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Can behavioral economics save us from ourselves?

Can behavioral economics save us from ourselves? | Bounded Rationality and Beyond | Scoop.it

Traditional economics holds that humans, as rational beings, make choices to maximize their welfare. Chicago’s Richard Thaler argues that policy makers—including those working on President Bush’s plan to partially privatize Social Security—would do well to remember that rationality has its bounds.

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Neuron - Learning to Simulate Others' Decisions

A fundamental challenge in social cognition is how humans learn another person's values to predict their decision-making behavior. This form of learning is often assumed to require simulation of the other by direct recruitment of one's own valuation process to model the other's process. However, the cognitive and neural mechanism of simulation learning is not known. Using behavior, modeling, and fMRI, we show that simulation involves two learning signals in a hierarchical arrangement. A simulated-other's reward prediction error processed in ventromedial prefrontal cortex mediated simulation by direct recruitment, being identical for valuation of the self and simulated-other. However, direct recruitment was insufficient for learning, and also required observation of the other's choices to generate a simulated-other's action prediction error encoded in dorsomedial/dorsolateral prefrontal cortex. These findings show that simulation uses a core prefrontal circuit for modeling the other's valuation to generate prediction and an adjunct circuit for tracking behavioral variation to refine prediction.

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Reflection is critical for development and well-being | Machines Like Us

Reflection is critical for development and well-being | Machines Like Us | Bounded Rationality and Beyond | Scoop.it
As each day passes, the pace of life seems to accelerate – demands on productivity continue ever upward and there is hardly ever a moment when we aren’t, in some way, in touch with our family, friends, or coworkers.
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Dan Ariely » Blog Archive Prada Overnight «

Dan Ariely » Blog Archive Prada Overnight « | Bounded Rationality and Beyond | Scoop.it

After meeting her through a friend from graduate school, the editor of Harper’s Bazaar invited me to give a talk at the magazine headquarters. It was my first experience presenting at a fashion magazine and I suspect it may have been their first experience hosting an academic speaker. They were very gracious and interested (or at least they appeared to be), and they laughed where I hoped they would and asked thoughtful questions.

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Sendhil Mullainathan: Solving social problems with a nudge | Video on TED.com

Sendhil Mullainathan: Solving social problems with a nudge | Video on TED.com | Bounded Rationality and Beyond | Scoop.it
MacArthur winner Sendhil Mullainathan uses the lens of behavioral economics to study a tricky set of social problems -- those we know how to solve, but don't. We know how to reduce child deaths due to diarrhea, how to prevent diabetes-related blindness and how to implement solar-cell technology ... yet somehow, we don't or can't. Why?
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Dan Ariely Presents: The Honest Truth About Dishonesty: How We Lie to Everyone---Especially Ourselves

Dan Ariely Presents:  The Honest Truth About Dishonesty: How We Lie to Everyone---Especially Ourselves | Bounded Rationality and Beyond | Scoop.it
Dan Ariely is the James B. Duke Professor of Psychology and Behavioral Economics at Duke University, with appointments in the Fuqua School of Business, the Center for Cognitive Neuroscience, and the department of Economics.
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Barry Schwartz on the paradox of choice | Video on TED.com

TED Talks Psychologist Barry Schwartz takes aim at a central tenet of western societies: freedom of choice. In Schwartz's estimation, choice has made us not freer but more paralyzed, not happier but more dissatisfied.
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The implications of Behavioral Finance

The debate in theoretical finance between the efficient market hypothesis and the field of the behavioral finance is of great interest. Since its emergence, the efficient market hypothesis has been the most important theory that explains the behavior of the various agents in the financial markets and neglects almost any potential impact of human behavior in the investment process. However, from the end of 1970s and the beginning of 1980s a growing number of researchers showed the anomalies of this theory. The anomalies of the modern portfolio models have prompted the development of what is now known as behavioral finance. Behavioral finance integrates psychology and economics in finance theory and has its roots in the pioneering work of psychologists Daniel Kahneman and Amos Tversky (1979). The purpose of this paper is to provide a synthesis of the behavioral finance literature over the past two decades.
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Insertion of Bounded Rationality in Economic Science

Downloadable! After having explained why economics introduced utility functions and later the axioms about behaviour in a risky environment, the paper examines the interest for microeco-nomics of the concept of bounded rationality. It starts from a simple model of the labour market on which agents scarch and adapt their demands, contributing unconsciously to the emergence of a unique price. More complex models are thereafter introduced, which enables to draw a picture of the variety of possible trajectories in a dynamic microeco-nomic system. This approach enables to enlarge microeconomics and to explain numerous facts poorly taken into account in the traditional presentations.
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Economics and psychology.Perfect rationality versus bounded rationality - Munich Personal RePEc Archive

Economics and psychology.Perfect rationality versus bounded rationality - Munich Personal RePEc Archive | Bounded Rationality and Beyond | Scoop.it

Classical mathematical algorithms often fail to identify in time when the international financial crises occur although, as the classical theory of choice would suggest, the economic agents are rational and the markets are or should be efficient and behave also rationally. This contribution does not pretend to give a complete answer to these questions, but it will highlight some well-known limits of the classical theory of rational choice and compare this theory of choice with the approach that seeks to combine economics and psychology and that has established itself as cognitive or behavioral economics. In particular, the present paper will focus on the juxtaposition of the concepts of perfect rationality and bounded rationality. It concludes with some references to the literature of behavioral finance which has given important contributions in explaining the behavior and the anomalies of financial markets.

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Economics and psychology.Perfect rationality versus bounded rationality - Munich Personal RePEc Archive

Economics and psychology.Perfect rationality versus bounded rationality - Munich Personal RePEc Archive | Bounded Rationality and Beyond | Scoop.it

Classical mathematical algorithms often fail to identify in time when the international financial crises occur although, as the classical theory of choice would suggest, the economic agents are rational and the markets are or should be efficient and behave also rationally. This contribution does not pretend to give a complete answer to these questions, but it will highlight some well-known limits of the classical theory of rational choice and compare this theory of choice with the approach that seeks to combine economics and psychology and that has established itself as cognitive or behavioral economics. In particular, the present paper will focus on the juxtaposition of the concepts of perfect rationality and bounded rationality. It concludes with some references to the literature of behavioral finance which has given important contributions in explaining the behavior and the anomalies of financial markets.

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Darwin's Mind: The Evolutionary Foundations of Heuristics and Biases by James Montier :: SSRN

Darwin's Mind: The Evolutionary Foundations of Heuristics and Biases by James Montier :: SSRN | Bounded Rationality and Beyond | Scoop.it
The catalogue of biases that cognitive psychologists have built up over the last three decades seem to have stem from one of three roots – selfdeception, heuristic simplification (including affect), and social interaction. This paper attempts to explore the evolutionary basis of each of these roots. The simple truth is that we aren't adapted to face the world as it is today. We evolved in a very different environment, and it is that ancestral evolutionary environment that governs the way in which we think and feel. We can learn to push our minds into alternative ways of thinking, but it isn't easy as we have to overcome the limits to learning posed by self-deception. In addition, we need to practice the reframing o
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Moral Hypocrisy, Power and Social Preferences

We show with a laboratory experiment that individuals adjust their moral principles to the situation and to their actions, just as much as they adjust their actions to their principles. We first elicit the individuals’ principles regarding the fairness and unfairness of allocations in three different scenarios (a Dictator game, an Ultimatum game, and a Trust game). One week later, the same individuals are invited to play those same games with monetary compensation. Finally in the same session we elicit again their principles regarding the fairness and unfairness of allocations in the same three scenarios. Our results show that individuals adjust abstract norms to fit the game, their role and the choices they made. First, norms that appear abstract and universal take into account the bargaining power of the two sides. The strong side bends the norm in its favor and the weak side agrees : Stated fairness is a compromise with power. Second, in most situations, individuals adjust the range of fair shares after playing the game for real money compared with their initial statement. Third, the discrepancy between hypothetical and real behavior is larger in games where real choices have no strategic consequence (Dictator game and second mover in Trust game) than in those where they do (Ultimatum game). Finally the adjustment of principles to actions is mainly the fact of individuals who behave more selfishly and who have a stronger bargaining power. The moral hypocrisy displayed (measured by the discrepancy between statements and actions chosen followed by an adjustment of principles to actions) appears produced by the attempt, not necessarily conscious, to strike a balance between self-image and immediate convenience.

ftp://ftp.gate.cnrs.fr/RePEc/2012/1216.pdf

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We’ve been brainwashed

We’ve been brainwashed | Bounded Rationality and Beyond | Scoop.it

It's no accident that Americans widely underestimate inequality. Winner of the 2001 Nobel Memorial Prize for Economics, Joseph E. Stiglitz is the best-selling author of "Making Globalization Work; Globalization and Its Discontents";

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Why do people choke when the stakes are high? Loss aversion may be the culprit

Why do people choke when the stakes are high? Loss aversion may be the culprit | Bounded Rationality and Beyond | Scoop.it
In sports, on a game show, or just on the job, what causes people to choke when the stakes are high? A new study by researchers at the California Institute of Technology (Caltech) suggests that when there are high financial incentives to succeed, people can become so afraid of losing their potentially lucrative reward that their performance suffers.
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Inside the Brains of Bieber Fans

Inside the Brains of Bieber Fans | Bounded Rationality and Beyond | Scoop.it
What's Behind Bieber Fever?Neuroscience Offers Explanation; a 'Safe' Infatuation...
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Bruce Schneier: The security mirage | Video on TED.com

TED Talks The feeling of security and the reality of security don't always match, says computer-security expert Bruce Schneier.
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The Role of Bounded Rationality in Farm Financing Decisions – First Empirical Evidence

Farmers do not often change from their house bank to another bank, even if the competing banks offer better conditions. This “reluctance to switch” can be explained, on the one hand, by the transaction costs resulting from such a change of business relation. On the other hand, it may be the result of bounded rationality. The results of a survey of North German farmers show that they are indeed bounded rational borrowers. They greatly underestimate the monetary disadvantages which are caused by the higher interest rates for loans from their house bank. In other words: They do not switch bank even if their individually perceived transaction costs are already “covered” by the lower interest rates of the alternative loan offer.

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Dan Ariely » Blog Archive A Dinner with Drug Reps «

Dan Ariely » Blog Archive A Dinner with Drug Reps « | Bounded Rationality and Beyond | Scoop.it

I have one more idea: What if we only allow people to be drug reps if they are over 75 and unattractive? Not only would these individuals have more personal experience with the healthcare system, it also could reduce conflicts of interest and open up job opportunities to an undervalued population.

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Can we ever trust instinct?

Can we ever trust instinct? | Bounded Rationality and Beyond | Scoop.it
DANIEL KAHNEMAN is the Eugene Higgins Professor of Psychology Emeritus at Princeton University and Emeritus Professor of Public Affairs at the Woodrow Wilson School of Public and International Affairs.
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A Non-Bayesian Approach to (Un)Bounded Rationality

Can one define and test the hypothesis of (un)bounded rationality in stochastic choice tasks without endorsing Bayesianism? Similar to the state specificity of assets, we rely on state-specific goal formation. In a given choice task, the list of state-specific goal levels is optimal if one cannot increase the goal level for one state without having to decrease that for other states. We show that this allows to relate optimality more easily to bounded rationality where we interpret goal levels as aspirations. If for the latter there exist choices satisfying all state-specific aspirations and if one such choice is used, we speak of satisficing which may or may not be optimal.

 

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Testing Bounded Rationality against Full Rationality in Job Changing Behavior

In this paper we question the hypothesis of full rationality in the context of job changing behaviour, via simple econometric explorations on microdata drawn from WHIP (Worker Histories Italian Panel). Workers’ performance is compared at the end of a three-year time window that starts when choices are expressed, under the accepted notion that the main driving forces of job change are future real wages and expected job quality. Bounded rationality suggests that individuals will search for new options capable to attain “satisfactory” targets (aspirations levels, standards, norms), based on conditions prevailing in their own local environments. Our empirical strategy consists of appropriately defining such environments (cells) and observing the ex-post individual performance in relation to the degree of dispersion, clustering and mobility within and between cells. Under full rationality the following are to be expected: high inter-cell mobility, large dispersion around the targets, and clustering in the vicinity of the efficiency frontier. None of the above expectations are confirmed in this exploration. Our conclusion is that workers behave according to principles of rationality that seem distant from those of “full rationality” assumed in the vast majority of contemporary empirical (and theoretical) studies. The idea of “bounded rationality” à la Simon provides a better fit to our observations.
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Antonio Damasio – On Consciousness | tools4mind

Antonio Damasio – On Consciousness | tools4mind | Bounded Rationality and Beyond | Scoop.it

Here is a wonderful and concise description of consciousness and the self. I am listening/reading by Antonio Damasio‘s book “Self Comes to Mind” and then found this video. I’d recommend the book. The video is a good preview.


Via David McGavock
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Behavioral Economics by Erik Angner, George Loewenstein :: SSRN

Behavioral economics is the effort to increase the explanatory and predictive power of economic theory by providing it with more psychologically plausible foundations. Behavioral economics, which recently emerged as a bona fide subdiscipline of economics, raises a number of questions of a philosophical, methodological, and historical nature. This chapter offers a survey of behavioral economics, including its historical origins, results, and methods; its relationship to neighboring fields; and its philosophical and methodological underpinnings. Our central thesis is that the development of behavioral economics in important respects parallels the development of cognitive science. Both fields are based on a repudiation of the positivist methodological strictures that were in place at their founding and a belief in the legitimacy of making reference to unobservable entities such as beliefs, emotions, and heuristics. And both fields adopt an interdisciplinary approach, admitting evidence of many kinds and using a variety of methods to generate such evidence. Moreover, there are in fact more direct links between the two fields. The single most important source of inspiration for behavioral economists has been behavioral decision research, which can in turn be seen as an integration of ideas from cognitive science and economics. Exploring the parallels between the two endeavors, we attempt to show, can shed light on the historical origins of, and the specific form taken by, behavioral economics.
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Option Traders Use (very) Sophisticated Heuristics, Never the Black–Scholes–Merton Formula by Espen Haug, Nassim Taleb :: SSRN

Option Traders Use (very) Sophisticated Heuristics, Never the Black–Scholes–Merton Formula by Espen Haug, Nassim Taleb :: SSRN | Bounded Rationality and Beyond | Scoop.it
Option traders use a heuristically derived pricing formula which they adapt by fudging and changing the tails and skewness by varying one parameter, the standard deviation of a Gaussian. Such formula is popularly called “Black–Scholes–Merton” owing to an attributed eponymous discovery (though changing the standard deviation parameter is in contra- diction with it). However, we have historical evidence that: (1) the said Black, Scholes and Merton did not invent any formula, just found an argument to make a well known (and used) formula compatible with the economics establishment, by removing the “risk” parameter through “dynamic hedging”, (2) option traders use (and evidently have used since 1902) sophisticated heuristics and tricks more compatible with the previous versions of the formula of Louis Bachelier and Edward O. Thorp (that allow a broad choice of probability distributions) and removed the risk parameter using put-call parity, (3) option traders did not use the Black–Scholes–Merton formula or similar formulas after 1973 but continued their bottom-up heuristics more robust to the high impact rare event. The paper draws on historical trading methods and 19th and early 20th century references ignored by the finance literature. It is time to stop using the wrong designation for option pricing.
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