Efficient methods for empirical tests of behavioral economics theories in laboratory and field experiments

In the quest for a descriptive theory of decision-making, the rational actor model in economics imposes rather unrealistic expectations and abilities on human decision makers. The further we move from idealized scenarios, such as perfectly competitive markets, and ambitiously extend the reach of the theory to describe everyday decision making situations, the less sense these assumptions make. Behavioural economics has instead proposed models based on assumptions that are more psychologically realistic, with the aim of gaining more precision and descriptive power. Increased psychological realism, however, comes at the cost of a greater number of parameters and model complexity. Now there are a plethora of models, based on different assumptions, applicable in differing contextual settings, and selecting the right model to use tends to be an ad-hoc process. In this thesis, we develop optimal experimental design methods and evaluate different behavioral theories against evidence from lab and field experiments.

We look at evidence from controlled laboratory experiments. Subjects are presented with choices between monetary gambles or lotteries. Different decision-making theories evaluate the choices differently and would make distinct predictions about the subjects' choices. Theories whose predictions are inconsistent with the actual choices can be systematically eliminated. Behavioural theories can have multiple parameters requiring complex experimental designs with a very large number of possible choice tests. This imposes computational and economic constraints on using classical experimental design methods. We develop a methodology of adaptive tests: Bayesian Rapid Optimal Adaptive Designs (BROAD) that sequentially chooses the "most informative" test at each stage, and based on the response updates its posterior beliefs over the theories, which informs the next most informative test to run. BROAD utilizes the Equivalent Class Edge Cutting (EC²) criteria to select tests. We prove that the EC² criteria is adaptively submodular, which allows us to prove theoretical guarantees against the Bayes-optimal testing sequence even in the presence of noisy responses. In simulated ground-truth experiments, we find that the EC² criteria recovers the true hypotheses with significantly fewer tests than more widely used criteria such as Information Gain and Generalized Binary Search. We show, theoretically as well as experimentally, that surprisingly these popular criteria can perform poorly in the presence of noise, or subject errors. Furthermore, we use the adaptive submodular property of EC² to implement an accelerated greedy version of BROAD which leads to orders of magnitude speedup over other methods.

We use BROAD to perform two experiments. First, we compare the main classes of theories for decision-making under risk, namely: expected value, prospect theory, constant relative risk aversion (CRRA) and moments models. Subjects are given an initial endowment, and sequentially presented choices between two lotteries, with the possibility of losses. The lotteries are selected using BROAD, and 57 subjects from Caltech and UCLA are incentivized by randomly realizing one of the lotteries chosen. Aggregate posterior probabilities over the theories show limited evidence in favour of CRRA and moments' models. Classifying the subjects into types showed that most subjects are described by prospect theory, followed by expected value. Adaptive experimental design raises the possibility that subjects could engage in strategic manipulation, i.e. subjects could mask their true preferences and choose differently in order to obtain more favourable tests in later rounds thereby increasing their payoffs. We pay close attention to this problem; strategic manipulation is ruled out since it is infeasible in practice, and also since we do not find any signatures of it in our data.

In the second experiment, we compare the main theories of time preference: exponential discounting, hyperbolic discounting, "present bias" models: quasi-hyperbolic (α, β) discounting and fixed cost discounting, and generalized-hyperbolic discounting. 40 subjects from UCLA were given choices between 2 options: a smaller but more immediate payoff versus a larger but later payoff. We found very limited evidence for present bias models and hyperbolic discounting, and most subjects were classified as generalized hyperbolic discounting types, followed by exponential discounting.

In these models the passage of time is linear. We instead consider a psychological model where the perception of time is subjective. We prove that when the biological (subjective) time is positively dependent, it gives rise to hyperbolic discounting and temporal choice inconsistency.

We also test the predictions of behavioral theories in the "wild". We pay attention to prospect theory, which emerged as the dominant theory in our lab experiments of risky choice. Loss aversion and reference dependence predicts that consumers will behave in a uniquely distinct way than the standard rational model predicts. Specifically, loss aversion predicts that when an item is being offered at a discount, the demand for it will be greater than that explained by its price elasticity. Even more importantly, when the item is no longer discounted, demand for its close substitute would increase excessively. We tested this prediction using a discrete choice model with loss-averse utility function on data from a large eCommerce retailer. Not only did we identify loss aversion, but we also found that the effect decreased with consumers' experience. We outline the policy implications that consumer loss aversion entails, and strategies for competitive pricing.

In future work, BROAD can be widely applicable for testing different behavioural models, e.g. in social preference and game theory, and in different contextual settings. Additional measurements beyond choice data, including biological measurements such as skin conductance, can be used to more rapidly eliminate hypothesis and speed up model comparison. Discrete choice models also provide a framework for testing behavioural models with field data, and encourage combined lab-field experiments.

Essays in Behavioral Decision Theory

This thesis studies decision making under uncertainty and how economic agents respond to information. The classic model of subjective expected utility and Bayesian updating is often at odds with empirical and experimental results; people exhibit systematic biases in information processing and often exhibit aversion to ambiguity. The aim of this work is to develop simple models that capture observed biases and study their economic implications.

In the first chapter I present an axiomatic model of cognitive dissonance, in which an agent's response to information explicitly depends upon past actions. I introduce novel behavioral axioms and derive a representation in which beliefs are directionally updated. The agent twists the information and overweights states in which his past actions provide a higher payoff. I then characterize two special cases of the representation. In the first case, the agent distorts the likelihood ratio of two states by a function of the utility values of the previous action in those states. In the second case, the agent's posterior beliefs are a convex combination of the Bayesian belief and the one which maximizes the conditional value of the previous action. Within the second case a unique parameter captures the agent's sensitivity to dissonance, and I characterize a way to compare sensitivity to dissonance between individuals. Lastly, I develop several simple applications and show that cognitive dissonance contributes to the equity premium and price volatility, asymmetric reaction to news, and belief polarization.

The second chapter characterizes a decision maker with sticky beliefs. That is, a decision maker who does not update enough in response to information, where enough means as a Bayesian decision maker would. This chapter provides axiomatic foundations for sticky beliefs by weakening the standard axioms of dynamic consistency and consequentialism. I derive a representation in which updated beliefs are a convex combination of the prior and the Bayesian posterior. A unique parameter captures the weight on the prior and is interpreted as the agent's measure of belief stickiness or conservatism bias. This parameter is endogenously identified from preferences and is easily elicited from experimental data.

The third chapter deals with updating in the face of ambiguity, using the framework of Gilboa and Schmeidler. There is no consensus on the correct way way to update a set of priors. Current methods either do not allow a decision maker to make an inference about her priors or require an extreme level of inference. In this chapter I propose and axiomatize a general model of updating a set of priors. A decision maker who updates her beliefs in accordance with the model can be thought of as one that chooses a threshold that is used to determine whether a prior is plausible, given some observation. She retains the plausible priors and applies Bayes' rule. This model includes generalized Bayesian updating and maximum likelihood updating as special cases.

Essays in revealed preference theory and behavioral economics

Time, risk, and attention are all integral to economic decision making. The aim of this work is to understand those key components of decision making using a variety of approaches: providing axiomatic characterizations to investigate time discounting, generating measures of visual attention to infer consumers' intentions, and examining data from unique field settings.

Chapter 2, co-authored with Federico Echenique and Kota Saito, presents the first revealed-preference characterizations of exponentially-discounted utility model and its generalizations. My characterizations provide non-parametric revealed-preference tests. I apply the tests to data from a recent experiment, and find that the axiomatization delivers new insights on a dataset that had been analyzed by traditional parametric methods.

Chapter 3, co-authored with Min Jeong Kang and Colin Camerer, investigates whether "pre-choice" measures of visual attention improve in prediction of consumers' purchase intentions. We measure participants' visual attention using eyetracking or mousetracking while they make hypothetical as well as real purchase decisions. I find that different patterns of visual attention are associated with hypothetical and real decisions. I then demonstrate that including information on visual attention improves prediction of purchase decisions when attention is measured with mousetracking.

Chapter 4 investigates individuals' attitudes towards risk in a high-stakes environment using data from a TV game show, Jeopardy!. I first quantify players' subjective beliefs about answering questions correctly. Using those beliefs in estimation, I find that the representative player is risk averse. I then find that trailing players tend to wager more than "folk" strategies that are known among the community of contestants and fans, and this tendency is related to their confidence. I also find gender differences: male players take more risk than female players, and even more so when they are competing against two other male players.

Chapter 5, co-authored with Colin Camerer, investigates the dynamics of the favorite-longshot bias (FLB) using data on horse race betting from an online exchange that allows bettors to trade "in-play." I find that probabilistic forecasts implied by market prices before start of the races are well-calibrated, but the degree of FLB increases significantly as the events approach toward the end.

Behavioral ontogeny in larvae and early juveniles of the giant trevally (Caranx ignobilis) (Pisces: Carangidae)

Behavior of young (8−18 mm SL) giant trevally (Caranx ignobilis), a large coral-reef−associated predator, was observed in the laboratory and the ocean. Size was a better predictor of swimming speed and endurance than was age. Critical speed increased with size from 12 to 40 cm/s at 2.7 cm/s for each mm increase in size. Mean scaled critical speed was 19 body lengths/s and was not size related. Swimming speed in the ocean was 4 to 20 cm/s (about half of critical speed) and varied among areas, but within each area, it increased at 2 cm/s for each mm increase in size. Swimming endurance in the laboratory increased from 5 to 40 km at 5 km for each mm increase in size. Vertical distribution changed ontogenetically: larvae swam shallower, but more variably, and then deeper with growth. Two-thirds of individuals swam directionally with no ontogenetic increase in orientation precision. Larvae swam offshore off open coasts, but not in a bay. In situ observations of C. ignobilis feeding, interacting with pelagic animals, and reacting to reefs are reported. Manusc

Efeitos da exposição à nicotina e/ou ao etanol durante a adolescência: alterações glutamatérgicas e na memória visuoespacial de camundongos

Adolescentes humanos frequentemente associam o fumo do tabaco ao consumo de bebidas alcoólicas. A despeito desta associação, pouco se sabe sobre a neurobiologia básica da coexposição no cérebro adolescente. No presente estudo, avaliamos os efeitos da exposição, que ocorreu do 30 ao 45 dia de vida pós natal (PN30 a PN45), à nicotina e/ou ao etanol durante a adolescência (PN38-45) e da retirada (PN50-57) na memória visuoespacial através do Labirinto Aquático de Morris (LAM: 6 sessões + 1 prova, 3 tentativas/sessão, latência = 2 min), em 4 grupos de camundongos Suíços machos e fêmeas: (1) exposição concomitante à NIC [solução de nicotina free base (50 μg/ml) em sacarina a 2% para beber] e ETOH [solução de etanol (25%, 2 g/kg) injetada i.p. em dias alternados]; (2) exposição à NIC; (3) exposição ao ETOH; (4) veículo (VEH). Uma vez que os resultados comportamentais podem sofrer a interferência de alterações motoras, avaliamos (a) a atividade locomotora no Teste de Campo Aberto (sessão única, 5 min) e (b) a coordenação e o equilíbrio no Teste de Locomoção Forçada sobre Cilindro Giratório (5 tentativas, latência = 2 min). Para os efeitos da exposição à NIC e/ou ao ETOH na eficiência do transporte de aminoácidos excitatórios, avaliamos a captação de [3H] D-aspartato no hipocampo. A expressão do transportador glial GLAST/EAAT1 foi avaliada por Western-blot. Durante a exposição, animais ETOH e NIC+ETOH apresentaram déficits de memória nas sessões de teste e de prova no LAM enquanto, na retirada, os grupos NIC e NIC+ETOH apresentaram prejuízos na retenção. Não houve diferenças significativas entre os grupos de tratamento em nenhum dos parâmetros testados em ambos os testes motores, tanto na exposição quanto na abstinência. Os grupos NIC, ETOH e NIC+ETOH tiveram uma diminuição significativa na captação de [3H] D-aspartato ao final do período de exposição, com uma normalização da atividade dos EAATs na retirada das drogas. O tratamento com NIC e ETOH reduziu ainda a expressão de GLAST/EAAT1 no hipocampo em ambas as idades testadas. O uso de etanol na adolescência causa prejuízos à memória de camundongos, com um efeito negativo mais acentuado quando associado à nicotina. Contudo, a retirada da nicotina apresentou um efeito mandatório nos danos encontrados. Ambas as drogas, isoladamente ou na coexposição, alteram os níveis de atividade e expressão dos EAATs, sugerindo que os resultados bioquímicos estejam implicados nas alterações comportamentais encontradas.

Nicotina e/ou estresse por contenção durante a adolescência de camundongos: efeitos em comportamentos de ansiedade, sociabilidade e comportamentos associados à depressão

Há um extenso número de evidências apontando para o estresse como tendo um papel crítico na iniciação, manutenção e relapso após a retirada, do hábito do tabagismo. De modo geral, adolescentes são mais sensíveis aos efeitos no sistema nervoso central de ambos estresse e nicotina, principal componente psicoativo do cigarro. No entanto, há uma escassez de estudos em neurobiologia básica que avaliem as possíveis interações entre os efeitos no sistema nervoso central entre nicotina e estresse nesta idade. Deste modo, o objetivo do presente estudo foi avaliar os efeitos da exposição à nicotina e estresse durante a adolescência de camundongos em comportamentos sociais e comportamentos associados a ansiedade e depressão. Para este estudo utilizamos camundongos Suíços de ambos os sexos. A partir do 30 dia pós-natal (PN) camundongos foram expostos à nicotina (até PN40) e/ou estresse (até PN38 para os animais avaliados em PN39-40 e PN40 para os animais avaliados nas outras idades). Desta forma, utilizamos quatro grupos experimentais: 1) Exposição concomitante de solução de nicotina (diluida na água potável, 50g/ml) e estresse por contenção (1h/dia); 2) Exposição somente à nicotina via oral; 3) Exposição somente ao estresse por contenção; 4) Grupo controle. Para a avaliação comportamental utilizamos: o teste do labirinto em cruz elevado (LCE), o teste de abordagem social de três câmaras (TS) e o teste do nado forçado (FST). Cada animal foi avaliado nos três testes, em um entre três momentos: ao final do período de exposição (PN39/40), após um curto período a partir do término da exposição (PN44/45) ou na vida adulta (PN69/70). A exposição ao estresse promoveu menor ganho de massa corporal durante a adolescência, sendo o consumo de nicotina incapaz de alterar este parâmetro. Além disso, o estresse não afetou o consumo da solução de nicotina. Nosso modelo não foi capaz de alterar os parâmetros de ansiedade avaliados pelo teste do LCE. Entretanto, a exposição de estresse em concomitância com nicotina gerou hiperatividade ao final do período de exposição em ambos os sexos. Na avaliação do TS e do FST observamos alterações significativas somente após período de retirada. Após um curto período de abstinência pela nicotina, fêmeas apresentaram aumento do comportamento associado à depressão, tendo este efeito sido revertido pela exposição concomitante ao estresse. De forma contrária, na mesma idade, somente a exposição combinada promoveu aumento do comportamento associado à depressão em machos. Além disso, nossos resultados sugerem um aumento de sociabilidade no grupo submetido a exposição combinada após longo período de interrupção da exposição durante a vida adulta. O presente trabalho fornece evidências experimentais que indicam que nicotina e estresse interagem durante a adolescência resultando em alterações na resposta emocional durante o período de exposição e tardiamente, após a sua interrupção causando alterações que perduram até o início da vida adulta.

The computer simulation of primate (Macaca mulatta) spatial visual delayed response and cerebral prefrontal control function

Cerebral prefrontal function is one of the important aspects in neurobiology. Based on the experimental results of neuroanatomy, neurophysiology, behavioral sciences, and the principles of cybernetics and information theory after constructed a simple model simulating prefrontal control function, this paper simulated the behavior of Macaca mulatta completing delayed tasks both before and after its cerebral prefrontal cortex being damaged. The results indicated that there is an obvious difference in the capacity of completing delayed response tasks for the normal monkeys and those of prefrontal cortex cut away. The results are agreement with experiments. The authors suggest that the factors of affecting complete delayed response tasks might be in information keeping and extracting of memory including information storing, keeping and extracting procedures rather than in information storing process.

Enriched environment treatment restores impaired hippocampal synaptic plasticity and cognitive deficits induced by prenatal chronic stress

Prenatal stress can cause long-term effects on cognitive functions in offspring. Hippocampal synaptic plasticity, believed to be the mechanism underlying certain types of learning and memory, and known to be sensitive to behavioral stress, can be changed

Modulation of pain ratings by expectation and uncertainty: Behavioral characteristics and anticipatory neural correlates.

Expectations about the magnitude of impending pain exert a substantial effect on subsequent perception. However, the neural mechanisms that underlie the predictive processes that modulate pain are poorly understood. In a combined behavioral and high-density electrophysiological study we measured anticipatory neural responses to heat stimuli to determine how predictions of pain intensity, and certainty about those predictions, modulate brain activity and subjective pain ratings. Prior to receiving randomized laser heat stimuli at different intensities (low, medium or high) subjects (n=15) viewed cues that either accurately informed them of forthcoming intensity (certain expectation) or not (uncertain expectation). Pain ratings were biased towards prior expectations of either high or low intensity. Anticipatory neural responses increased with expectations of painful vs. non-painful heat intensity, suggesting the presence of neural responses that represent predicted heat stimulus intensity. These anticipatory responses also correlated with the amplitude of the Laser-Evoked Potential (LEP) response to painful stimuli when the intensity was predictable. Source analysis (LORETA) revealed that uncertainty about expected heat intensity involves an anticipatory cortical network commonly associated with attention (left dorsolateral prefrontal, posterior cingulate and bilateral inferior parietal cortices). Relative certainty, however, involves cortical areas previously associated with semantic and prospective memory (left inferior frontal and inferior temporal cortex, and right anterior prefrontal cortex). This suggests that biasing of pain reports and LEPs by expectation involves temporally precise activity in specific cortical networks.

The neurobiology of punishment.

Animals, in particular humans, frequently punish other individuals who behave negatively or uncooperatively towards them. In animals, this usually serves to protect the personal interests of the individual concerned, and its kin. However, humans also punish altruistically, in which the act of punishing is personally costly. The propensity to do so has been proposed to reflect the cultural acquisition of norms of behaviour, which incorporates the desire to uphold equity and fairness, and promotes cooperation. Here, we review the proximate neurobiological basis of punishment, considering the motivational processes that underlie punishing actions.

Modulation of pain processing in hyperalgesia by cognitive demand.

The relationship between pain and cognitive function is of theoretical and clinical interest, exemplified by observations that attention-demanding activities reduce pain in chronically afflicted patients. Previous studies have concentrated on phasic pain, which bears little correspondence to clinical pain conditions. Indeed, phasic pain is often associated with differential or opposing effects to tonic pain in behavioral, lesion, and pharmacological studies. To address how cognitive engagement interacts with tonic pain, we assessed the influence of an attention-demanding cognitive task on pain-evoked neural responses in an experimental model of chronic pain, the capsaicin-induced heat hyperalgesia model. Using functional magnetic resonance imaging (fMRI), we show that activity in the orbitofrontal and medial prefrontal cortices, insula, and cerebellum correlates with the intensity of tonic pain. This pain-related activity in medial prefrontal cortex and cerebellum was modulated by the demand level of the cognitive task. Our findings highlight a role for these structures in the integration of motivational and cognitive functions associated with a physiological state of injury. Within the limitations of an experimental model of pain, we suggest that the findings are relevant to understanding both the neurobiology and pathophysiology of chronic pain and its amelioration by cognitive strategies.

Exploring the use of sensors to measure behavioral interactions: an experimental evaluation of using hand trajectories.

Humans appear to be sensitive to relative small changes in their surroundings. These changes are often initially perceived as irrelevant, but they can cause significant changes in behavior. However, how exactly people's behavior changes is often hard to quantify. A reliable and valid tool is needed in order to address such a question, ideally measuring an important point of interaction, such as the hand. Wearable-body-sensor systems can be used to obtain valuable, behavioral information. These systems are particularly useful for assessing functional interactions that occur between the endpoints of the upper limbs and our surroundings. A new method is explored that consists of computing hand position using a wearable sensor system and validating it against a gold standard reference measurement (optical tracking device). Initial outcomes related well to the gold standard measurements (r = 0.81) showing an acceptable average root mean square error of 0.09 meters. Subsequently, the use of this approach was further investigated by measuring differences in motor behavior, in response to a changing environment. Three subjects were asked to perform a water pouring task with three slightly different containers. Wavelet analysis was introduced to assess how motor consistency was affected by these small environmental changes. Results showed that the behavioral motor adjustments to a variable environment could be assessed by applying wavelet coherence techniques. Applying these procedures in everyday life, combined with correct research methodologies, can assist in quantifying how environmental changes can cause alterations in our motor behavior.

Self-stabilization and behavioral diversity of embodied adaptive locomotion

Locomotion is of fundamental importance in understanding adaptive behavior. In this paper we present two case studies of robot locomotion that demonstrate how higher level of behavioral diversity can be achieved while observing the principle of cheap design. More precisely, it is shown that, by exploiting the dynamics of the system-environment interaction, very simple controllers can be designed which is essential to achieve rapid locomotion. Special consideration must be given to the choice of body materials. We conclude with some speculation about the importance of locomotion for understanding cognition. © Springer-Verlag Berlin Heidelberg 2004.