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News on the effects of bounded rationality in economics and business, relationships and politics
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Behaviorally Informed Financial Services Regulation

Abstract

Financial services decisions can have enormous consequences

for household well-being. Households need a range of financial services—to conduct basic transactions, such as receiving their income, storing it, and paying bills; to save for emergency needs and long-term goals; to access credit; and to insure against life’s key risks. But the financial services system is exceedingly complicated and often not well-designed to optimize household behavior. In response to the complexity of our financial system, there has been a long-running debate about the appropriate role and form of regulation. Regulation is largely stuck in two competing models—disclosure, and usury or product restrictions. 

This paper explores a different approach, based on insights from behavioral economics on the one hand, and an understanding of industrial organization on the other. At the core of the analysis is the interaction between individual psychology and market competition. This is in contrast to the classic model, which relies on the interaction between rational choice and market competition. The introduction of richer psychology complicates the impact

of competition. It helps us understand that firms compete based on how individuals will respond to products in the marketplace, and competitive outcomes may not always and in all contexts closely align with improved decisional choice and increased consumer welfare. The paper adopts a behavioral economic framework that considers firm incentives to respond to regulation. Under this framework, outcomes are an equilibrium interaction between individuals with specific psychologies and firms that respond to those psychologies within specific market contexts. Regulation must then address failures in this equilibrium. The model suggests, for example, that in some contexts market participants seek to overcome common human failings (as for example, with under-saving) while in other contexts market participants seek to exploit these failings (as for example, with over-borrowing).

Behaviorally informed regulation needs to take account of these different contexts. 

The paper discusses the specific application of these forces to the case of mortgage, credit card, and banking markets. The purpose of this paper is not to champion policies, but to illustrate how a  behaviorally informed regulatory analysis would lead to a deeper understanding of the costs and benefits of specific policies. To further that understanding, in particular, the paper discusses ten ideas:

• Full information disclosure to debias home mortgage borrowers.

• A new standard for truth in lending.

• A “sticky” opt-out home mortgage system.

• Restructuring the relationship between brokers and borrowers.

• Using framing and salience to improve credit card disclosures.

• An opt-out payment plan for credit cards.

• An opt-out credit card.

• Regulating of credit card late fees.

• A tax credit for banks offering safe and affordable accounts.

• An opt-out bank account for tax refunds.

#neuroeconomy #Behavioraleconomics #neuroeconomia #boundedrationality

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The Precautionary Principle -

Yaneer Bar-Yam, Rupert Read, Nassim Nicholas Taleb, New England Complex Systems Institute
School of Philosophy, University of East Anglia
School of Engineering, New York University

Abstract—The precautionary principle is useful only in certain
contexts and can justify only a certain type of actions. We
present a non-naive, fragility-based version of the precautionary
principle, placing it under formal statistical and probabilistic
structure of “ruin” problems, in which an entire system is at a
risk of total failure. We discuss the implications this definition
has on current questions about the use of nuclear energy and
the creation of GMOs, and address common counterarguments
to our claims.

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The evolution of eusociality. [Nature. 2010] - PubMed - NCBI

The evolution of eusociality. [Nature. 2010] - PubMed - NCBI | Bounded Rationality and Beyond | Scoop.it

Eusociality, in which some individuals reduce their own lifetime reproductive potential to raise the offspring of others, underlies the most advanced forms of social organization and the ecologically dominant role of social insects and humans. For the past four decades kin selection theory, based on the concept of inclusive fitness, has been the major theoretical attempt to explain the evolution of eusociality. Here we show the limitations of this approach. We argue that standard natural selection theory in the context of precise models of population structure represents a simpler and superior approach, allows the evaluation of multiple competing hypotheses, and provides an exact framework for interpreting empirical observations.

 
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La crise économique sur le divan du psychanalyste

La crise économique sur le divan du psychanalyste | Bounded Rationality and Beyond | Scoop.it

L'analyse économique repose sur un postulat faux : la rationalité des acteurs. La nouvelle norme est celle du chaos perpétuel. Même le FMI a avoué qu'il avait beaucoup de mal à analyser avec les outils « classiques » de l'économie l'enchaînement de crises qui se succèdent depuis 2008 dans le monde. Deux économistes de renom, Vivien Levy-Garboua, « senior adviser » de BNP Paribas, et Gérard Maarek, conseiller scientifique de l'Edhec, prennent acte de ce constat d'impuissance dans ce nouveau livre qui propose ni plus ni moins une sorte de révolution pour leur discipline. Le problème, expliquent les deux auteurs, l'un et l'autre praticiens aguerris des modèles économétriques, c'est que ces modèles reposent sur l'hypothèse de rationalité de l'homo oeconomicus, de moins en moins pertinente pour analyser les évolutions convulsives de notre économie financiarisée et mondialisée. « Depuis quelques décennies, observent-ils, le psychisme de l'homme moderne s'est profondément modifié et, avec lui, celui des groupes constitués, familles, entreprises, peuples, dans lesquels il s'insère. »

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Neuroeconomics of Complex Social Behavior - YouTube

Michael L. Platt
Duke Institute for Brain Sciences, Center for Cognitive Neuroscience, Duke University

We are the most charitable species on the planet—often giving to others we don't even know. We are also among the most competitive—misleading, lying, and cheating to further our own ends. How the brain shapes these choices remains poorly understood. I will describe recent work using a new model of social decision making in which pairs of monkeys interact through a computer device while we either monitor or manipulate their brains. We found that monkeys favor choices that reward another monkey, particularly if he is more familiar or subordinate, rather than choosing to reward no one. Oxytocin—a hormone implicated in social bonding—increases both prosocial choices and attention to the other monkey. We also found that prosocial choices selectively activated neurons in the medial frontal cortex, an area implicated in empathy in humans. By contrast, when monkeys played a competitive game against each other, they rapidly developed unpredictable behaviors that served to mislead the other monkey. We found that deceptive tactics selectively activated a specific population of cells in the lateral frontal cortex. Inactivating these neurons impaired deceptive planning. Together, these discoveries define part of a network of brain areas specialized for complex social behavior and cognition.
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Intelligence and the Brain: Recent Advances in Understanding How the Brain Works with Jeff Hawkins - YouTube

By Xiao-Jing Wang, NYU Shanghai Many challenging questions about how the brain makes choices require an integrative approach across different levels of investimets. How the brain creates intelligence is viewed by many as the greatest scientific quest of all time. We are living at the time when rapid progress is being made and a comprehensive theory of brain function is emerging. Jeff Hawkins, an inventor, engineer, neuroscientist, author and entrepreneur, presents the big picture of what we know so far and describes recent progress in a core issue: why neurons are arranged as they are in the neocortex, how this arrangement builds models of the world, and how these models make predictions and generate actions. Series: "UC Berkeley Graduate Council Lectures" ..

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Prospect Theory for Online Financial Trading

Abstract: Prospect theory is widely viewed as the best available descriptive model of how people evaluate risk in experimental settings. According to prospect theory, people are risk-averse with respect to gains and risk-seeking with respect to losses, a phenomenon called "loss aversion". Despite of the fact that prospect theory has been well developed in behavioral economics at the theoretical level, there exist very few large-scale empirical studies and most of them have been undertaken with micro-panel data. Here we analyze over 28.5 million trades made by 81.3 thousand traders of an online financial trading community over 28 months, aiming to explore the large-scale empirical aspect of prospect theory. By analyzing and comparing the behavior of winning and losing trades and traders, we find clear evidence of the loss aversion phenomenon, an essence in prospect theory. This work hence demonstrates an unprecedented large-scale empirical evidence of prospect theory, which has immediate implication in financial trading, e.g., developing new trading strategies by minimizing the effect of loss aversion. Moreover, we introduce three risk-adjusted metrics inspired by prospect theory to differentiate winning and losing traders based on their historical trading behavior. This offers us potential opportunities to augment online social trading, where traders are allowed to watch and follow the trading activities of others, by predicting potential winners statistically based on their historical trading behavior rather than their trading performance at any given point in time.

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For Dan Ariely, ABCs of economics are alcohol, 'bubbles' and comedy - Jerusalem Post

For Dan Ariely, ABCs of economics are alcohol, 'bubbles' and comedy - Jerusalem Post | Bounded Rationality and Beyond | Scoop.it
For Dan Ariely, ABCs of economics are alcohol, 'bubbles' and comedy
Jerusalem Post
Behavioral economics can have lessons for some of the toughest problems Israeli policy-makers face, including peace negotiations.

Via Emre Erdogan
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Unlocking The Brain: Are We Entering A Golden Age Of Neuroscience?

Unlocking The Brain: Are We Entering A Golden Age Of Neuroscience? | Bounded Rationality and Beyond | Scoop.it
Brain science is entering what some researchers say may be a golden age, gaining important new insights into the workings of the brain -- even as brain disorders, from autism to Alzheimer's to mental illness -- are increasingly recognized as a worldwide scourge affecting over a billion people and growing rapidly. 

That’s the monumental gamble of Obama’s BRAIN initiative — and other major neuroscience efforts now getting under way around the world. They’re not trying to solve philosophical questions. They’re responding to the growing realization that brain disorders — from autism to mental illness to dementia — are a worldwide scourge, affecting at least a billion people.

“The global cost from brain disorders is about $2.5 trillion, and will go up more than double over the next two decades,” says Tom Insel, director of the National Institute of Mental Health. “So policymakers look at these numbers and say, ‘Oh my God, we have got to begin investing to make sure we don’t incur those kinds of costs.’ ”

 
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Computational Neuroeconomics: Bridging Levels of Understanding - YouTube

By Xiao-Jing Wang, NYU Shanghai Many challenging questions about how the brain makes choices require an integrative approach across different levels of investigation, from single neurons to circuits to behavior. Computational modeling provides a powerful tool in this endeavor. Here I will summarize recent work on biological mechanisms and neural network models of choice behavior, and offer an unifying local circuit framework for both perceptual decision and value-based choice behavior in terms of a recurrent neural circuit model endowed with reward-dependent synaptic plasticity. Finally, I will discuss future research directions that aim at understanding learning adaptive choice behavior in a large system of multiple brain modules..

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Reinforcement Learning Signal Predicts Social Conformity

Reinforcement Learning Signal Predicts Social Conformity | Bounded Rationality and Beyond | Scoop.it
Summary

We often change our decisions and judgments to conform with normative group behavior. However, the neural mechanisms of social conformity remain unclear. Here we show, using functional magnetic resonance imaging, that conformity is based on mechanisms that comply with principles of reinforcement learning. We found that individual judgments of facial attractiveness are adjusted in line with group opinion. Conflict with group opinion triggered a neuronal response in the rostral cingulate zone and the ventral striatum similar to the “prediction error” signal suggested by neuroscientific models of reinforcement learning. The amplitude of the conflict-related signal predicted subsequent conforming behavioral adjustments. Furthermore, the individual amplitude of the conflict-related signal in the ventral striatum correlated with differences in conforming behavior across subjects. These findings provide evidence that social group norms evoke conformity via learning mechanisms reflected in the activity of the rostral cingulate zone and ventral striatum.

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Cognitive Ability, Expectations, and Beliefs about the Future: Psychological Influences on Retirement Decisions

Abstract: Recent advances in behavioral decision research, behavioral economics, and life-span development psychology provide leverage for expanding our understanding of the decision to retire earlier versus later. This report examines how cognitive abilities, perceptions about the future, and other psychological characteristics affect retirement decisions. We use existing and new data collected through the RAND-USC American Life Panel, including detailed assessments of fluid and crystallized intelligence, financial literacy, expectations for the future, future time perspective, and maximizing versus satisficing decision styles. We find those with high levels of cognitive ability are more likely to retire later, as are those with greater longevity expectations. We also find those with lower cognitive ability have less coherent expectations of retirement—suggesting a need for planning assistance. We also find expectation of lower Social Security benefits is associated with plans to retire later—contrary to our hypothesis that such expectation might spur early retirement in an effort to lock in benefits. Finally, we find that tendencies maximize (versus satisfice) had mixed effects on retirement decision making, with different aspects of maximizing tendencies showing different relationships with retirement decision making. Future work should expand these data in a targeted direction. Recent research notes that decision-making competence can be improved with training, and to the extent this trainability extends to older adults, decision skills may be a useful target for intervention. Stronger longitudinal design and analysis can also help demonstrate possible endogenities between retirement and psychological variables.

 
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A Timeless and Spaceless Quantum Theory of Consciousness

AbstractIn this article, a timeless and spaceless theory of consciousness in terms of quantum entanglement is proposed. It is shown that time and consciousness can be spontaneously emerged and, thus, be defined by separating a subsystem from a much bigger quantum system. The mass and relative distances are recognized as functions of the entanglement entropies between separated systems and the classical background space can be restored in terms of these relative distances. We carefully examine the world with two coexisting consciousnesses. By equivalence principle of consciousness, the criterion of whether an entity is conscious or not is formulated implying that nowadays robots cannot be conscious. In addition, the relativity of intrinsic and extrinsic attributes of consciousness is discussed which might reveal the intricate connections between material and spiritual worlds at the deepest level. This relativity together with the new interpretation of mass further implies that consciousness has a negative mass, but this counterintuitive prediction needs to be verified by future experiments.
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Post-Crash Economics

Post-Crash Economics | Bounded Rationality and Beyond | Scoop.it
LONDON – In last month’s European Parliament election, euroskeptic and extremist parties won 25% of the popular vote, with the biggest gains chalked up in France, the United Kingdom, and Greece. These results were widely, and correctly, interpreted as showing the degree of disconnect between an arrogant European elite and ordinary citizens.

Less noticed, because less obviously political, are today’s intellectual rumblings, of which French economist Thomas Piketty’s Capital in the Twenty-First Century, a withering indictment of growing inequality, is the latest manifestation. We may be witnessing the beginning of the end of the neoliberal capitalist consensus that has prevailed throughout the West since the 1980s – and that many claim led to the economic disaster of 2008-2009.

Particularly important is the growing discontent of economics students with the university curriculum. Undergraduates’ discontent matters, because economics has long been the West’s political lodestar.

This discontent was born in the “post-autistic economics movement,” which started in Paris in 2000, and spread to the United States, Australia, and New Zealand. Its adherents’ main complaint was that the mainstream economics taught to students had become a branch of mathematics, disconnected from reality.

The revolt made little progress in the years of the “Great Moderation” of the 2000s, but was revived following the 2008 crisis. Two important links with the earlier network are US economist James Galbraith, the son of John Kenneth Galbraith, and British economist Ha-Joon Chang, author of the best-selling 23 Things They Don’t Tell You about Capitalism.

In a manifesto published in April, economics students at the University of Manchester advocated an approach “that begins with economic phenomena and then gives students a toolkit to evaluate how well different perspectives can explain it,” rather than with mathematical models based on unreal assumptions. Significantly, Andrew Haldane, Executive Director for Financial Stability at the Bank of England, wrote the introduction.

 


LONDON – In last month’s E
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Using empathy to use people: Emotional intelligence and manipulation | The Moral Universe, Scientific American Blog Network

Using empathy to use people: Emotional intelligence and manipulation | The Moral Universe, Scientific American Blog Network | Bounded Rationality and Beyond | Scoop.it

People tend to stereotype psychological phenomena.  It’s tempting to think that stress is always bad, resilience is always good, and so forth.  Like other stereotypes, these beliefs help us neaten the world and extract signal from noise.  Also like other stereotypes, such beliefs are misleading and often harmful.  Call me pessimistic, but whenever the media breathlessly praises a practice or trait—meditation and grit come to mind—I always wonder about its downsides.  Jogging is great for you, but not always, and not in every way (ask my knees).  The same goes for happiness.

My own favorite human characteristic, empathy, is no different.  Recently, empathy has gotten lots of good press.  Books like The Age of Empathy, The Empathic Civilization, and The Better Angels of Our Nature suggest that empathy is on the rise, and might provide a cure for many of our social ills.  Barack Obama is likely the most empathy-positive president in history, often suggesting that curing our country’s “empathy deficit” is mission critical.

But empathy is not always used in the service of good.  Two papers last month highlight this idea through evidence that people use empathy to use other people, manipulating them through a savvy understanding of emotions.

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Why Standard Macro Models Fail During Crises

Why Standard Macro Models Fail During Crises | Bounded Rationality and Beyond | Scoop.it

David Hendry and Grayham Mizon show why the models used by many policymakers perform so poorly in the face of uncertainty

The standard macroeconomic model used by most central banks and other policymakers are "dynamic stochastic general equilibrium models" or "DSGE" as they are known (economists have a knack for catchy branding).  There has been much discussion and debate about why these models performed so poorly during the 2008 financial crisis.  Not only did these models fail to anticipate the crisis, but during the crisis itself - when they were most needed by policymakers - they often failed to give useful or correct advice. The Institute for New Economic Thinking at Oxford's David Hendry and Grayham Mizon in a recent paper show that these standard models crucially depend on the assumption of "stationarity" - that there are no unanticipated or structural changes to the world that could affect agent's decision making.  Of course the real world is far from stationary - particularly in times of crisis.  Hendry and Mizon show that economic history is full of "location shifts" when the means of distributions change.  For example they identify four major epochs in British employment history, the pre WWI era 1860-1914, the period from WWI to 1939, the post-war reconstruction until 1979, and then the modern era from 1979 to present.  Both the means and variances of employment shifted significantly across these epochs. Unfortunately such shifts run afoul of the rational expectations hypothesis (REH) that macroeconomic DSGE models are built on.  In the rational world of these models agents may face uncertainty about the future, but are supposed to have well defined, stationary probabilistic models to make their decisions on.  But in the real world they do not, and as Hendry and Mizon show, this is very damaging for the performance of DSGE models.

#neuroeconomy #Behavioraleconomics #neuroeconomia #boundedrationality

 

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Instinct Can Beat Analytical Thinking

Instinct Can Beat Analytical Thinking | Bounded Rationality and Beyond | Scoop.it
A Q&A with psychologist Gerd Gigerenzer.

Researchers have confronted us in recent years with example after example of how we humans get things wrong when it comes to making decisions. We misunderstand probability, we’re myopic, wepay attention to the wrong things, and we just generally mess up. This popular triumph of the “heuristics and biases” literature pioneered by psychologists Daniel Kahneman and Amos Tverskyhas made us aware of flaws that economics long glossed over, and led to interesting innovations inretirement planning and government policy.

It is not, however, the only lens through which to view decision-making. Psychologist Gerd Gigerenzer has spent his career focusing on the ways in which we get things right, or could at least learn to. In Gigerenzer’s view, using heuristics, rules of thumb, and other shortcuts often leads to better decisions than the models of “rational” decision-making developed by mathematicians and statisticians. At times this belief has led the managing director of the Max Planck Institute for Human Development in Berlin into pretty fierce debates with his intellectual opponents. It has also led to a growing body of fascinating research, and a growing library of books for lay readers, the latest of which, Risk Savvy: How to Make Good Decisions, is just out.

During a visit to HBR’s New York office, Gigerenzer discussed his work for an Ideacast podcast, which you can listen to here:

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The Intuitive Investor: Why Intuition Is Important

The Intuitive Investor: Why Intuition Is Important | Bounded Rationality and Beyond | Scoop.it
There is a growing regard for intuition as many successful investors, including George Soros, attribute their success to it. Here is why intuition is important. 

Over the course of my investment career, I used several unconventional tools to improve the results of the fund I co-managed, but none was more powerful than intuition. In fact, there is a growing regard forintuition as many successful investors, including George Soros, attribute their success to intuition. A recent Wall Street Journal article said of executive decision making, “The potential conclusion is thatpeople who are good at strategy are better at sensing or feeling their way through strategies, rather than relying only on logic and being rational.” Even the author of My Life as a Quant, Emanuel Derman, has a deep-seated research interest in intuition. In this, the first in a regular series on the importance of intuition in investing, I will weigh in on the burgeoning discussion about intuition.

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Behavioural Economics and Taxation

Abstract: Most traditional tax policies have been based on classical economic models of tax payers as decision makers.As in many fields where humans make decision, however, more integrated behavioural economic models, that is, models that take into account both psychological and purely economic factors can provide further insights.Therefore, a large literature in the field on the behavioural economics of taxation exists. This report summarizes central parts of this literature, reviewing mainly experimental and observational studies in the academic literature to be informative for policy-makers. It also provides a potential agenda for future research and application of behavioural economic policies with regard to tax compliance.

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How to Use Language to Subtly Project Power — PsyBlog

How to Use Language to Subtly Project Power — PsyBlog | Bounded Rationality and Beyond | Scoop.it
Why framing the debate is such a powerful and subtle device.

Why framing the debate is such a powerful and subtle device.

Those in power tend to talk about the big picture rather than the details, a new study finds.

By the same token, if a speaker focuses on abstract concepts, this sends the message that they are a powerful person.

For example:

“…a speaker discussing a massive earthquake might either state that 120 people died and 400 were injured (a concrete statement conveying specific details), or that the earthquake is a national tragedy (an abstract statement conveying higher-level meaning).” 

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Theoretical physics: The origins of space and time

Theoretical physics: The origins of space and time | Bounded Rationality and Beyond | Scoop.it

Many researchers believe that physics will not be complete until it can explain not just the behaviour of space and time, but where these entities come from.  Imagine waking up one day and realizing that you actually live inside a computer game,” says Mark Van Raamsdonk, describing what sounds like a pitch for a science-fiction film. But for Van Raamsdonk, a physicist at the University of British Columbia in Vancouver, Canada, this scenario is a way to think about reality. If it is true, he says, “everything around us — the whole three-dimensional physical world — is an illusion born from information encoded elsewhere, on a two-dimensional chip”. That would make our Universe, with its three spatial dimensions, a kind of hologram, projected from a substrate that exists only in lower dimensions.This 'holographic principle' is strange even by the usual standards of theoretical physics. But Van Raamsdonk is one of a small band of researchers who think that the usual ideas are not yet strange enough. If nothing else, they say, neither of the two great pillars of modern physics — general relativity, which describes gravity as a curvature of space and time, and quantum mechanics, which governs the atomic realm — gives any account for the existence of space and time. Neither does string theory, which describes elementary threads of energy. Zeeya Merali discusses some of the theories that are trying to explain the origins of space and time. Van Raamsdonk and his colleagues are convinced that physics will not be complete until it can explain how space and time emerge from something more fundamental — a project that will require concepts at least as audacious as holography. They argue that such a radical reconceptualization of reality is the only way to explain what happens when the infinitely dense 'singularity' at the core of a black hole distorts the fabric of space-time beyond all recognition, or how researchers can unify atomic-level quantum theory and planet-level general relativity — a project that has resisted theorists' efforts for generations.

 
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Reinforcement Learning Signal Predicts Social Conformity: Neuron

Reinforcement Learning Signal Predicts Social Conformity: Neuron | Bounded Rationality and Beyond | Scoop.it

New research reveals the brain activity that underlies our tendency to "follow the crowd." The study, published by Cell Press in the January 15th issue of the journal Neuron, provides intriguing insight into how human behavior can be guided by the perceived behavior of other individuals.

Many studies have demonstrated the profound effect of group opinion on individual judgments, and there is no doubt that we look to the behavior and judgment of others for information about what will be considered expected and acceptable behavior.

"We often change our decisions and judgments to conform with normative group behavior," says lead study author Dr. Vasily Klucharev from the F.C. Donders Center for Cognitive Neuroimaging in The Netherlands. "However, the neural mechanisms of social conformity remain unclear."

Dr. Klucharev and colleagues hypothesized that social conformity might be based on reinforcement learning and that a conflict with group opinion could trigger a "prediction error" signal. A prediction error, first identified in reinforcement learning models, is a difference between expected and obtained outcomes that is thought to signal the need for a behavioral adjustment.

The researchers used functional magnetic resonance imaging to examine brain activity in subjects whose initial judgments of facial attractiveness were open to influence by group opinion. Specifically, they examined the rostral cingulate zone (RCZ) and the nucleus accumbens (NAc). The RCZ is thought to play a role in monitoring behavioral outcomes, and the NAc has been implicated in the anticipation and processing of rewards as well as social learning. The study authors found that a conflict with the group opinion triggered a long-term conforming adjustment of an individual's own rating and that conflict with the group elicited a neuronal response in the RCZ and NAc similar to a prediction error signal. Further, the magnitude of the individual conflict-related signal in the NAc correlated with differences in conforming behavior across subjects.

"The present study explains why we often automatically adjust our opinion in line with the majority opinion," says Dr. Klucharev. "Our results also show that social conformity is based on mechanisms that comply with reinforcement learning and is reinforced by the neural error-monitoring activity which signals what is probably the most fundamental social mistake—that of being too different from others."

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Brain Activity Follow Up of Stock Market Financial Variables

ABSTRACT Efficiency Market hypothesis assume that all investors reason in the same way to make their financial decisions. In contrast, Neurosciences have provided strong evidences that cognitive diversity is the hallmark of human intelligence. Neurofinances has shown that volunteers learned different profitable financial decision-making strategies depending on the kind of market they begun to trade. Here, we decide to further explore this hypothesis by studying a possible correlation between brain activity and the financial variables in a stock market game and to test if this correlation differ between experimental groups that trade in different market conditions. Present results show that volunteers had different perceptions of the studied financial variables depending if they initially traded in a bear or a bull market. Our findings are consistent with the hypothesis that different neural circuits were learned to monitor the different financial variables studied here, depending on market conditions.

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A neurochemical approach to valuation sensitivity over gains and losses

A neurochemical approach to valuation sensitivity over gains and losses | Bounded Rationality and Beyond | Scoop.it

Prospect theory proposes the hypothesis that people have diminishing sensitivity in valuing increases in the size of monetary outcomes, for both gains and losses. For decision-making under risk, this implies a tendency to be risk-tolerant over losses while being generally risk averse over gains. We offer a neurochemistry-based model of the diminishing valuation sensitivity hypothesis. Specifically, we propose that dopamine tone modulates the sensitivity towards valuation of gains while serotonin tone modulates the sensitivity towards valuation of losses. Consequently, higher dopamine tone would yield a more concave

valuation function over gains while higher serotonin tone would yield a more convex valuation function over losses. Using a neurogenetics strategy to test our neurochemical model, we find that subjects with the

9-repeat allele of DAT1 (lower DA tone) are more risk-tolerant over gains than subjects with the 10-repeat allele, and that subjects with the 10-repeat allele of STin2 (higher 5HT tone) are more risk-tolerant over losses than subjects with the 12-repeat allele. Overall, our results support the implications of our model and provide the first neurogenetics evidence that risk attitudes are partially hard-wired in differentiating

between gain- and loss-oriented risks.

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