In this paper, I argue for a new normative theory of rational choice under risk, namely expected comparative utility (ECU) theory. I first show that for any choice option, a, and for any state of the world, G, the measure of the choiceworthiness of a in G is the comparative utility (CU) of a in G—that is, the difference in utility, in G, between a and whichever alternative to a carries the greatest utility in G. On the basis of this (...) principle, I then argue that for any agent, S, faced with any decision under risk, S should rank his or her decision options (in terms of how choiceworthy they are) according to their comparative expected comparative utility (CECU) and should choose whichever option carries the greatest CECU. For any option, a, a’s CECU is the difference between its ECU and that of whichever alternative to a carries the greatest ECU, where a’s ECU is a probability‐weighted sum of a’s CUs across the various possible states of the world. I lastly demonstrate that in some ordinary decisions under risk, ECU theory delivers different verdicts from those of standard decision theory. (shrink)

This paper aims to address the question of how one ought to choose when one is uncertain about what outcomes will result from one’s choices, but when one can nevertheless assign probabilities to the different possible outcomes. These choices are commonly referred to as choices (or decisions) under risk. I assume in this paper that one ought to make instrumentally rational choices—more precisely, one ought to adopt suitable means to one’s morally permissible ends. Expected utility (EU) theory is generally accepted (...) as a normative theory of rational choice under risk, or, more specifically, as a theory of instrumental rationality. According to EU theory, when faced with a decision under risk, one ought to rank one’s options (from least to most choiceworthy) according to their EU and one ought to choose whichever option carries the greatest EU (or one of them in the event that several alternatives are tied). The EU of an option is a probability-weighted sum of each of its possible utilities. In this paper, I argue that EU theory is not the correct theory of instrumental rationality. In its place, I argue for a new theory of instrumental rationality, namely expected comparative utility (ECU) theory. I first show that for any choice option, a, and for any state of the world, G, the measure of the choiceworthiness of a in G is the comparative utility of a in G—that is, the difference in utility, in G, between a and whichever alternative to a carries the greatest utility in G. On the basis of this principle, I then argue, roughly speaking, that for any agent, S, faced with any decision under risk, S ought to rank her options (in terms of how choiceworthy they are) according to their ECU and S ought to choose whichever option carries the greatest ECU (or one of them in the event that several alternatives are tied). For any option, a, a’s ECU is a probability‐weighted sum of a’s comparative utilities across the various possible states of the world. In this paper, I show that in some commonplace decisions under risk, ECU theory delivers different verdicts from those of EU theory. (shrink)

The Internet and social media have opened niches for political exploitation of human dispositions to hyper-alarmed states that amplify perceived threats relative to their objective probabilities of occurrence. Researchers should aim to observe the dynamic “ramping up” of security threat mechanisms under controlled experimental conditions. Such research necessarily begins from a clear model of standard baseline states, and should involve adding treatments to established experimental protocols developed by experimental economists. We review these protocols, which allow for joint estimation of risk (...) preferences and subjective beliefs about probabilities and their distributions. Results we have obtained on such estimates, from populations in various countries, are gathered for comparison. Most people show moderate risk aversion in non-alarmed states. We also find universal heterogeneity in risk preference structures, with substantial sub-samples weighting probabilities in such a way as to display “probability pessimism”, while others make risky choices in accordance with expected utility theory. (shrink)

Research on decision making has mainly been based on economic models that have tried to downplay the overall context of decision-making situations. When we look into the social influences on decision making we realize it is crucial that we bring the issue of context back into the spotlight. In the present paper we explore the methodological foundations of selected qualitative approaches for studying social influences on decision-making, focusing especially on their strengths and weaknesses. We conclude that this area has great (...) potential for further research providing academic rigor is maintained when using qualitative methods. (shrink)

We develop a model of Disappointment in which disappointment and elation arise from comparing the outcome received, not with an expected value as in previous models, but rather with the other individual outcomes of the lottery. This approach may better reflect the way individuals are liable to experience disappointment. The model obtained accounts for classic behavioral deviations from the normative theory, offers a richer structure than previous disappointment models, and leads to a Rank-Dependent Utility formulation in a transparent way. Thus, (...) our disappointment model may provide a clear psychological rationale for the subjective transformation of probabilities. (shrink)

This paper develops a model of persuasive demand inducement in the expert–client relationship. The expert frames the decision on whether or not to buy expert services faced by a client with prospect-theoretic preferences, by making the client see this decision from the perspective of a particular reference point. When inducing a client to buy risky curative services, the expert should set a high reference point, and frame all outcomes as losses. When instead inducing a client to buy safe preventive services, (...) as long as the client’s loss aversion is sufficiently high, the expert should set an intermediate reference point, framing high outcomes as gains and low outcomes as losses. (shrink)

Many studies claim to measure decision-making under risk by employing the Domain-Specific Risk-Taking (DOSPERT) scale, a self-report measure, or the Balloon Analogue Risk Task (BART), a behavioural task. However, these tasks do not measure decision-making under risk but decision-making under uncertainty, a related but distinct concept. The present commentary discusses both the theoretical and empirical basis of the distinction between uncertainty and risk from the viewpoint of several scientific disciplines and reports how many studies wrongfully employ the DOSPERT scale and (...) BART as risk-taking measures. Importantly, we call for proper distinguishing between (tasks measuring) decision-making under uncertainty and decision-making under risk in psychology and related fields. We believe this is vital as research has shown that people’s attitudes, behaviour, and brain activity differ between both concepts, indicating that confusing the concepts may lead researchers to erroneous conclusions. (shrink)

Poverty is associated with a wide range of counterproductive economic behaviors. Scarcity theory proposes that poverty itself induces a scarcity mindset, which subsequently forces the poor into suboptimal decisions and behaviors. The purpose of our work is to provide an integrated, up-to-date, critical review of this theory. To this end, we reviewed the empirical evidence for three fundamental propositions: Poverty leads to attentional focus and neglect causing overborrowing, poverty induces trade-off thinking resulting in more consistent consumption decisions, and poverty reduces (...) mental bandwidth and subsequently increases time discounting and risk aversion. Our findings indicate that the current literature predominantly confirms the first and second proposition, although methodological issues prevent a firm conclusion. Evidence for the third proposition was not conclusive. Additionally, we evaluated the overall status of scarcity theory. Although the theory provides an original, coherent, and parsimonious explanation for the relationship between financial scarcity and economic decision making, the theory does not fully accord with the data and lacks some precision. We conclude that both theoretical and empirical work are needed to build a stronger theory. (shrink)

In this paper, we defend two claims. First, we argue that a notion of contextuality that has been formalized in physics and psychology is applicable to linguistic contexts. Second, we propose that this formal apparatus is philosophically significant for the epistemology of language because it imposes homogeneous rational constraints on speakers. We propose a Contextuality Principle that explains and articulates these two claims. This principle states that speakers update contextual information by significantly reducing the space of probabilities and variables in (...) a non-commutative way. Some contexts affect other contexts not merely in terms of the information they contain, but also on the basis of their sequential order. In particular, we argue that the Contextuality by Default theory provides a formalism that helps explain the role of contextuality in rational linguistic exchanges. (shrink)

Explanations of organizational misconduct frequently point to declining firm performance and/or the actions of unethical or suspect leaders. Evidence that high-performing firms act illegally or unethically is an enigma. The purpose of this paper is to address these issues by exploring organizational performance using aspirational rather than absolute measures and examining the effect that suspect leader succession has on the increased probability of organizational misconduct. Our analysis of 128 collegiate football programs competing between 1953 and 2016 reveals an increased likelihood (...) of misconduct among organizations with strong as well as weak performance, most notably in comparison to competitive peer programs. Social- and self-referenced aspirations produced distinct relationships between relative performance and misconduct. The impact of leader succession was conditional. The data revealed an increased likelihood of infraction episodes with the appointment of suspect leaders. In some instances, however, a reduced likelihood of misconduct accompanied succession events involving untainted leaders. (shrink)

The Iowa Gambling Task (IGT) and the Soochow Gambling Task (SGT) are two experience-based risky decision-making tasks for examining decision-making deficits in clinical populations. Several cognitive models, including the expectancy-valence learning model (EVL) and the prospect valence learning model (PVL), have been developed to disentangle the motivational, cognitive, and response processes underlying the explicit choices in these tasks. The purpose of the current study was to develop an improved model that can fit empirical data better than the EVL and PVL (...) models and, in addition, produce more consistent parameter estimates across the IGT and SGT. Twenty-six opiate users (mean age 34.23; SD 8.79) and 27 control participants (mean age 35; SD 10.44) completed both tasks. Eighteen cognitive models varying in evaluation, updating, and choice rules were fit to individual data and their performances were compared to that of a statistical baseline model to find a best fitting model. The results showed that the model combining the prospect utility function treating gains and losses separately, the decay-reinforcement updating rule, and the trial-independent choice rule performed the best in both tasks. Furthermore, the winning model produced more consistent individual parameter estimates across the two tasks than any of the other models. (shrink)

What is morality? How many moral values are there? And what are they? According to the theory of morality-as-cooperation, morality is a collection of biological and cultural solutions to the problems of cooperation recurrent in human social life. This theory predicts that there will be as many different types of morality as there are different types of cooperation. Previous research, drawing on evolutionary game theory, has identified at least seven different types of cooperation, and used them to explain seven different (...) types of morality: family values, group loyalty, reciprocity, heroism, deference, fairness and property rights. Here we explore the conjecture that these simple moral ‘elements’ combine to form a much larger number of more complex moral ‘molecules’, and that as such morality is a combinatorial system. For each combination of two elements, we hypothesise a candidate moral molecule, and successfully locate an example of it in the professional and popular literature. These molecules include: fraternity, blood revenge, family pride, filial piety, gavelkind, primogeniture, friendship, patriotism, tribute, diplomacy, common ownership, honour, confession, turn taking, restitution, modesty, mercy, munificence, arbitration, mendicancy, and queuing. These findings indicate that morality – like many other physical, biological, psychological and cultural systems – is indeed a combinatorial system. Thus morality-as-cooperation provides a principled and powerful theory, that explains why there are many moral values, and successfully predicts what they will be; and it generates a systematic framework that has the potential to explain all moral ideas, possible and actual. Pursuing the many implications of this theory will help to place the study of morality on a more secure scientific footing. (shrink)

Most research on risk aversion in behavioral science with human subjects has focused on a component of risk aversion that does not adapt itself to context. More recently, studies have explored risk aversion adaptation to changing circumstances in sequential decision-making tasks. It is an open question whether one can identify evidence, at the single subject level, for such risk aversion adaptation. We conducted a behavioral experiment on human subjects, using a sequential decision making task. We developed a model-based approach for (...) estimating the adaptation of risk-taking behavior with single-trial resolution by modelling a subject’s goals and internal representation of task contingencies. Using this model-based approach, we estimated the subject-specific adaptation of risk aversion depending on the current task context. We found striking inter-subject variations in the adaptation of risk-taking behavior. We show that these differences can be explained by differences in subjects’ internal representations of task contingencies and goals. We discuss that the proposed approach can be adapted to a wide range of experimental paradigms and be used to analyze behavioral measures other than risk aversion. (shrink)

In the decision-making and rationality research field, rational decision theory (RDT) has always been the main framework, thanks to the elegance and complexity of its mathematical tools. Unfortunately, the formal refinement of the theory is not accompanied by a satisfying predictive accuracy, thus there is a big gap between what is predicted by the theory and the behaviour of real subjects. Here we propose a new foundation of the RDT, which has to be based on a cognitive architecture for reason-based (...) agents, acting on the basis of their beliefs in order to achieve their goals. The decision process is a cognitive evaluation of conflicting goals, based on different beliefs and values, but also on emotions and desires. We refer to a cognitive analysis of emotions and we integrate them in this more general RDT. (shrink)

This paper uses the economic crisis of 2008 as a case study to examine the explanatory validity of collective mental representations. Distinguished economists such as Paul Krugman and Joseph Stiglitz attribute collective beliefs, desires, intentions, and emotions to organizations such as banks and governments. I argue that the most plausible interpretation of these attributions is that they are metaphorical pointers to a complex of multilevel social, psychological, and neural mechanisms. This interpretation also applies to collective knowledge in science: scientific communities (...) do not literally have collective representations, but social mechanisms do make important contributions to scientific knowledge. (shrink)

We describe a computational model of two central aspects of people's probabilistic reasoning: descriptive probability estimation and inferential probability judgment. This model assumes that people's reasoning follows standard frequentist probability theory, but it is subject to random noise. This random noise has a regressive effect in descriptive probability estimation, moving probability estimates away from normative probabilities and toward the center of the probability scale. This random noise has an anti-regressive effect in inferential judgement, however. These regressive and anti-regressive effects explain (...) various reliable and systematic biases seen in people's descriptive probability estimation and inferential probability judgment. This model predicts that these contrary effects will tend to cancel out in tasks that involve both descriptive estimation and inferential judgement, leading to unbiased responses in those tasks. We test this model by applying it to one such task, described by Gallistel et al. ). Participants' median responses in this task were unbiased, agreeing with normative probability theory over the full range of responses. Our model captures the pattern of unbiased responses in this task, while simultaneously explaining systematic biases away from normatively correct probabilities seen in other tasks. (shrink)

This article examines quantitatively the determinants of purchase decisions based on corporate social responsibility (CSR), adopting a hierarchical conceptual model of decision making where the key factors are personal concern, information availability and financial considerations. We use best–worst methods to assess consumer priorities (personal concern) for CSR activities in milk production; and elicit consumer interpretation of four labels (organic, Validus, Colorado Proud and rBST free) in terms of CSR and other outcomes (information availability). We then elicit willingness to pay (WTP) (...) for the labels (financial considerations), and estimate regression models to determine how predictive each label perceptual profile is of WTP for milk. Animal welfare and sustainable agricultural practices are the most important activities, and milk labels do convey CSR-related messages. With the exception of the pair animal welfare-Validus, the link between CSR messages and WTP is tenuous. The discussion emphasizes the central role of each label’s perceptual profile in triggering product differentiation among consumers. (shrink)

Norms—that is, specifications of what we ought to do—play a critical role in the study of informal argumentation, as they do in studies of judgment, decision-making and reasoning more generally. Specifically, they guide a recurring theme: are people rational? Though rules and standards have been central to the study of reasoning, and behavior more generally, there has been little discussion within psychology about why (or indeed if) they should be considered normative despite the considerable philosophical literature that bears on this (...) topic. In the current paper, we ask what makes something a norm, with consideration both of norms in general and a specific example: norms for informal argumentation. We conclude that it is both possible and desirable to invoke norms for rational argument, and that a Bayesian approach provides solid normative principles with which to do so. (shrink)

In a recent article in Argumentation, O’Keefe (Argumentation 21:151–163, 2007) observed that the well-known ‘framing effects’ in the social psychological literature on persuasion are akin to traditional fallacies of argumentation and reasoning and could be exploited for persuasive success in a way that conflicts with principles of responsible advocacy. Positively framed messages (“if you take aspirin, your heart will be more healthy”) differ in persuasive effect from negative frames (“if you do not take aspirin, your heart will be less healthy”), (...) despite containing ‘equivalent’ content. This poses a potential problem, because people might be unduly (and unsuspectingly) influenced by mere presentational differences. By drawing on recent cognitive psychological work on framing effects in choice and decision making paradigms, however, we show that establishing whether two arguments are substantively equivalent—and hence, whether there is any normative requirement for them to be equally persuasive—is a difficult task. Even arguments that are logically equivalent may not be information equivalent. The normative implications of this for both speakers and listeners are discussed. (shrink)

What is the function of cognition? On one influential account, cognition evolved to co-ordinate behaviour with environmental change or complexity. Liberal interpretations of this view ascribe cognition to an extraordinarily broad set of biological systems—even bacteria, which modulate their activity in response to salient external cues, would seem to qualify as cognitive agents. However, equating cognition with adaptive flexibility per se glosses over important distinctions in the way biological organisms deal with environmental complexity. Drawing on contemporary advances in theoretical biology (...) and computational neuroscience, we cash these distinctions out in terms of different kinds of generative models, and the representational and uncertainty-resolving capacities they afford. This analysis leads us to propose a formal criterion for delineating cognition from other, more pervasive forms of adaptive plasticity. On this view, biological cognition is rooted in a particular kind of functional organisation; namely, that which enables the agent to detach from the present and engage in counterfactual inference. (shrink)

In the 1940s and 1950s thousands of lobotomies were performed on people with mental disorders. These operations were known to be dangerous, but thought to offer great hope. Nowadays, the lobotomies of the 1940s and 1950s are widely condemned. The consensus is that the practitioners who employed them were, at best, misguided enthusiasts, or, at worst, evil. In this paper I employ standard decision theory to understand and assess shifts in the evaluation of lobotomy. Textbooks of medical decision making generally (...) recommend that decisions under risk are made so as to maximise expected utility (MEU) I show that using this procedure suggests that the 1940s and 1950s practice of psychosurgery was justifiable. In making sense of this finding we have a choice: Either we can accept that psychosurgery was justified, in which case condemnation of the lobotomists is misplaced. Or, we can conclude that the use of formal decision procedures, such as MEU, is problematic. (shrink)

The increased scrutiny of investors regarding the non-financial aspects of corporate performance has placed portfolio managers in the position of having to weigh the benefits of ' holding the market' against the cost of having positions in companies that are subsequently found to have questionable business practices. The availability of stock indexes based on sustainability screening makes increasingly viable for institutional investors the transition to a portfolio based on a Socially Responsible Investment (SRI) benchmark at relatively low cost. The increasing (...) share of socially responsible investments may play a role in providing incentives towards a continuous upgrading of sustainability standards to the extent that their performance is not systematically inferior to that of the other funds. This article examines whether these incentives have been so far detectable with particular reference to the Dow Jones Sustainability Stoxx Index (DJSSI) that focuses on the European corporations with the highest CSR scores among those included in the Dow Jones Stoxx 600 Index. The aim of the article is twofold. First, we analyse the performance of the DJSSI over the period 2001-2006 compared to that of the Surrogate Complementary Index (SCI), a new benchmark that includes only the components of the DJ Stoxx 600 that do not belong to the ethical index to evaluate more correctly the size of possible divergent performances. Second, we perform an event study on the same data set to analyse whether the stock market evaluation reacts to the inclusion (deletion) in the DJSSI. In both cases, the results suggest that the evaluation of the CSR performance of a firm is a significant criterion for asset allocation activities. (shrink)

In this article we discuss what are the implications for improving the design of corporate ethics programs, if we focus on the moral motivation accounts offered by main ethical theories. Virtue ethics, deontological ethics and utilitarianism offer different criteria of judgment to face moral dilemmas: Aristotle's virtues of character, Kant's categorical imperative, and Mill's greatest happiness principle are, respectively, their criteria to answer the question "What is the right thing to do?" We look at ethical theories from a different perspective: (...) the question we ask is "Why should I do the right thing?" In other words, we deal with the problem of moral motivation, and we examine the different rationale the main ethical theories provide. We then point out the relation between moral motivation and the concept of rationality in the different approaches - is acting morally seen as an expression of rational behavior? Our analysis of moral motivation provides a useful framework to improve the understanding of the relationships between formal and informal elements of corporate ethics programs, emphasizing the importance of the latter, often overlooked in compliance-focused programs. We conclude by suggesting that the concept of moral imagination can provide a unifying approach to enhance the effectiveness of corporate ethics programs, by providing an intangible asset that supports the implementation of their formal components into management decision making. (shrink)

A significant increase in the probability of an action resulting from observing that action performed by another agent cannot, on its own, provide persuasive evidence of imitation. Simple models of social influence based on two-person sequential games suggest that both imitation and pseudo-imitation can be explained by a process more fundamental than priming, namely, subjective utility maximization.

The aim of the paper is to propose a preferences representation model under risk where risk perception can be past experience dependent. A first step consists in considering a one period decision problem where individual preferences are no more defined only on decisions but on pairs (decision, past experience). The obtained criterion is used in the construction of a dynamic choice model under risk. The paper ends with an illustrative example concerning insurance demand. It appears that our model allows to (...) explain modifications in the insurance demand behavior over time observed on the insurance markets for catastrophic risk and difficult to justify with standard models. (shrink)

I distinguish several doctrines that economic methodologists have found attractive, all of which have a positivist flavour. One of these is the doctrine that preference assignments in economics are just shorthand descriptions of agents' choice behaviour. Although most of these doctrines are problematic, the latter doctrine about preference assignments is a respectable one, I argue. It doesn't entail any of the problematic doctrines, and indeed it is warranted independently of them.

There is widespread agreement about a combination of attributes that someone needs to possess if they are to be counted as a conservative. They need to lack definite political ideals, goals or ends, to prefer the political status quo to its alternatives, and to be risk averse. Why should these three highly distinct attributes, which are widely believed to be characteristic of adherents to a significant political position, cluster together? Here I draw on prospect theory to develop an explanation for (...) the clustering of attributes that is characteristic of conservatives. I argue that a lack of political ideals is the underlying driver of conservatism. I will provide reason to believe that people who lack political ideals are disposed to prefer the political status quo to its alternatives; and reason to believe that people who prefer the political status quo to its alternatives are disposed to be risk averse, at least with respect to significantly many of the risks that arise in the social and political domain. I also consider and reject some other potential explanations for the clustering of attributes that is characteristic of conservatives and sketch some policy implications that follow from the explanation I develop. (shrink)

Ever since the publication of Harry Frankfurt’s “Equality as a Moral Ideal” :21–43, 1987), the doctrine of sufficiency has attracted great attention among both ethical theorists and political philosophers. The doctrine of sufficiency consists of two main theses: the positive thesis states that it is morally important for people to have enough; and the negative thesis states that once everybody has enough, relative inequality has absolutely no moral importance. Many political philosophers have presented different versions of sufficientarianism that retain the (...) general spirit of what Frankfurt had proposed in his seminal work. However, all of these different versions of sufficientarianism suffer from two critical problems: they fail to give right answers to lifeboat situations, and they fail to provide continuous ethical judgments. In this paper, I show a version of utilitarianism that solves these problems while retaining the major attractions of sufficientarianism. I call it “prospect utilitarianism.” In addition, I show that prospect utilitarianism can avoid standard objections to utilitarianism and has aspects that can appeal to both prioritarians and egalitarians as well. (shrink)

We propose a generalization of expected utility that we call generalized EU (GEU), where a decision maker’s beliefs are represented by plausibility measures and the decision maker’s tastes are represented by general (i.e., not necessarily real-valued) utility functions. We show that every agent, “rational” or not, can be modeled as a GEU maximizer. We then show that we can customize GEU by selectively imposing just the constraints we want. In particular, we show how each of Savage’s postulates corresponds to constraints (...) on GEU. (shrink)

In business settings, decision makers facing moral issues often experience the challenges of continuous changes. This dynamic process has been less examined in previous literature on moral decision making. We borrow theories on learning strategies and computational models from decision neuroscience to explain the updating and learning mechanisms underlying moral decision processes. Specifically, we present two main learning strategies: model-free learning, wherein the values of choices are updated in a trial-and-error fashion sustaining the formation of habits and model-based learning, wherein (...) the brain updates more general cognitive maps and associations, thus sustaining flexible and state-dependent behaviors. We then summarize studies explaining the neuro-computational processes of both learning strategies—the calculation of prediction errors and valuation. We conclude by emphasizing how the incorporation of dynamic aspects in moral decision making could open new avenues for understanding moral behaviors in a changing world. (shrink)

Argument is often taken to deal with conflicting opinion or belief, while negotiation deals with conflicting goals or interests. It is widely accepted that argument ought to comply with some principles or norms. On the other hand, negotiation and bargaining involve concession exchange and tactical use of power, which may be contrasted with attempts to convince others through argument. However, there are cases where it is difficult to draw a clear distinction between bargaining and argument: notably cases where negotiators persuade (...) others through `framing' and cases where the aims of negotiation have to do with public assertion and acceptance. Those cases suggest that the distinction between negotiation and argument is not absolute, and this raises the question whether rules about what is acceptable in argument and rules about what is acceptable in negotiation can all be viewed as instances of more general common norms about human interaction. (shrink)

The view from inside improves our understanding on market failure and regulation failure in financial market. The EMH fails to understand the causes of financial bubbles and crashes. Behavioral finance introduces insight from psychology. The heuristic and biases approach studied behavioral asymmetry in static environment that leads to market irrationality and information distortion. The fast and frugal thinking in decision-making further explore more complex situation under changing environment. They argue that soft-paternalistic regulation is needed under information overload. The most critical (...) issue is information uncertainty and complexity. Lacking information in frequency domain is the main barrier in managing business cycles. Data form inside reveals current limitations of financial data mainly in the short-term price changes. Microstructure studies show that pricing process is shaped by trading rules. Quantitative analysis reveals severe instability in high frequency trading and derivative market. Feasible regulation should aim to encourage new technology and sustainable growth, rather than protect obsolete technology and short-term speculation. The most fundamental challenge to sustainable economic order is the excessive size of the derivative markets that crowding out investment in real economy. This is a more severe issue than the climate change. (shrink)

Prior research has used an Interactive Landslide Simulator tool to investigate human decision making against landslide risks. It has been found that repeated feedback in the ILS tool about damages due to landslides causes an improvement in human decisions against landslide risks. However, little is known on how theories of learning from feedback would account for human decisions in the ILS tool. The primary goal of this paper is to account for human decisions in the ILS tool via computational models (...) based upon reinforcement learning and to explore the model mechanisms involved when people make decisions in the ILS tool. Four different reinforcement-learning models were developed and evaluated in their ability to capture human decisions in an experiment involving two conditions in the ILS tool. The parameters of an Expectancy-Valence model, two Prospect-Valence-Learning models, a combination EV-PU model, and a random model were calibrated to human decisions in the ILS tool across the two conditions. Later, different models with their calibrated parameters were generalized to data collected in an experiment involving a new condition in ILS. When generalized to this new condition, the PVL-2 model’s parameters of both damage-feedback conditions outperformed all other RL models. We highlight the implications of our results for decision making against landslide risks. (shrink)

Often in insurance decision making, there are risk factors on which the insurer has an informational advantage over the consumer. But when the insurer sets and posts a premium for the consumer to consider, the consumer can potentially use the premium as an informational cue for the loss probability, and thereby to reduce the insurer’s informational advantage. We study, by means of a behavioral model, how consumers would use the premium as an informational cue in such contexts. The belief formation (...) process in our model assumes that both prior knowledge and the premium might have an impact on the consumer’s estimate of the loss probability. Moreover, the premium impacts the estimate through an anchoring-and-adjustment process. The model potentially leads to violations of rational expectations, with which the consumer overestimates the loss probability beyond what could be inferred from the premium, given the premise that the insurer must seek to break even or earn an expected profit. Our model analysis moreover implies that the frequency of such violations is non-increasing as the premium increases. Last, the model implies a generally inverted-U relationship between insurance demand and the premium so that the demand is upward sloping at low premium levels and downward sloping at high premium levels. A pilot field study and a laboratory experiment provide robust evidence for our model implications and calibrations for its parameters. (shrink)

We use the multiple price list method and a recursive expected utility theory of smooth ambiguity to separate out attitude towards risk from that towards ambiguity. Based on this separation, we investigate if there are differences in agent behaviour under uncertainty over gain amounts vis-a-vis uncertainty over loss amounts. On an aggregate level, we find that (i) subjects are risk averse over gains and risk seeking over losses, displaying a “reflection effect” and (ii) they are ambiguity neutral over gains and (...) are mildly ambiguity seeking over losses. Further analysis shows that on an individual level, and with respect to both risky and ambiguous prospects, there is limited incidence of a reflection effect where subjects are risk/ambiguity averse (seeking) in gains and seeking (averse) in losses, though this incidence is higher for ambiguous prospects. A very high proportion of such cases of reflection exhibit risk (ambiguity) aversion in gains and risk (ambiguity) seeking in losses, with the reverse effect being significantly present in the case of risk but almost absent in case of ambiguity. Our results suggest that reflection across gains and losses is not a stable individual characteristic, but depends upon whether the form of uncertainty is precise or ambiguous, since we rarely find an individual who exhibits reflection in both risky and ambiguous prospects. We also find that correlations between attitudes towards risk and ambiguity were domain dependent. (shrink)