-benefit ratio of 2.1. These results indicate that a policy of mandating targets for sustainable buildings would provide substantial benefits to the state of Queensland, water utilities and citizens.
Abstract The present research examines the prevalence of predictions in daily life. Specifically we examine whether spending predictions for specific purchases occur spontaneously in life outside of a laboratory setting. Across community samples and student samples, overall self-report and diary reports, three studies suggest that people make spending predictions for about two-thirds of purchases in everyday life. In addition, we examine factors that increase the likelihood of spending predictions: the size of purchase, payment form, time pressure, personality variables, and purchase decisions. Spending predictions were more likely for larger, more exceptional purchases and for item and project predictions rather than time periods.
LOSS AVERSION AND RISK AVERSION ARE CORRELATED (AT LEAST WITH OUR TECHNIQUE) rala A student recently emailed us asking for some data from our 2008 paper: Goldstein, Daniel G., Johnson, Eric J. & Sharpe, William F. (2008). Choosing outcomes versus choosing products: Consumer-focused retirement investment advice. Journal of Consumer Research, 35(3), 440-456. In particular, they were interested in the correlation between estimates of risk aversion and loss aversion within a person, which can be seen in the above plot (Figure 4 in the article). We thought, why not make the data open to the whole world. Here they are: Goldstein, Johnson, Sharpe (2008) Loss Aversion and Risk Aversion Data subject: An anonymous identifier indexing the unique human who submitted the data dist: participants submitted two distributions (one right after another) in Year 1. They were invited back in Year 2 to submit distributions again. There was some dropout. This column tells you which distribution you are looking at. riskAversion: this is the coefficient of relative risk aversion, commonly referred to as alpha lossAversion: this is the coefficient of loss aversion, commonly referred to as lambda
This paper studies, theoretically and empirically, the role of overconfidence in political behavior. Our model of overconfidence in beliefs predicts that overconfidence leads to ideological extremeness, increased voter turnout, and stronger partisan identification. The model also makes nuanced predictions about the patterns of ideology in society. These predictions are tested using unique data that measure the overconfidence and standard political characteristics of a nationwide sample of over 3,000 adults. Our numerous predictions find strong support in these data. In particular, we document that overconfidence is a substantively and statistically important predictor of ideological extremeness, voter turnout, and partisan identification.
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 Beginning January 2014, Psychological Science gave authors the opportunity to signal open data and materials if they qualified for badges that accompanied published articles. Before badges, less than 3% of Psychological Science articles reported open data. After badges, 23% reported open data, with an accelerating trend; 39% reported open data in the first half of 2015, an increase of more than an order of magnitude from baseline. There was no change over time in the low rates of data sharing among comparison journals. Moreover, reporting openness does not guarantee openness. When badges were earned, reportedly available data were more likely to be actually available, correct, usable, and complete than when badges were not earned. Open materials also increased to a weaker degree, and there was more variability among comparison journals. Badges are simple, effective signals to promote open practices and improve preservation of data and materials by using independent repositories.
We propose that in strategic interactions a player is influenced by self-similarity. Self-similarity means that a player who chooses some action X tends to believe, to a greater extent than a player who chooses a different action, that other players will also choose action X. To demonstrate this phenomenon, we analyze the actions and the reported beliefs of players in a two-player two-action symmetric game. The game has the feature that for “materialistic” players, who wish to maximize their own payoff, there should be negative correlation between players’ actions and the beliefs that they assign to their opponent choosing the same action. We first elicit participants’ preferences over the outcomes of the game, and identify a large group of materialistic players. We then ask participants to choose an action in the game and report their beliefs. The reported beliefs of materialistic players are positively correlated with their actions, i.e., they are more likely to choose an action the stronger is their belief that their opponent will also choose the same action. We view this pattern as evidence for the presence of self-similarity.
Introduction Cell biologist Dr. Glen Rein had conceived of the idea that DNA would make a good target for testing healers’ ability to affect biological systems, since well established quantitative measures of DNA’s conformational state existed and it potentially offered a more stable and reliable system than cell or bacterial cultures. He had tested this model system with several healers by having them hold test tubes containing DNA while they attempted to create a healing environment, and had obtained some positive indicators that the conformational state of DNA changed when exposed to these environments. In late 1991, Dr. Rein accepted a position at the HeartMath Research Center with the intention of continuing these experiments in addition to a series of cell culture studies. We conducted a number of different experiments with DNA over the next year and a half. The first six months were primarily spent performing a series of control studies to insure the stability of the measurement system and refining the protocols. Doc Childre then added the element of intentionality to the protocols, which proved to be a key factor. Some of the key results of this series of studies were presented at research conferences and published in several conference proceedings.1-4 We have since received so many requests for the results of this research that we are now making a summary of our findings available in this brief report.
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.
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