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News on the effects of bounded rationality in economics and business, relationships and politics
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Psychological versus economic models of bounded rationality

Psychological versus economic models of bounded rationality | Bounded Rationality and Beyond | Scoop.it
That the rationality of individual people is ‘bounded’ – that is, finite in scope and representational reach, and constrained by the opportunity cost of time – cannot reasonably be controversial as an empirical matter.
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Rivoluzione nella scienza triste: nasce l'economia sperimentale - Greenreport: economia ecologica e sviluppo sostenibile

Rivoluzione nella scienza triste: nasce l'economia sperimentale - Greenreport: economia ecologica e sviluppo sostenibile | Bounded Rationality and Beyond | Scoop.it

L’approccio sperimentale, nel buio epistemologico neoclassico, ha il merito di accendere una lampada di Diogene che possa fare luce sui modelli tradizionali del pensiero economico standard. Il programma di studi cominciato negli anni ’70 da Daniel Kahneman e Amos Tversky segnò una svolta radicale. I due ricercatori, premiati con il premio Nobel del 20021 insieme a Vernon Smith, ebbero il merito di battere una nuova strada che modificò nell’essenza la teoria della scelta razionale.

Da un punto di vista scientifico, il programma di ricerca tradusse rigorosamente le intuizioni del Keynes della Teoria della probabilità (1921). Ciò che l’economista inglese aveva trattato come tantaliche limitazioni all’analisi, visto l’imponderabile ruolo che la soggettività esercita nella valutazione degli eventi incerti, diventò un insieme di vincoli cognitivi al centro di una teoria che si pone l’obiettivo di ribaltare completamente la prospettiva con cui il processo di scelta viene considerato.

- See more at: http://www.greenreport.it/rubriche/rivoluzione-nella-scienza-triste-nasce-leconomia-sperimentale/#sthash.dFUUEzN4.dpuf

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Women and Investing: a Behavioral Finance Perspective

According to new Merrill Lynch research, gender differences among investors tend to be overstated. In fact, the ways in which men and women approach their financial lives are often strikingly similar. Understanding who they are as investors can help women better focus on ways to successfully work toward their personal goals.

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Top Ten Ways to Deal with Behavioral Biases

Top Ten Ways to Deal with Behavioral Biases | Bounded Rationality and Beyond | Scoop.it
We all suffer from cognitive and behavioral biases. How can we best deal with them? 

Pretty much since the day I wrote it, my Investors’ 10 Most Common Behavioral Biases has been the most popular post on this blog.  It still gets a surprising number of hits all these months later.  Due to the pioneering work of Daniel Kahneman and others, nearly everyone in the financial world acknowledges the reality of cognitive and behavioral biases and their impact on people, the markets and life in general. It’s a very popular subject.

Unfortunately, we don’t think that we are susceptible to them personally.

As I have noted before, we all tend to share this foible — the bias blind spot, which is our inability to recognize that we suffer from the same cognitive distortions and behavioral biases that plague other people.  As one prominent piece of research puts it:

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Anomalies The Endowment Effect, Loss Aversion, and Status Quo Bias Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler

Economics can be distinguished from other social sciences by the belief that most (all?) behavior can be explained by assuming that agents have stable, well-defined preferences and make rational choices consistent with those preferences in markets that (eventually) clear. An empirical result qualifies as an anomaly if it is difficult to "rationalize," or if implausible assumptions are necessary to explain it within the paradigm. This column presents a series of such anomalies. Readers are invited to suggest topics for future columns by sending a note with some reference to (or better yet copies  of) the relevant research. Comments on anomalies printed here are also welcome. The address is: Richard Thaler, c/o Journal of Economic Perspectives, Johnson Graduate School of Management, Malott Hall, Cornell University, Ithaca, NY 14853. After this issue, the "Anomalies" column will no longer appear in every issue and instead will appear occasionally, when a pressing anomaly crosses Dick Thaler's desk. However, suggestions for new columns and comments on old ones are still welcome. Thaler would like to quash one rumor before it gets started, namely that he is cutting back because he has run out of anomalies. Au contraire, it is the dilemma of choosing which juicy anomaly to discuss that takes so much time.

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Incremental Shifts in pH Spring Water Can Be Stored as “Space-Memory”: Encoding and Retrieval Through the Application of the Same Rotating Magnetic Field | Dotta | NeuroQuantology

Incremental Shifts in pH Spring Water Can Be Stored as “Space-Memory”: Encoding and Retrieval Through the Application of the Same Rotating Magnetic Field | Dotta | NeuroQuantology | Bounded Rationality and Beyond | Scoop.it
Both four-dimensional (space-time) models and Casimir-like processes predict that the representations of stimulus-response pairing remain in altered or virtual states that can be potentially retrieved. Over a six month period we demonstrated “excess correlations” between mild acidification in quantities (50 ml) of spring water in a local space and the temporally contiguous incremental alkalinisation in nonlocal quantities of water when both loci were exposed to the same experimental paradigm that produced “entanglement” in photon reactions. The procedure required simultaneous exposures of both loci to specific patterns of rotating magnetic fields displaying specific rates of change in angular velocity. If the ~0.1 unit increases in pH within the non-local water samples due to injections of acetic acid in the local samples had been established on one day, comparable shifts occurred in the non-local water samples the following day when there were no injections of acetic acid if the space was exposed to the original magnetic field configurations. These results suggest that, like photon patterns, the “memory” or representation of pH (H+) shifts remain in space long after the stimulus has been removed and can be retrieved within that space if the specific electromagnetic field is repeated.. NeuroQuantology 
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Attractive Students Get Higher Grades

Attractive Students Get Higher Grades | Bounded Rationality and Beyond | Scoop.it

Students whose looks are above average get the best grades.  A new study finds that students who are rated as more attractive get better grades and are more likely to go to college.

The study followed about 9,000 US adolescents from high school in the 1990s, through until they were in their 30s 

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Four Points Beginner Risk Managers Should Learn from Jeff Holman's Mistakes in the Discussion of Antifragile by Nassim Nicholas Taleb :: SSRN

Four Points Beginner Risk Managers Should Learn from Jeff Holman's Mistakes in the Discussion of Antifragile by Nassim Nicholas Taleb :: SSRN | Bounded Rationality and Beyond | Scoop.it
Using Jeff Holman's comments in Quantitative Finance to illustrate 4 critical errors students should learn to avoid: 1) Mistaking tails (4th moment) for volatil
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L’uomo a razionalità limitata.

L’uomo a razionalità limitata. | Bounded Rationality and Beyond | Scoop.it
Al World Business Forum di Milano appena trascorso si è parlato, tra i vari argomenti, dei complessi meccanismi che regolano le decisioni del consumatore. Giungendo tutti, sia gli speaker che i partecipanti, alla constatazione che il consumatore compie sovente scelte del tutto irrazionali e imprevedibili.
Ma irrazionali in che senso? Una logica, un motivo, un’intenzione dietro ad una scelta ci sono sempre. Solo che queste sono soggettive e limitate alla soggettività della persona. E quindi piuttosto che di scelte irrazionali, può essere più appropriato parlare di scelte prese in virtù di una ‘razionalità limitata’.

L’economia e la psicologia delle scelte e delle decisioni hanno attraversano diverse fasi e perseguito diversi filoni di ricerca. Il filone neoclassico e tradizionalista ha attribuito all’uomo la capacità di saper scindere e quella di saper scegliere. Di saper perseguire sempre il massimo livello di soddisfazione, attraverso scelte ‘razionali’ e calcolate in base ad un semplice schema, quello dei costi/benefici.
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The functional architecture of human empathy

The functional architecture of human empathy | Bounded Rationality and Beyond | Scoop.it

BEHAVIORAL AND COGNITIVE NEUROSCIENCE REVIEWS 

Decety, Jackson / FUNCTIONAL ARCHITECTURE OF HUMAN EMPATHY  Jean Decety Philip L. Jackson
University of Washington  Empathy accounts for the naturally occurring subjective experi- enceofsimilaritybetweenthefeelingsexpressedbyselfandothers withoutloosingsightofwhosefeelingsbelongtowhom.Empathy involves not only the affective experience of the other person’s actual or inferred emotional state but also some minimal recog- nition and understanding ofanother’semotionalstate. Inlight of multiple levels of analysis ranging from developmental psy - chology, social psychology, cognitive neuroscience, and clinical neuropsychology, this article proposes a model of empathy that involves parallel and distributed processing in a number of dissociablecomputationalmechanisms.Sharedneuralrepresen- tations, self-awareness, mental flexibility, and emotion regula- tionconstitutethebasicmacrocomponentsofempathy,whichare underpinned by specific neural systems. This functional model maybeusedtomakespecificpredictionsaboutthevariousempa- thy deficits that can be encountered in different forms of social and neurological disorders
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Nothing more than feelings

Nothing more than feelings | Bounded Rationality and Beyond | Scoop.it

FIRST, you realise it’s a gorilla. The opening strains of Phil Collins’s “In the Air Tonight” are playing; the beast is enraptured. As the camera pulls back, you see that he’s seated at a drum kit. He flexes, raises his drumsticks, then brings them resoundingly down. Only in the final frames do you discover that the gorilla is pitching Cadbury’s Dairy Milk chocolate. The advert, released in 2007, should not have worked. Conventional wisdom doubted that a jolt of joy from a drumming primate, however rhythmically gifted, would spur sales of chocolate bars. A member of the team that developed the ad says that when it was passed to Millward Brown, the world’s biggest tester of adverts, the firm found that it scored poorly among women on its measures of “awareness” and “brand appeal” and about average among men (Millward Brown says it did better on other measures). Yet Cadbury went ahead, and was rewarded with millions of online views, better perceptions of its brand and higher sales. Return on investment was three times the average for packaged-goods marketing campaigns.

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Behavioural Public Policy: Adam Oliver: 9781107617377: Amazon.com: Libri

Behavioural Public Policy

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How can individuals best be encouraged to take more responsibility for their well-being and their environment or to behave more ethically in their business transactions? Across the world, governments are showing a growing interest in using behavioural economic research to inform the design of nudges which, some suggest, might encourage citizens to adopt beneficial patterns of behaviour. In this fascinating collection, leading academic economists, psychologists and philosophers reflect on how behavioural economic findings can be used to help inform the design of policy initiatives in the areas of health, education, the environment, personal finances and worker remuneration. Each chapter is accompanied by a shorter 'response' that provides critical commentary and an alternative perspective. This accessible book will interest academic researchers, graduate students and policy-makers across a range of disciplinary perspectives.
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On Emergent Market Phenomena: Heuristic Biases and Rationality in the Evolutionary Domain | EconStreams.com

On Emergent Market Phenomena: Heuristic Biases and Rationality in the Evolutionary Domain | EconStreams.com | Bounded Rationality and Beyond | Scoop.it

Evolutionary psychologists point to a growing relationship between rapid, non-linear change in the human social environment and relative stationarity in individuals’ behavioral dispositions as evidence of  “mismatch” between evolution’s intended purposes and contemporary lifestyle (think Fast food, and pornography). Thisinconsistency dynamic has resulted in the emergence of a series of pervasive cognitive biases which impair long-term rationality (promote adaptively neutral Hyperbolic Discounting, at best) and thus seriously compromise the potential growth and development of modern, global economies—at least relative to some hypothetical yet ideal possible optimum.


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Suzana Herculano-Houzel: What is so special about the human brain?

The human brain is puzzling -- it is curiously large given the size of our bodies, uses a tremendous amount of energy for its weight and has a bizarrely dense cerebral cortex. But: why? Neuroscientist Suzana Herculano-Houzel puts on her detective's cap and leads us through this mystery. By making "brain soup," she arrives at a startling conclusion.

 

http://www.ted.com/talks/suzana_herculano_houzel_what_is_so_special_about_the_human_brain.html ;


Via Complexity Digest
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Best of 2013: Know Yourself (and How You Make Decisions)

Best of 2013: Know Yourself (and How You Make Decisions) | Bounded Rationality and Beyond | Scoop.it

As I looked back over a year of tweets and blog posts, one theme was perennial: we cannot escape ourselves. What do I mean by that? Behavioral biases inform our investment decisions, regardless of gender, season, or geography With apologies to Joan Didion, 2013 also turned out, somewhat unexpectedly, to be a year of magical (mathematical) thinking.

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Mental Accounting and Consumer Choice - Richard H. Thaler

A new model of consumer behavior is developed using a hybrid of cognitive psychology and microeconomics. The development of the model starts with the mental coding of combinations of gains and losses using the prospect theory value function. Then the evaluation of purchases is modeled using the new concept of “transaction utility.” The household budgeting process is also incorporated to complete the characterization of mental accounting. Several implications to marketing, particularly in the area of pricing, are developed.

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Kahneman and Tversky and the Origin of Behavioral Economics

Abstract

Kahneman and Tversky and their behavioral economics stand in a long tradition of applying mathematics to human behavior. In the seventeenth century, attempts to describe rational behavior in mathematical terms run into problems with the formulation of the St. Petersburg paradox. Bernoulli’s celebrated solution to use utility instead of money marks the beginning of expected utility theory (EUT). Bernoulli’s work is taken up by psychophysics which in turn plays an important role in the making of modern economics. In the 1940s von Neumann and Morgenstern throw away Bernoulli and psychophysics, and redefine utility in monetary terms.

Relying on this utility definition and on von Neumann and Morgenstern’s axiomatic constraints of the individual’s preferences, Friedman and Savage attempt to continue Bernoulli’s research. After this fails economics and psychology go separate ways. Economics employs Friedman’s positive-normative distinction; psychology uses Savage’s normativedescriptive distinction. Using psychophysics Kahneman and Tversky broaden the normativedescriptive

distinction and argue with increasing strength for a descriptive theory of rational behavior. A prominent part of contemporary behavioral economics is founded upon the export of Tversky and Kahneman’s program to economics. Within this research, two different branches of research can be observed. One branch continues Kahneman and Tversky’s search for a descriptive theory of rational behavior and extends the normative-descriptive distinction with a prescriptive part. A second branch takes Tversky and Kahneman’s work as a falsification of positive economics. It argues that economics should take account of the psychological critique but stick to rigorous mathematical model building and Friedman’s positive-normative distinction

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Money, Well-Being, and Loss Aversion

Money, Well-Being, and Loss Aversion | Bounded Rationality and Beyond | Scoop.it

Higher income is associated with greater well-being, but do income gains and losses affect well-being differently? Loss aversion, whereby losses loom larger than gains, is typically examined in relation to decisions about anticipated outcomes. Here, using subjective-well-being data from Germany (N = 28,723) and the United Kingdom (N = 20,570), we found that losses in income have a larger effect on well-being than equivalent income gains and that this effect is not explained by diminishing marginal benefits of income to well-being. Our findings show that loss aversion applies to experienced losses, challenging suggestions that loss aversion is only an affective-forecasting error. By failing to account for loss aversion, longitudinal studies of the relationship between income and well-being may have overestimated the positive effect of income on well-being. Moreover, societal well-being might best be served by small and stable income increases, even if such stability impairs long-term income growth.

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Stirling Behavioural Science Blog : The 15 Best Behavioural Science Graphs of 2010-13

Stirling Behavioural Science Blog : The 15 Best Behavioural Science Graphs of 2010-13 | Bounded Rationality and Beyond | Scoop.it

(1) Benartzi & Thaler (2013), Behavioral Economics and the Retirement Savings Crisis, Policy Forum
Shlomo Benartzi and Richard Thaler have a graph showing an enormous growth trend over the last 10 years in the percentage of U.S. employers offering 401(k) plans that automatically enroll employees and automatically escalate savings rates (for example 3% savings this year increasing to 6% next year). This trend has been no doubt influenced by their Save More Tomorrow program which first implemented auto-escalating savings (see #4 here).

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L'ILLUSIONE DI SAPERE

L'ILLUSIONE DI SAPERE | Bounded Rationality and Beyond | Scoop.it
L’illusione di sapere È compito tradizionale della filosofia della conoscenza e dell’epistemologia cercare di rispondere alla do-manda: com’è possibile conoscere? 

La sostituzione di attributi 

Un semplice esperimento ci introdurrà direttamente alla nozione di sostituzione di attributi. Si è domandato a studenti universitari statunitensi quanto giudicano, soggettivamente, di essere felici, in una scala da uno a dieci. Si è anche chiesto loro quanti appuntamenti galanti (dates) avevano avuto nel mese precedente. L’ordine con il quale queste due domande sono state poste ha alterato moltissimo le risposte: ponendo prima il quesito sulla felicità la correlazione statistica tra le due risposte è risultata trascurabile, mentre ponendo prima quello sul numero degli appuntamenti la correlazione con la risposta sulla felicità è diventata considerevole. In sostanza, è difficile valutare quanto si è felici, ma facilissimo rispondere alla domanda sugli appuntamenti. Se questa viene posta prima, inconsapevolmente si sostituisce un attributo facile (numero di appuntamenti galanti) a un attributo difficile (grado di felicità) e si crede di rispondere alla domanda difficile, offrendo in realtà una risposta sulla base della domanda facile.

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Why does printing cover pages save paper? - Decision Science News

Why does printing cover pages save paper? - Decision Science News | Bounded Rationality and Beyond | Scoop.it
Last week, we wrote about how setting printers to print double-sided by default saves paper. Kind of a no brainer. But we ended with a “counterintuitive coda” about how cover pages save paper. Counterintuitively, we were inundated with emails about the coda and none about the main finding. People wanted to know “How much paper did the cover sheets save?”, “Why does it work?” and so on. internal studies have shown that when cover pages are disabled, print volumes increase 15% to 17%
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The Selling of Attention Deficit Disorder

The Selling of Attention Deficit Disorder | Bounded Rationality and Beyond | Scoop.it

Diagnoses have soared as makers of the drugs used to treat attention deficit hyperactivity disorder have found success with a two-decade marketing campaign. Quotation of the Day: "The numbers make it look like an epidemic. Well, it’s not. It’s preposterous. This is a concoction to justify the giving out of medication at unprecedented and unjustifiable levels." — 
Keith Connors, a psychologist and professor emeritus at Duke University, criticizing the rise of attention deficit hyperactivity disorder or A.D.H.D. diagnoses and prescriptions for stimulants.

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Complexity and Smart Nudges with Inattentive Consumers

Abstract
In an experiment on markets for services, we find that consumers are likely to stick to defaults and achieve suboptimal outcomes. We unpack two key psychological reasons why they do this - complexity (in terms of non-linearity, number and bundling of tariffs) and consumer inattention -. The complexity induced by product bundling, non-linearity and number of tariffs has an important role, but this is overstated if the explanatory power of inattention is neglected. We show that a ‘smart nudge’ policy of automatically switching default tariffs can be used to exploit inattention-based consumer inertia to achieve better consumer outcomes.

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Danielle Gillespie's curator insight, August 4, 2014 6:01 AM

Study of consumer inertia and finding ways for marketers to overcome this communication barrier

Elizabeth Cora Hayes's curator insight, August 7, 2014 7:04 AM

This paper explores the communication barrier of CONSUMER INERTIA. This is an important/relevant area of interest for companies and brands because brand inertia will ultimately lead to brand switching.

A new brand however, would want to encourage brand switching to establish its own new loyal customer base. The paper uses three experiments to see why consumers stick to default practices and achieve sub optimal outcomes-  and what we can do to get around this (get consumers actively looking for alternative competitors with better offerings).

Jacques Dupeyroux's curator insight, September 20, 2014 8:30 PM

Some key ideas on consumer inertia and highlighting why it is a key concept to understand in order to successfully overcome certain communication barriers.

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A Bruxelles niente trappole

A Bruxelles niente trappole | Bounded Rationality and Beyond | Scoop.it
di Alberto Alemanno*
e Matteo Motterlini
Negli ultimi anni, le scienze comportamentali hanno svelato gli intimi meccanismi cognitivi che si celano, spesso inconsciamente, dietro le nostre scelte e decisioni. In particolare, l'economia comportamentale, confutando l'ipotesi neoclassica della piena razionalità umana, ha rivelato una serie di «distorsioni psicologiche» in grado di spiegare perché, spesso, le persone prendono decisioni che vanno contro i loro interessi. È ben documentata per esempio la tendenza delle persone a rispettare le impostazioni predefinite (si tratti dell'iscrizione a un fondo pensione, l'autorizzazione all'espianto di organi o semplicemente l'utilizzo di un software che gira sul nostro pc). Se non si è automaticamente indirizzati verso l'opzione che sarebbe per noi preferibile, è pertanto improbabile che la si sottoscriva spontaneamente. Allo stesso modo, sappiamo che un'informazione mirata e concreta può indurre un comportamento in senso virtuoso molto più efficacemente di statistiche asettiche e impersonali. Ecco perché le avvertenze illustrative dei prodotti del tabacco producono maggiori effetti dissuasivi delle avvertenze testuali. 
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