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News on the effects of bounded rationality in economics and business, relationships and politics
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Behavioral Corporate Finance: A Survey by Malcolm P. Baker, Richard S. Ruback, Jeffrey Wurgler :: SSRN

Behavioral Corporate Finance: A Survey by Malcolm P. Baker, Richard S. Ruback, Jeffrey Wurgler :: SSRN | Bounded Rationality and Beyond | Scoop.it
Abstract:      
Research in behavioral corporate finance takes two distinct approaches. The first emphasizes that investors are less than fully rational. It views managerial financing and investment decisions as rational responses to securities market mispricing. The second approach emphasizes that managers are less than fully rational. It studies the effect of nonstandard preferences and judgmental biases on managerial decisions. This survey reviews the theory, empirical challenges, and current evidence pertaining to each approach. Overall, the behavioral approaches help to explain a number of important financing and investment patterns. The survey closes with a list of open questions. 

 

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Why pay-what-you-want pricing may not be as crazy as it seems

Why pay-what-you-want pricing may not be as crazy as it seems | Bounded Rationality and Beyond | Scoop.it

Imagine you are about to check out from your overnight stay at a hotel in Paris. You get to the counter and the receptionist smiles and asks “how much would you like to pay?”

Say what? A hotel where you can choose to pay what you want?

It’s not a dream. It’s happening right now in Paris where a group of hotels allow you to book one of their rooms and pay only what you think the stay was worth.

Is this risky business? Surely people will jump at the opportunity to short change the hotel, paying much less that the standard rate. After all, we all love getting stuff for free.

Well it’s probably not as risky for the hotel as it first appears. Availability is limited to a set number of rooms and the interest the promotion has generated will probably outweigh any margin they lose on the standard rate. But more importantly, behavioural economics suggests that most guests will probably pay a fair amount anyway.

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Matteo Motterlini, speaker life a #bDf14 - Better Decisions Forum

Matteo Motterlini, speaker life a #bDf14 - Better Decisions Forum | Bounded Rationality and Beyond | Scoop.it
Una scienza economica più vicina all’uomo “in carne e ossa”, non l’essere perfettamente razionale che è descritto in teoria: un’economia più attenta alla componente decisionale human può realmente contribuire a costruire un mondo migliore fondato su decisioni migliori. Ce ne ha parlato il filosofo e neuroeconomista Matteo Motterlini, direttore del CRESA  – Centro di Ricerca Epistemologica Sperimentale e Applicata dell’Università Vita e Salute San Raffaele di Milano.
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Using Cognitive Dissonance to Manipulate Social Preferences

Abstract: We explore the role of cognitive dissonance in dictator and public goods games. Specifically, we motivate cognitive dissonance between one's perception of “fair treatment” and self-interested behaviour by having participants answer a question about fairness. Utilizing two manipulations (reminding participants about their answer to the fairness question and publicly reporting aggregate answers to the question), we find that there is greater cognitive dissonance and behavioural change when there is a social component (i.e., reporting of aggregate answers). When a participant's answer to the fairness question is private, there is less dissonance and hence no behavioural change.

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Choice Construction Versus Preference Construction: the Instability of Preferences Learned in Context by On Amir, Jonathan Levav :: SSRN

Choice Construction Versus Preference Construction: the Instability of Preferences Learned in Context by On Amir, Jonathan Levav :: SSRN | Bounded Rationality and Beyond | Scoop.it
Abstract:      
Preference consistency implies that people have learned their willingness to trade off attributes. We argue that this is not necessarily the case. Instead, we show that when preferences are learned in context (e.g., through repeated choices made from a trinary choice set that includes an asymmetrically dominated decoy), people learn a context specific choice heuristic (e.g., always the asymmetrically dominating option), which leads to less consistent preferences across contexts. In contrast, repeated choices from sets containing only two options impel people to learn their subjective attribute weights, yielding preferences that are consistent across contexts. The difference between choice construction and preference construction is of importance to marketing managers because repeat purchase is typically interpreted as a signal of customer preference. We show that this preference might just be a learned solution to the choice problem, and that as soon as the competitive context changes (in a normatively meaningless way), so will consumers' preferences. 

 

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Be suspicious of stories

Be suspicious of stories | Bounded Rationality and Beyond | Scoop.it

 Like all of us, economist Tyler Cowen loves a good story. But in this intriguing talk, he asks us to step away from thinking of our lives -- and our messy, complicated irrational world -- in terms of a simple narrative.
(Filmed at TEDxMidAtlantic.)


Via Philippe Vallat
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Philippe Vallat's curator insight, July 15, 2014 3:47 AM

About stories, mental laziness, cognitive biases, manipulation

Pierre Gauthier's curator insight, July 15, 2014 9:46 AM

Anyone who practices mindfulness is very intimately familiar with "the storyteller". What Tyler Cowan talks about in the excellent TEDx talk could be quite upsetting to some people who haven't been deep in their practice. Very good! 

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3 Behavior Change Experts Debate: What Does It Take To Kick Bad Money Habits?

3 Behavior Change Experts Debate: What Does It Take To Kick Bad Money Habits? | Bounded Rationality and Beyond | Scoop.it

If you’ve ever experienced a sense of euphoria after paying off your credit card in full or purchasing a piece of furniture thatfinally completes your living room, you know that our relationship to money isn’t just a purely economical one.

There’s a big psychological component, too.

And this is exactly why a growing number of scholars these days are studying behavioral psychology and economics—in tandem.

The reason: They want to figure out how to best capitalize on our emotions—the pride we feel when a savings account balance grows or the panic that ensues when a hefty bill arrives in the mail—in order to help us adopt more productive money habits.

Scholars like Jonathan Zinman, Hersh Shefrin and Julie Agnew—all luminaries in the field of finance-related behavior change techniques. And the very kind of people whose brains we love to pick for advice on how to work toward kicking unproductive habits—say, like a never-ending cycle of overspending—in order to get on the right financial track.

Each one of them has a unique perspective to share, so read on and you may just glean a good money habit or two.

 
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Astrocytes contribute to gamma oscillations and recognition memory

Astrocytes contribute to gamma oscillations and recognition memory | Bounded Rationality and Beyond | Scoop.it
Abstract

Glial cells are an integral part of functional communication in the brain. Here we show that astrocytes contribute to the fast dynamics of neural circuits that underlie normal cognitive behaviors. In particular, we found that the selective expression of tetanus neurotoxin (TeNT) in astrocytes significantly reduced the duration of carbachol-induced gamma oscillations in hippocampal slices. These data prompted us to develop a novel transgenic mouse model, specifically with inducible tetanus toxin expression in astrocytes. In this in vivo model, we found evidence of a marked decrease in electroencephalographic (EEG) power in the gamma frequency range in awake-behaving mice, whereas neuronal synaptic activity remained intact. The reduction in cortical gamma oscillations was accompanied by impaired behavioral performance in the novel object recognition test, whereas other forms of memory, including working memory and fear conditioning, remained unchanged. These results support a key role for gamma oscillations in recognition memory. Both EEG alterations and behavioral deficits in novel object recognition were reversed by suppression of tetanus toxin expression. These data reveal an unexpected role for astrocytes as essential contributors to information processing and cognitive behavior.

 
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7 2 6 2 Dual process theory & neuroeconomics 14 58 - YouTube

Dual process theory & neuroeconomics 
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Timeful, a mobile app, promises to stop distraction in its tracks

Timeful, a mobile app, promises to stop distraction in its tracks | Bounded Rationality and Beyond | Scoop.it
Timeful promises to combine behavioral science and machine learning to create a holistic calendar of your day—from meetings to flossing.

Ariely, whose first book Predictably Irrational highlighted how painfully incompetent we are at making optimal financial decisions (and poked holes in the theory of supply and demand), has been researching human fallibility for years. (No wonder the guy is a little despondent.) But there is reason for a small, newfound source of hope. Along with Stanford University computer science professor Yoav Shoham and Jacob Bank, a Stanford doctoral candidate, Ariely has co-founded a company that aims to help people make better use of their most precious resource—time.

The trio’s first product is an application called Timeful, a name that their Mountain View, Calif-based company shares. At first glance, the iOS app seems like a slightly souped-up calendar tool: it automatically synchronizes with existing calendars and has a familiar interface. But the app also instructs users to pick from a list of health- and happiness-minded tasks—running, flossing, calling Mom or Dad—in addition to the usual personal or work-related to-do list. It then incorporates all of that data, which can include sleep patterns and designated productive times of the day, to suggest time slots for everything. “Figuring out what to do with your time is a really complex computational problem,” Ariely says.

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Nudged towards homebrand by our supermarkets; but is it really a choice?

Nudged towards homebrand by our supermarkets; but is it really a choice? | Bounded Rationality and Beyond | Scoop.it

nternational food giant Heinz has recently again complained about the behaviour of Australian supermarkets Coles and Woolworths, complaining the Australian retailers' homebrand strategy is creating an “inhospitable environment” for suppliers by restricting consumer choice.

The increasingly widespread use of homebrand, or “private labels” in Australia illustrates the ugly relationship between such strategies, “nudge” theory and the illusion of choice.

Developed by academics such as Richard Thaler, director of the Centre for Decision Research at the University of Chicago,nudge theory works along the lines that most of us will not do what we should unless we get a gentle nudge in the right direction.

Restricting our choices via regulation or other government intervention when it comes to eating unhealthy food, but widening the choices when it comes to healthy food to make us eat more healthy food, is an example of nudge theory.

Once the majority starts eating more healthy food then the rest of us will be nudged into following as we won’t to be left behind.

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Nudge novelty has worn off, but we still need behavioural economics

Nudge novelty has worn off, but we still need behavioural economics | Bounded Rationality and Beyond | Scoop.it

It took decades for behavioural economics to break into the mainstream. Now, after just a few years of “bias”, “anchoring” and “nudge”, some critics are already questioning whether it has anything left to offer.

This is a curious suggestion. Behavioural economics might well be open to ill-informed accusations of relying on easy wins, but so it goes in many scientific disciplines. Challenging and refining findings is essential to how we progress, which is why relentless experimentation – the signature research method of behavioural economics – is the very foundation of science.

Make no mistake: behavioural economics is an experimental science in action. The perception of economics as non-experimental endured for most of the 20th century, sustained by the beliefs and pronouncements of figures as influential and as decorated as Milton Friedman, but nowadays many economists – not most, granted, but many – do run experiments.

What do these experiments actually tell us? Perhaps the single most important inference, one that’s demonstrated again and again, is that we need to invest in developing theories of behaviour that are built on evidence about how people make decisions rather than on age-old assumptions about how idealised hyper-rational beings ought to choose.

 
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Anchoring or Loss Aversion? Empirical Evidence from Art Auctions

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

 
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Shared brain activity predicts audience preferences

Shared brain activity predicts audience preferences | Bounded Rationality and Beyond | Scoop.it

Neuromarketing firms claim that brain scanning technology can be used to evaluate consumers’ responses to products and predict which ones they prefer, but so far most of these claims are hugely exaggerated.

New research published in the journal Nature Communications adding some hope to the neuromarketing hype, by showing that the brain activity shared by small groups of people in response to film clips can accurately predict how popular those clips will be among larger groups.

Ten years ago, Uri Hasson and his colleagues recruited five participants and used functional magnetic resonance imaging (fMRI) to scan their brains while each one watched the same 30-minute clip of Sergio Leone’s classic spaghetti western, The Good, the Bad and the Ugly. They noticed that the film produced remarkably similar patterns of brain activity in all the participants, synchronising the activity across multiple regions, such that their brains “ticked collectively” while they viewed it. 

 

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Giorgio Coricelli, speaker Human a #bDf14 - Better Decisions Forum

Giorgio Coricelli, speaker Human a #bDf14 - Better Decisions Forum | Bounded Rationality and Beyond | Scoop.it
Giorgio Coricelli, neuroeconomista della University of Southern California ha partecipato come speaker “human” a Better Decisions Forum 2014. Guarda il talk “Le basi neuronali delle scelte strategiche”
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Intelligence moderates neural responses to monetary reward and punishment

Abstract 

The relation between intelligence (IQ) and neural responses to monetary gains and losses were investigated in a simple decision task. In 94 healthy adults, typical responses of striatal BOLD signal after monetary reward and punishment were weaker for subjects with higher IQ. IQ-moderated differential responses to gains and losses were also found for regions in the medial prefrontal cortex, posterior cingulate cortex, and left inferior frontal cortex. These regions have previously been identified with the subjective utility of monetary outcomes. Analysis of subjects’ behavior revealed a correlation between IQ and the extent to which choices were related to experienced decision outcomes in preceding trials. Specifically, higher IQ predicted behavior to be more strongly correlated with an extended period of previously experienced decision outcomes, whereas lower IQ predicted behavior to be correlated exclusively to the most recent decision outcomes. We link these behavioral and imaging findings to a theoretical model capable of describing a role for intelligence during the evaluation of rewards generated by unknown probabilistic processes. Our results demonstrate neural differences in how people of different intelligence respond to experienced monetary rewards and punishments. Our theoretical discussion offers a functional description for how these individual differences may be linked to choice behavior. Together, our results and model support the hypothesis that observed correlations between intelligence and preferences may be rooted in the way decision outcomes are experienced ex post, rather than deriving exclusively from how choices are evaluated ex-ante. 

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RSA_Social_Brain_Report_final_english.pdf

We have thinking tendencies (biases) such as:
seeking out information to support what we already
believe (confirmation bias), over-valuing information we
receive early on in an evaluation (anchoring and the halo
effect), and feeling the pain of a loss more acutely than
the pleasure of a similar gain (loss aversion).
These tendencies can affect learning of subject
content, your (and your pupils’) evaluation of their
ability, and effort levels

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Alternative Payoff Mechanisms for Choice under Risk

Abstract: Most experiments on decision theory ask individual subjects to make more than one decision. The isolation hypothesis is commonly used to justify the choice of the random lottery incentive mechanism as the preferred payoff protocol. This research note reports on the main findings on the theoretical and empirical performance of different payoff mechanisms on eliciting individuals’ attitudes toward risk. It challenges the conventional view that the random lottery incentive mechanism introduces no biases in inducing risk preferences

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Behavioural tracking and neuroscience are tools for sustainable innovation

Behavioural tracking and neuroscience are tools for sustainable innovation | Bounded Rationality and Beyond | Scoop.it

Let's ditch sustainability surveys which tell us consumers pay more for sustainability - they don't. New tools, used responsibly, can properly analyse behavioural patterns. 

A new set of tools and technologies has emerged over the last several years to measure the behaviours of consumers. These tools, if used responsibly, transparently, and without violating people's privacy, hold important potential for better understanding consumer behavior with respect to sustainability.

Last week Accenture and Havas Media RE:PURPOSE released the latest in a long line of surveys asserting that consumers care about sustainability. The most interesting finding from this study however, was that CEOs don't believe consumer-stated commitments to sustainability.

This makes sense. There is a massive gap between what consumers say and do. Which is why most companies don't ask consumers what they believe or value; they study their actual behaviours (and increasingly their brain waves).

Brands, retailers, and market researchers assert that the newest behavioural tracking and neuroscience tools are designed to help them learn what consumers want and need. And ultimately they help them deliver more relevant ads and products.

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Deterrence Works for Criminals

Abstract: Criminal law and economics rests on the expectation that deterrence incentives can be employed to reduce crime. Prison survey evidence however suggests that a majority of criminals are biased and may not react to deterrence incentives. This study employs an extra-laboratory experiment in a German prison to test the effectiveness of deterrence. Subjects either face potential punishment when stealing, or they can steal without deterrence. We confirm Gary Becker’s deterrence hypothesis that deterrence works for criminals

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The Fundamental Psychological Bias That Determines Your Politics — PsyBlog

The Fundamental Psychological Bias That Determines Your Politics — PsyBlog | Bounded Rationality and Beyond | Scoop.it

Are you on the right or the left? It could be down to this basic psychological bias. Our position on the political spectrum — right, left or centrist — could be down to a deep-seated psychological bias in the way people think about the world.

That’s according to new research published in the journal Behavioral and Brain Sciences, which tested reactions to viewing negative stimuli, like people eating worms or maggot-infested wounds (Hibbing et al., 2014).

The study found that the more conservative people’s politics was, the more intense their reaction to these pictures.

The variation between people was quite striking: some people did not seem to mind the pictures that much, while others reacted strongly, with much higher levels of skin conductance, showing they were sweating more.

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Surviving the Global Pension Crisis

Surviving the Global Pension Crisis | Bounded Rationality and Beyond | Scoop.it
The US$100 trillion global retirement savings shortfall is the megatrend that will define the next 40 years, according to Rich Marin.

No megatrend will define the next 40 years more than the global pension crisis, according to Richard Marin, author of Global Pension Crisis: Unfunded Liabilities and How We Can Fill the Gap. He recently spoke at the 2014 CFA Institute Financial Analysts Seminar, and his sober assessment of the state of the world’s pension plans should serve as a wake-up call for the some of the world’s biggest economies.

How big is the problem? Marin estimates the global retirement savings shortfall at nearly $100 trillion. In the developed world, unfavorable demographics and an unwillingness on the part of policymakers to make difficult choices are the problem’s key drivers. Aging populations, longer lifespans, and static retirement ages have led Marin to conclude that, without meaningful changes, generational conflict is on the horizon.

Marin estimates global recorded wealth in monetary assets to be $132 trillion, of which roughly $50 trillion is allocated as retirement assets. Looking out to the year 2050, he calculates a current retirement funding need of $98.6 trillion. To drive home his view that few will be insulated from the looming crisis, Marin shared that he considered titling his book, You Can’t Build Your Walls High Enough. Higher taxes, he warned, are almost certainly going to be part of any solution.

 
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Why Behavioral Economics Is Cool, and I'm Not

Why Behavioral Economics Is Cool, and I'm Not | Bounded Rationality and Beyond | Scoop.it

Here are some of my favorite surprising studies. What do they have in common?

• People are more likely to buy jam when they're presented with 6 flavors than 24.
• After inspecting a house, real estate agents thought it was $14,000 more valuable when the seller listed it at $149,900 than $119,900.
• When children play a fun game and then get rewarded for it, they lose interest in playing the game once the rewards are gone.
• People conserve more energy when they see their neighbors' consumption rates.
• If you flip a coin six times, people think Heads-Heads-Heads-Tails-Tails-Tails is less likely than Heads-Tails-Tails-Heads-Heads-Tails, even though the two are equally likely.
• Managers underestimate the intrinsic motivation of their employees.

They've all appeared in the media as research done by behavioral economists, when in fact they were done by psychologists.*

This is a common mistake. As one Nobel Laureate in economics observes: "When it comes to policy making, applications of social or cognitive psychology are now routinely labeled behavioral economics."

 

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AUDIO Q&A: Neuroeconomics and the answer to the 'curse of choice'

AUDIO Q&A: Neuroeconomics and the answer to the 'curse of choice' | Bounded Rationality and Beyond | Scoop.it

We are faced with a myriad of choice in our lives - but an emerging body of work suggests the more choice we’re faced with, the more likely we’ll make a poor decision.

The conundrum is called the “curse of choice” and the field of neuroeconomics - a blend of economics, psychology and neuroscience - uses a variety of methodological tools to understand how we make decisions and help us improve our ability to choose well.

New York University Professor Paul Glimcher, a world leader in neuroeconomics, visited the University of Sydney recently to present his findings on the curse of choice - and how to overcome it.

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