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Risk taking, diversification behavior and financial literacy of individual investors

Elisa Cavezzali , Gloria Gardenal  and Ugo Rigoni - 2012

 

This research investigates whether the financial literacy of individuals influences risk taking decisions and diversification behavior. This issue is relevant in that investors are increasingly in charge of their own financial security, but they have to deal with financial instruments whose increasing complexity often eventually prevents them from making conscious investment decisions. Prior empirical evidence shows that people are unable to perform a ÒsophisticatedÓ portfolio diversification: what they do is to split equally their wealth among the asset classes available, in a na•ve way. We try to detect if the financial literacy is a driver of this kind of decisions. By submitting a questionnaire to 200 American individuals, we find that financial literacy plays a role in risk taking decisions, positively affecting how much risk individuals are willing to take. Moreover, only those who are literate in terms of diversification select less risky portfolios; the others merely increase their risk exposure, without managing it. Consistently with the previous literature, the strategy of diversification adopted by the literate ones is mainly na•ve. Instead, financial literacy turns out not being significant in explaining more sophisticated diversification strategies. As financial literacy affects positively the amount of risk taken by individuals, but only partially the diversification strategies pursued, there might be a dangerous pitfall in today's financial education programs promoted by governments and regulators, which, though they make investors more aware of their investment decisions, they eventually push them to assume more risks than they are able to manage. Two possible ways to tackle this issue could be: 1) to boost the financial literacy of the investors so as to make them able to use all the investment techniques required by the standard theory. This, however, seems difficult to obtain; 2) to promote advisory activity among investors. This may help them to apply the diversification principle in a sophisticated way.

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USING HEURISTICS IN ECONOMIC DECISION MAKING

USING HEURISTICS IN ECONOMIC DECISION MAKING | Bounded Rationality and Beyond | Scoop.it

Classical economic theory considers a man as rational decision maker that takes into account all relevant information and makes decision that is optimal. This model of decision making was influential until it failed to predict and explain why people make irrational decisionsregarding money. Field of behavioral economics studies decision making that violates axiomsof rational decision-making model. The research we conducted is about prevalence of decisions under heuristics.

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The Paradox of Consensus and Conflict in Organisational Life

The Paradox of Consensus and Conflict in Organisational Life | Bounded Rationality and Beyond | Scoop.it
Today’s dominant thought collective[i] of practitioners, consultants and academics concerned with leadership, management and other organisational matters is characterised by thought styles[ii] which, in a completely taken-for-granted way, equate success with positives, sharing, harmony and consensus. Leaders are called upon to communicate inspiring, compelling visions of desirable futures shorn of all problematic features. Followers are to be converted to sharing the vision and committing to the mission so that everyone ‘is on the same page’, ‘singing from the same hymn sheet’, ‘climbing on board’, ‘on the message’ and ‘a team player’. This whole raft of idealisations is taken even further when it is accompanied by a relentless emphasis on the positive aspects of all situations. There seems to be a scarcely-concealed dread of ‘negatives’, such as conflict, and a half-expressed conviction that success can only be achieved when all share the same view, with breakdown as the consequence of not doing this. If conflict is noticed it is immediately followed by calls for the practice of ‘conflict resolution’ or approaches which rapidly move people from anything negative to a focus on the ‘positives’.

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Evolutionary accounts of belief in supernatural punishment: a critical review

Evolutionary accounts of belief in supernatural punishment: a critical review | Bounded Rationality and Beyond | Scoop.it
Although largely unaddressed by evolutionary theory for more than a century after Darwin, over the last decade a wide range of adaptationist, byproduct, and memetic explanations have emerged for various recurrent features of religious belief and practice. One feature that has figured prominently in adaptationist accounts of religion is belief in the reality of moralizing, punishing supernatural agents. However, there is at present no unified theory of what fitness-relevant feature of the selective environment to which this cognitive predisposition is adapted. We distinguish two divergent and often conflated approaches to supernatural punishment theory which hypothesize the adaptive character of such beliefs arise from the fact that they increase cooperation or decrease the cost of incurring punishment for norm violations. We evaluate these, and group and individual selectionist versions, in view of game theoretic models, experimental studies, and ethnographic data in light of which each proposal is plausible but with which none is fully concordant.

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Ancestors in the simulation machine: measuring the transmission and oscillation of religiosity in computer modeling

Ancestors in the simulation machine: measuring the transmission and oscillation of religiosity in computer modeling | Bounded Rationality and Beyond | Scoop.it
Ancestors in the simulation machine: measuring the transmission and oscillation of religiosity in computer modeling...
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Notes on Behavioural Management Techniques 3rd edition

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What is behavioral safety?

Everybody who works to reduce accidents and improve safe performance is concerned with human behavior. “Behavior and accidents is what it’s all about,” is a commonly heard phrase.

Is everybody who is concerned with reducing workplace injuries and illnesses, and the work practices associated with these injuries and illnesses, using “behavioral safety”?

While behavioral safety shares a concern with human behavior and safe performance in the workplace with other approaches, it is more than that. Behavioral safety is the application of beha

vioral research on human performance to the problems of safety in the workplace. This means that any safety program labeling

itself as a behavioral safety program must meet the standards of behavior analytic research as practices are applied to the workpla

ce.

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The Effect of Schooling on Cognitive Skills

Magnus Carlsson  Gordon B. Dahl and Dan-Olof Rooth- 2012

How schooling affects cognitive skills is a fundamental question for studies of human capital and labor markets. While scores on cognitive ability tests are positively associated with schooling, it has proven difficult to ascertain whether this relationship is causal. Moreover, the effect of schooling is difficult to separate from the confounding factors of age at test date, relative age within a classroom, season of birth, and cohort effects. In this paper, we exploit conditionally random variation in the assigned test date for a battery of cognitive tests which almost all 18 year-old males were required to take in preparation for military service in Sweden. Both age at test date and number of days spent in school vary randomly across individuals after flexibly controlling for date of birth, parish, and expected graduation date (the three variables the military conditioned on when assigning test date). We find an extra 10 days of school instruction raises cognitive scores on crystallized intelligence tests (synonym and technical comprehension tests) by approximately one percent of a standard deviation, whereas extra nonschool days have almost no effect. The benefit of additional school days is homogeneous, with similar effect sizes based on past grades in school, parental education, and father's earnings. In contrast, test scores on fluid intelligence tests (spatial and logic tests) do not increase with additional days of schooling, but do increase modestly with age. These findings have important implications for questions about the malleability of cognitive skills in young adults, schooling models of signaling versus human capital, the interpretation of test scores in wage regressions, and policies related to the length of the school year.

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When do consumers indulge in luxury? Emotional certainty signals when to indulge to regulate affect

The allocation of children’s time among different activities may be important for their cognitive and non-cognitive development. In our work we exploit time use diaries from the Longitudinal Study of Australian Children to study the effect of time allocation across a wide range of alternative activities. By doing so we characterize the trade-off between the activities to which a child is exposed. On the one hand, our results suggest that time spent in educational activities, particularly with parents, is the most productive input for cognitive skill development. On the other hand, non-cognitive skills appear insensitive to alternative time allocations. Instead, these skills are greatly affected by the mother’s parenting style.

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Design for Complexity: The Hidden Power of Networks

Design for Complexity: The Hidden Power of Networks | Bounded Rationality and Beyond | Scoop.it
 

I recently moderated a fascinating session at the World Economic Forum 'Summer Davos' in Tianjin, China. Two network scientists, Cesar Hidalgo of MIT and Albert-Laszlo Barabasi of Harvard, discussed the underlying science of how networks operate and how this knowledge might be applied to business and economics.

At the outset of network science a key question was raised: are networks random? If so, all nodes would be more or less similar to each other. But that is not the case. The reality is that certain nodes have more connections than others and play the role of hubs. New nodes in a pre-existing network tend to connect with highly connected nodes. After a certain threshold, the removal of highly connected nodes can make a whole network fall apart. Thus interconnectivity is beneficial but also brings in vulnerability: if you and I are connected we can share resources; meanwhile your problems can become mine, and vice versa. This happens in many different kinds of networks, from financial systems to social media to electrical power grids. Numerous complex systems can be mapped and analyzed, such as transportation and biological systems.

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Prof. Konstantinos Katsikopoulos: David Blockley lectures in Systems

Prof. Konstantinos Katsikopoulos of Max Planck on Decision Theory and Rules of Thumb

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DARPA combines human brains and 120-megapixel cameras to create the ultimate military threat detection system | ExtremeTech

DARPA combines human brains and 120-megapixel cameras to create the ultimate military threat detection system | ExtremeTech | Bounded Rationality and Beyond | Scoop.it
After more than four years of research, DARPA has created a system that successfully combines soldiers, EEG brainwave scanners, 120-megapixel cameras, and multiple computers running cognitive visual processing algorithms into a cybernetic hivemind.
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ModAmb.pdf

Come affrontare in modo efficace le complessità del mondo moderno? I sistemi complessi per poterli affrontare e per poterci adeguatamente preparare ai loro possibili stati richiedono un approccio diverso dalla logica lineare. In un sistema complesso si possono solo ipotizzare un certo numero di possibili stati alternativi e piccole variazioni possono modificarne radicalmente le loro evoluzioni. Fra le tecniche più utilizzate c'è la sumulazione dinamica o System Dynamics, ma anche la simulazione ad agenti. Si parla di simulazione dato che un sistema complesso per sua stesa natura non può essere dimostrato ma "osservato" nel suo comportamento. La simulazione deterministica lineare che verte alla risposta ultima e certa "della sfera di creistallo" non è applicabile in un sistema complesso.

Il “Pensiero Sistemico” è un approccio generale mentre la “Analisi Dinamica dei Sistemi” è un insieme di strumenti che ci possono, insieme aiutare a modellare sistemi complessi e ad operare proficuamente su tali modelli.

Nel link una sintetica dispensina sull'argomento dell System Dynamics con spiegazione degli utilizzi.

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How ‘social intelligence’ can guide decisions - McKinsey Quarterly - Strategy - Strategic Thinking

How ‘social intelligence’ can guide decisions - McKinsey Quarterly - Strategy - Strategic Thinking | Bounded Rationality and Beyond | Scoop.it

By offering decision makers rich real-time data, social media is giving some companies fresh strategic insight.

In many companies, marketers have been first movers in social media, tapping into it for insights on how consumers think and behave. As social technologies mature and organizations become convinced of their power, we believe they will take on a broader role: informing competitive strategy. In particular, social media should help companies overcome some limits of old-school intelligence gathering, which typically involves collecting information from a range of public and propriety sources, distilling insights using time-tested analytic methods, and creating reports for internal company “clients” often “siloed” by function or business unit.
A McKinsey Quarterly Strategy article.

 

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The Effects of Expectations - Dan Ariely Dan Ariely November 08, 2012

As part of the Predictably Irrational series, this video explores the effects of expectations.Watch me give out beer with or without the addition of balsalmic vinegar -- which will people prefer?

How are our experiences defined by how we expect them to turn out?

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Working with the paradox of theory and practice

Working with the paradox of theory and practice | Bounded Rationality and Beyond | Scoop.it

In this post I will discuss some of the similarities and differences between scientific method in the natural and social sciences and question what it might mean to be scientific about the social. I will focus particularly on the nexus of theory and practice. This is important in the field of management where theories proliferate but where much less work is done to understand how these theories play out and evolve in organisational life, no matter what the strength of the prior claim that they have been empirically tested.

I doubt that anyone would want to make the case that what we are lacking in management is enough theories. Just to take the domain of leadership as an example, we are assailed with contradictory and competing theories, such as trait theories, behavioural theories, theories of transformational leadership, servant leadership, distributed leadership, and more latterly agile and sustainable leadership. An enormous amount of work goes into elaborating theories which are supposed to be ‘applied’ to organisations, accepting implicitly the dualism between theory, assumed to be the most important work, and practice, a lesser activity which has to be brought into line with theory. This distinction reaches back to the dispute between Plato and Aristotle, who disagreed as to the relative importance of each, with Aristotle arguing that in the field of human action, theories are necessary but insufficient:

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Death of homo economicus, rise of behavioral economics

Death of homo economicus, rise of behavioral economics | Bounded Rationality and Beyond | Scoop.it
HOW ECONOMICS GOT IT WRONG AND WHAT TO DO ABOUT IT

The time has come for the end of the economics as we know it. It seems thatacademic economics amplified with its intellectual vanity failed to realize the humansas they truly are. Or at least they kept quiet about it and hoped “it” would go away .Recent economic crisis triggered a tsunami of critics pointed at economists, bankers,politicians and regulators as well as world‟s most prominent business schoolfor leading the same world into crisis instead of taking care of sustainability of the currentliving conditions. How did economics fail? Well, this is a simple question so I will trywith a simple answer. It all began when economic mathematicians decided to revealhuman nature and explain human behavior. The legacy they left us got materializedin certain assumptions and theories which turned out to be completely ignorant of thefact how do people really think and behave. These theories are filtered down to theeconomics education system (business schools) creating thereby very closed andrigid environment that lacks interdisciplinary and academic diversity. In this paper I‟lltry to detect origins and process of economics becoming troublesome in today‟ssociety. Giving insight in some historical precedents and development of some newscientific disciplines, I‟ll conclude that time has come to change the way economics is taught. Great responsibility that is put on business school to create individuals withpower to create global policies needs to be (re)justified. Business schools need torethink how to shape business education for the future. A business education that willbe based on multidisciplinarity and taking a bigger picture in perspective. This doesnot exclude resent body of economics knowledge but it implies incorporating some“new stuffthat‟s been on the street” for some time

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Behavioral Systems Analysis: Fundamental concepts and cutting edge applications: Part I Definition and Fundamental Concept by Dale Brethower, Ph.D.

Behavioral Systems Analysis: Fundamental concepts and cutting edge applications: Part I Definition and Fundamental Concept by Dale Brethower, Ph.D.

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Behavioural Coaching

Behavioural Coaching - Howard Lees

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Strategic behavior in regressions: an experimental

Javier Perote, Juan Perote-Peña and Marc Vorsatz - No 2012-07

Working Papers from FEDEA

Abstract:

We study experimentally in the laboratory the situation when individuals have to report their private information (that is commonly known to be the sum of an observable and a random component) to a public authority that then makes inference about the true value hold by each of the individuals. It is assumed that individuals prefer this inferred or predicted value to be as close as possible to the their true value. Consistent with the theoretical literature, we show that the participants in our experiment misrepresent their private information more under the OLS than under the resistant line estimator (which extends the median voter theorem to the two{dimensional setting). Moreover, only the resistant line estimator is empirically unbiased and subjects earn signi cantly less if the OLS estimator is applied.

 

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Why We Can't Solve Big Problems | MIT Technology Review

Why We Can't Solve Big Problems | MIT Technology Review | Bounded Rationality and Beyond | Scoop.it
Has technology failed us?...

It's not true that we can't solve big problems through technology; we can. We must. But all these elements must be present: political leaders and the public must care to solve a problem, our institutions must support its solution, it must really be a technological problem, and we must understand it. The Apollo program, which has become a metaphor for technology's capacity to solve big problems, met these criteria, but it is an irreproducible model for the future. This is not 1961: there is no galvanizing historical context akin to the Cold War, no likely politician who can heroize the difficult and dangerous, no body of engineers who yearn for the productive regimentation they had enjoyed in the military, and no popular faith in a science-fictional mythology such as exploring the solar system. Most of all, going to the moon was easy. It was only three days away. Arguably, it wasn't even solving much of a problem. We are left alone with our day, and the solutions of the future will be harder won.

We don't lack for challenges. A billion people want electricity, millions are without clean water, the climate is changing, manufacturing is inefficient, traffic snarls cities, education is a luxury, and dementia or cancer will strike almost all of us if we live long enough. In this special package of stories, we examine these problems and introduce you to the indefatigable technologists who refuse to give up trying to solve them.

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How Memory Works: 10 Things Most People Get Wrong — PsyBlog

How Memory Works: 10 Things Most People Get Wrong — PsyBlog | Bounded Rationality and Beyond | Scoop.it

“If we remembered everything we should on most occasions be as ill off as if we remembered nothing. - William James”...

It's often said that a person is the sum of their memories. Your experience is what makes you who you are.

Memory, then, shapes the very core of human experience. Despite this, memory is generally poorly understood, which is why many people say they have 'bad memories'. That's partly because the analogies we have to hand—like that of computer memory—are not helpful. Human memory is vastly more complicated and quirky than the memory residing in our laptops, tablets or phones.

Here is my 10-point guide to the psychology of memory (it is based on an excellent review chapter by the distinguished UCLA memory expert, Professor Robert A. Bjork)

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How Might We Design for Behavior Change?

How Might We Design for Behavior Change? | Bounded Rationality and Beyond | Scoop.it
 

If you talk to people at the Santa Fe Institute, or read any of their books, you'll learn that a key characteristic of a complex system is that the more complex a system is, the more information flows through it. If this is true, then we ought to be thinking more about these information flows when we are designing for behavior change in complex systems.

Harvard’s Nicholas Christakis has studied the relationships between people with respect to their health, and one of the conclusions he has come to is that if you are in a network of obese people, you are three times more likely to be obese yourself. Conversely, if you are in a network of non-obese people, you are three times more likely to not be obese. This is a very important insight for design: that the behavior of those around us significantly affects our behavior. Intuitively we might know this, but we don’t necessarily always think about it when we’re designing systems.

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udgmental Overcon dence and Trading Activity by G. Fellner & S. Krugel

Gerlinde Fellner and Sebastian Krugel - October 12, 2012
Abstract
We investigate the theoretically proposed link between judgmental overconfidence and trading activity. In addition to applying classical measures of miscalibration, we introduce a measure to capture misperception of signal reliability, which is the relevant bias in the theoretical overconfidence literature. We relate the obtained overconfidence measures to trading activity in call and continuous experimental asset markets. Our results confirm prior findings that classical miscalibration measures are not related to trading activity. However, misperception of signal reliability is signicantly linked to trading volume, particularly in the continuous market. In addition, we find that men trade more than women at high levels of risk aversion, but the gender trading gap vanishes as risk aversion lessens. The reason is that the trading activity of women seems to be more sensitive to risk attitudes than that of men.

 

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“runtenso” – the art of working with complex systems | Synthesis

“runtenso” – the art of working with complex systems | Synthesis | Bounded Rationality and Beyond | Scoop.it

It’s tempting to think of complex systems as being like simple systems, only more complicated. This is a mistake, of course – complicated systems have many elements but are nonetheless comprehensible in everyday terms.

Goverments and policy-makers are always tempted to look for the magic bullet – the change which will sort this issue out once and for all. They then look in micro-detail to analyse the situation and seek to find the key to unlock the problem. From a rutenso perspective, this is almost certainly a futile act. However well you analyse the system, you can’t fully understand it. Whatever intervention you make will have unpredictable side-effects – the ‘law of unintended consequences’. Any real-life ‘wicked’ problem will have many aspects, and to get narrowly focused onto one of the them risks missing something important elsewhere.

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