Bounded Rationality and Beyond
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News on the effects of bounded rationality in economics and business, relationships and politics
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Trust, morality -- and oxytocin?

Trust, morality -- and oxytocin? | Bounded Rationality and Beyond | Scoop.it

What drives our desire to behave morally? Neuroeconomist Paul Zak shows why he believes oxytocin (he calls it "the moral molecule") is responsible for trust, empathy and other feelings that help build a stable society. Oxytocin infusion increases generosity in unilateral monetary transfers by 80 percent [and] increases donations to charity by 50 percent.

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Why We Procrastinate - Issue 9: Time - Nautilus

Why We Procrastinate - Issue 9: Time - Nautilus | Bounded Rationality and Beyond | Scoop.it

he British philosopher Derek Parfit espoused a severely reductionist view of personal identity in his seminal book, Reasons and Persons: It does not exist, at least not in the way we usually consider it. We humans, Parfit argued, are not a consistent identity moving through time, but a chain of successive selves, each tangentially linked to, and yet distinct from, the previous and subsequent ones. The boy who begins to smoke despite knowing that he may suffer from the habit decades later should not be judged harshly: “This boy does not identify with his future self,” Parfit wrote. “His attitude towards this future self is in some ways like his attitude to other people.”

Parfit’s view was controversial even among philosophers. But psychologists are beginning to understand that it may accurately describe our attitudes towards our own decision-making: It turns out that we see our future selves as strangers. Though we will inevitably share their fates, the people we will become in a decade, quarter century, or more, are unknown to us. This impedes our ability to make good choices on their—which of course is our own—behalf. That bright, shiny New Year’s resolution? If you feel perfectly justified in breaking it, it may be because it feels like it was a promise someone else made.

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Fiscal Austerity, Unemployment an Suicide Rates in Greece

Abstract
This study examines the effects of fiscal austerity, among other socioeconomic variables, on suicide rates in Greece over the period 1968-2011. Our results suggest that fiscal austerity, higher unemployment rates, negative economic growth and reduced fertility rates, significantly increase suicide rates in Greece, while increased alcohol consumption and divorce rates do not exert any significant influence on suicide rates. Interestingly, the effects of fiscal austerity and economic growth are gender-specific, as fiscal austerity measures and negative economic growth significantly increase male suicide rates, while no significantly effects of fiscal austerity and negative economic growth on female suicide rates could be identified.
Finally, the effects of fiscal austerity on suicide rate are also age-specific, affecting mostly the population between the ages of 45 and 89 years. These results have important implications for policy makers, and for the creation and implementation of specialised suicide prevention programs in Greece by national health agencies.

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Biases and Implicit Knowledge - Munich Personal RePEc Archive

Biases and Implicit Knowledge - Munich Personal RePEc Archive | Bounded Rationality and Beyond | Scoop.it
Abstract

 

A common explanation for biases in judgment and choice has been to postulate two separate processes in the brain: a “System 1” that generates judgments automatically, but using only a subset of the information available, and a “System 2” that uses the entire information set, but is only occasionally activated. This theory faces two important problems: that inconsistent judgments often persist even with high incentives, and that inconsistencies often disappear in within-subject studies. In this paper I argue that these behaviors are due to the existence of “implicit knowledge”, in the sense that our automatic judgments (System 1) incorporate information which is not directly available to our reflective system (System 2). System 2 therefore faces a signal extraction problem, and information will not always be efficiently aggregated. The model predicts that biases will exist whenever there is an interaction between the information private to System 1 and that private to System 2. Additionally it can explain other puzzling features of judgment: that judgments become consistent when they are made jointly, that biases diminish with experience, and that people are bad at predicting their own future judgments. Because System 1 and System 2 have perfectly aligned preferences, welfare is well-defined in this model, and it allows for a precise treatment of eliciting preferences in the presence of framing effects.

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Neuroscience

Neuroscience | Bounded Rationality and Beyond | Scoop.it

So why do neurons respond in this remarkable way? A new study by Professor Jeff Bowers and colleagues at the University of Bristol argues that highly selective neural representations are well suited to co-activating multiple things, such as words, objects and faces, at the same time in short-term memory. 

The researchers trained an artificial neural network to remember words in short-term memory. Like a brain, the network was composed of a set of interconnected units that activated in response to inputs; the network ‘learnt’ by changing the strength of connections between units. The researchers then recorded the activation of the units in response to a number of different words.

When the network was trained to store one word at a time in short-term memory, it learned highly distributed codes such that each unit responded to many different words. However, when it was trained to store multiple words at the same time in short-term memory it learned highly selective (‘grandmother cell’) units – that is, after training, single units responded to one word but not any other. This is much like the neurons in the cortex that respond to one face amongst many.

 
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Two Additional Remarks on Conformism - Ekkehart Schlicht

Abstract: Abstract This note offers two comments on the article “Social Influences towards Conformism in Economic Experiments” by Hargreaves Heap that is to appear in the Economics e-Journal. One relates to the concept of conformism, the other lines out some phenomena where an explicit recognition of group processes, such as conformism, may be analytically helpful.

 
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Empirically Informed Regulation (2011)

Downlodable - The implications of behavioural economics for law and regulation have been extensively discussed by Professor Cass Sunstein. His paper Empirically Informed Regulation (2011) is a particularly useful overview of the issues involved and we will discuss this in depth during the lecture. The more accessible account Simpler recounts Sunstein's time as a lead regulator within the Obama Administration.
Key points:
Benefits of incorporating empirical findings into the development of regulation.
Can small inexpensive policy initiatives have large and highly beneficial effects?

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History, Expectations, and Leadership in the Evolution of Social Norms

History, Expectations, and Leadership in the Evolution of Social Norms | Bounded Rationality and Beyond | Scoop.it
Abstract
We study the evolution of a social norm of “cooperation” in a dynamic environment.Each agent lives for two periods and interacts with agents from the previous and nextgenerations via a coordination game. Social norms emerge as patterns of behaviorthat are stable in part due to agents’ interpretations of private information aboutthe past, influenced by occasional commonly-observed past behaviors. For sufficientlybackward-looking societies, history completely drives equilibrium play, leading to asocial norm of high or low cooperation. In more forward-looking societies, there is apattern of “reversion” whereby play starting with high (low) cooperation reverts towardlower (higher) cooperation. The impact of history can be countered by occasional“prominent” agents, whose actions are visible by all future agents and who can leveragetheir greater visibility to influence expectations of future agents and overturn socialnorms of low cooperation.
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Eli Levine's curator insight, February 27, 2014 10:31 AM

Indeed, being forward looking helps one see greater possibilities than if one were to continuously be stuck in the past.

 

Another reason how conservatism in and of itself, is a detriment to the whole of human society.

 

Too much on the past.  Not enough potential to grow in the future.  Same old patterns, repeated again and again and again, with no real lessons being learned from any of it.

 

Silly brains.

 

Think about it.

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Manipulation of Choice Behavior

Downloadable! We introduce and study the problem of manipulation of choice behavior. In a class of two-stage models of decision making, with the agent's choices determined by three "psychological variables," we imagine that a subset of these variables can be selected by a "manipulator." To what extent does this confer control of the agent's behavior? Within the specified framework, which overlaps with two existing models of choice under cognitive constraints, we provide a complete answer to this question.
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Come la scienza del comportamento può ridurre la tua bolletta energetica

C'è una via sicura per ridurre i vostri costi energetici? Non ci credereste: basta sapere quanto pagano i vostri vicini. Alex Laskey ci mostra come una particolare caratteristica del comportamento umano possa renderci migliori e più saggi consumatori di energia, con bollette più basse per dimostrarlo.
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Biological characteristics modulating investor overconfidence

Abstract
Applying a standard questionnaire (Lichtenstein and Fischhoff 1977) to a sample of 44 professional investors, we sought for explicit correlations between selected biological characteristics of the investors and the cognitive bias known as overconfidence. We found that both male and female investors showed overconfidence above the subjective probability of 0.7 and underconfidence below this threshold. But the sexes seemed to behave differently when they were totally uncertain of their answers. Experienced and inexperienced investors were overconfident whenever they were 70 percent (or above) confident of their answers. Despite that, experienced investors were relatively more
calibrated. Of those who were highly uncertain of their answers, the inexperienced showed less confidence. Moreover, a logistic regression analysis showed that male subjects, fathers, right-handers, and subjects with a university degree and less than five years of experience in stock markets were more prone to the overconfidence effect.

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CiteSeerX — A Dynamic Model of Group Performance: Considering the Group Members’ Capacity To Learn

CiteSeerX — A Dynamic Model of Group Performance: Considering the Group Members’ Capacity To Learn | Bounded Rationality and Beyond | Scoop.it
CiteSeerX - Document Details (Isaac Councill, Lee Giles, Pradeep Teregowda): A dynamic model of group performance is suggested that combines the group learning approach and the combination of contributions approach. Three hypotheses are tested in two experiments, comparing individual training conditions with mixed group and individual training conditions on subsequent nominal and collective group performance of rule induction tasks under identical time constraints. As predicted, collective group performance improves as a function of group experience, nominal group performance improves as a function of improved individual resources for performing the task individually, and group experience reduces process losses by improving individuals’ ability to collaborate efficiently. Several experiments from the literature that address issues of group learning are analyzed in the light of the propositions made in the dynamic model. Overall, theoretical and experimental approaches to investigating group learning phenomena are discussed.
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Emotional and Cognitive Biases - YouTube

This year's Investment Forum, co-hosted by SVA Plumb Financial and SVA, was held on October 2nd in Madison and October 3rd in Milwaukee. We were proud to welcome from ING Financial Services, Steve Bohn, Senior Vice President, Investment Management and Mike Mahoney, Senior Vice President, Head of Private Wealth & Advisory as our keynote speakers. Steve and Mike discussed the psychology of investing and how to manage your own investing behavior to position yourself for financial success.
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Memory: 10 Fascinating Quirks Everyone Should Know — PsyBlog

Memory: 10 Fascinating Quirks Everyone Should Know — PsyBlog | Bounded Rationality and Beyond | Scoop.it

Why we remember and why we forget: it’s context, fading emotions, deep processing, the ‘Google effect’, the reminiscence bump and way more…

Many people say they have bad memories, but the majority are wrong.

The way memory works can be unexpected, frustrating, wonderful, and even quirky — but not necessarily ‘bad’.

For most of us the problem isn’t with our memories, it’s with understanding how memory works.

Here are ten interesting quirks of memory which provide a better insight into what makes us remember — or forget.

 

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Eli Levine's curator insight, March 5, 2014 11:59 AM

The brain is a quirky organ.

 

Period.

 

Enjoy!

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The paradox of choice

The paradox of choice | Bounded Rationality and Beyond | Scoop.it
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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A perspective on judgment and choice: Mapping bounded rationality

Abstract

Early studies of intuitive judgment and decision making conducted with the late Amos Tversky are reviewed in the context of two related concepts: an analysis of accessibility, the ease with which thoughts come to mind; a distinction between effortless intuition and deliberate reasoning. Intuitive thoughts, like percepts, are highly accessible. Determinants and consequences of accessibility help explain the central results of prospect theory, framing effects, the heuristic process of attribute substitution, and the characteristic biases that result from the substitution of nonextensional for extensional attributes. Variations in the accessibility of rules explain the occasional corrections of intuitive judgments. The study of biases is compatible with a view of intuitive thinking and decision making as generally skilled and successful.

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The European Financial Review » Economics & Politics Finance Innovation Lead Story Management New » How Biases Affect Investor Behaviour

The European Financial Review » Economics & Politics Finance Innovation Lead Story Management New » How Biases Affect Investor Behaviour | Bounded Rationality and Beyond | Scoop.it
By H. Kent Baker and Victor Ricciardi Investor behaviour often deviates from logic and reason, and investors display many behaviour biases that influence their investment decision-making processes. Below, H. Kent Baker and Victor Ricciardi describe some common behavioural biases and suggest how to mitigate them. The investor's chief problem – even his worst enemy – is likely to be himself. Benjamin Graham
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Ambiguity on Audits and Cooperation in a Public Goods Game

Abstract: We investigate the impact of various audit schemes on the future provision of public goods, when contributing less than the average of the group is sanctioned exogenously and the probability of an audit is unknown. We study how individuals update their beliefs about the probability of being audited, both before and after audits are definitely withdrawn. We find that when individuals have initially experienced systematic audits, they decrease both their beliefs and their contributions almost immediately after audits are withdrawn. In contrast, when audits were initially less frequent and more irregular, they maintain high beliefs about the probability of being audited and continue cooperating long after audits have been withdrawn. Inconsistency in experiencing audits across time clearly increases the difficulty of learning the true audit probabilities. Thus, conducting less frequent and irregular audits with higher fines can increase efficiency dramatically.

 
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The Effect of Behavioral Codes and Gender on Honesty

Abstract: We examine the effect of adherence to behavioral codes, as measured by the degree of religiosity, on the level of honesty by conducting under-the-cup die experiments. The findings suggest that behavioral codes, which prohibit lying, offset the monetary incentive to lie. The highest level of honesty is found among young religious females while the lowest is found among secular females. Moreover, when the monetary incentive to lie is removed, the tendency of secular subjects to lie disappears. Given the strict separation between the secular and religious education systems the research findings confirm the importance of education in instilling ethical values.

 
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Understanding Investor Behavior

Understanding Investor Behavior | Bounded Rationality and Beyond | Scoop.it

Discover how some strange human tendencies can play out in the market, posing the question: are we really rational?

Behavioral finance certainly reflects some of the attitudes embedded in the investment system. Behaviorists will argue that investors often behave irrationally, producing inefficient markets and mispriced securities - not to mention opportunities to make money. That may be true for an instant, but consistently uncovering these inefficiencies is a challenge. Questions remain over whether these behavioral finance theories can be used to manage your money effectively and economically. (To continue reading on behavioral finance, see Taking A Chance On Behavioral Finance.)

That said, investors can be their own worst enemies. Trying to out-guess the market doesn't pay off over the long term. In fact, it often results in quirky, irrational behavior, not to mention a dent in your wealth. Implementing a strategy that is well thought out and sticking to it may help you avoid many of these common investing mistakes.

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How do we really make decisions?

How do we really make decisions? | Bounded Rationality and Beyond | Scoop.it

With every decision you take, every judgement you make, there is a battle in your mind - a battle between intuition and logic.

And the intuitive part of your mind is a lot more powerful than you may think.

Most of us like to think that we are capable of making rational decisions. We may at times rely on our gut instinct, but if necessary we can call on our powers of reason to arrive at a logical decision.

Continue reading the main story If we think that we have reasons for what we believe, that is often a mistake” Prof Daniel KahnemanPrinceton University

We like to think that our beliefs, judgements and opinions are based on solid reasoning. But we may have to think again.

Prof Daniel Kahneman, from Princeton University, started a revolution in our understanding of the human mind. It's a revolution that led to himwinning a Nobel Prize.

His insight into the way our minds work springs from the mistakes that we make. Not random mistakes, but systematic errors that we all make, all the time, without realising.

Prof Kahneman and his late colleague Amos Tversky, who worked at the Hebrew University of Jerusalem and Stanford University, realised that we actually have two systems of thinking. There's the deliberate, logical part of your mind that is capable of analysing a problem and coming up with a rational answer.

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Emoticons in mind: An event-related potential study

Emoticons in mind: An event-related potential study | Bounded Rationality and Beyond | Scoop.it

(2014). Abstract

It is now common practice, in digital communication, to use the character combination “:-)”, known as an emoticon, to indicate a smiling face. Although emoticons are readily interpreted as smiling faces, it is unclear whether emoticons trigger face-specific mechanisms or whether separate systems are utilized. A hallmark of face perception is the utilization of regions in the occipitotemporal cortex, which are sensitive to configural processing. We recorded the N170 event-related potential to investigate the way in which emoticons are perceived. Inverting faces produces a larger and later N170 while inverting objects which are perceived featurally rather than configurally reduces the amplitude of the N170. We presented 20 participants with images of upright and inverted faces, emoticons and meaningless strings of characters. Emoticons showed a large amplitude N170 when upright and a decrease in amplitude when inverted, the opposite pattern to that shown by faces. This indicates that when upright, emoticons are processed in occipitotemporal sites similarly to faces due to their familiar configuration. However, the characters which indicate the physiognomic features of emoticons are not recognized by the more laterally placed facial feature detection systems used in processing inverted faces.

 

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Why journalists drive scientists crazy, in graphs | Poynter.

Why journalists drive scientists crazy, in graphs | Poynter. | Bounded Rationality and Beyond | Scoop.it
Journalists have to simplify material for a general audience. Is there a technological fix? 

Scientists and the journalists who cover them are locked in an “eternal tug of war,” Sabine Hossenfelder writes. The journos feel they have to elide detail so a general audience can read them. The scientists feel the resulting “knowledge transfer” to readers is pitifully low. Hossenfelder illustrates the problem with a series of graphs, like this one:

Hossenfelder notes that sports journalism doesn’t assume its readers need their reports dumbed-down, and suggests online science journalism may hold a solution: “a system with a few layers – call them beginner, advanced, pro – would already make a big difference.”

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THE COGNITIVE ILLUSION CONTROVERSY A METHODOLOGICAL DEBATE IN DISGUIS THAT MATTERS TO ECONOMISTS

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CiteSeerX — Proper analysis of the accuracy of group judgments

CiteSeerX — Proper analysis of the accuracy of group judgments | Bounded Rationality and Beyond | Scoop.it
CiteSeerX - Document Details (Isaac Councill, Lee Giles, Pradeep Teregowda): Modern societies rely heavily on groups to make important economic and political decisions. However, a review of research on group processes shows that progress has been slow in the delineation of the conditions that promote or impede efficient, accurate group judgments. One reason for the slow progress is that research methods and data analysis in this area are varied, difficult to compare, and often substandard. In this review, the authors summarize alternate methods of analysis and provide detailed illustrations of the best methods for assessing and analyzing group judgment accuracy Increased accuracy is a common justification for using groups, rather than individuals, to make judgments. However, the empirical literature shows that groups excel as judges only under limited conditions. Hill's (1982) review found that groups tend to perform around the level of the second best member in most tasks, including group judgment. Hastie (1986) identified several task differences that moderate the relative accuracy of group and individual judges, but he also concluded that there were few, if any, task conditions under which groups consistently
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Eli Levine's curator insight, February 26, 2014 5:18 PM

Indeed, we're not going to be perfect at everything.  However, making us aware of our short-comings will do much more, I think, to increase our potential than by focusing on our positives.

 

Humans love flattery and are prone to believing it.  So, a conscientious mind that's working to be above that which flatters is is probably best for us all.

 

More realism, more connection to reality, better results, better predictive abilities.

 

Enjoy.

 

Think about it.