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.

PRESENTATION. Experimental and behavioral economics. Theory, tools and topics

This note presents the special issue on Experimental and Behavioral Economics. The volume includes some recent contributions from these correlated disciplines –empirical the former and theoretical the latter– and their potential contribution to the intersection of Economics with Psychology and Sociology. The project “El papel de la comparación social en las decisiones económicas bajo incertidumbre” (Junta de Andalucía, P07-SEJ-03155)” provided us with inspiration and financial support to publish this volume.

Research on the influence of behavioral forces that motivate trader behavior and sentiment: A prospect theory exegesis

This study focuses on empirical investigations and seeks implications by utilizing three different methodologies to test various aspects of trader behavior. The first methodology utilizes Prospect Theory to determine trader behavior during periods of extreme wealth contracting periods. Secondly, a threshold model to examine the sentiment variable is formulated and thirdly a study is made of the contagion effect and trader behavior. ^ The connection between consumers' sense of financial well-being or sentiment and stock market performance has been studied at length. However, without data on actual versus experimental performance, implications based on this relationship are meaningless. The empirical agenda included examining a proprietary file of daily trader activities over a five-year period. Overall, during periods of extreme wealth altering conditions, traders "satisfice" rather than choose the "best" alternative. A trader's degree of loss aversion depends on his/her prior investment performance. A model that explains the behavior of traders during periods of turmoil is developed. Prospect Theory and the data file influenced the design of the model. ^ Additional research included testing a model that permitted the data to signal the crisis through a threshold model. The third empirical study sought to investigate the existence of contagion caused by declining global wealth effects using evidence from the mining industry in Canada. Contagion, where a financial crisis begins locally and subsequently spreads elsewhere, has been studied in terms of correlations among similar regions. The results provide support for Prospect Theory in two out of the three empirical studies. ^ The dissertation emphasizes the need for specifying precise, testable models of investors' expectations by providing tools to identify paradoxical behavior patterns. True enhancements in this field must include empirical research utilizing reliable data sources to mitigate data mining problems and allow researchers to distinguish between expectations-based and risk-based explanations of behavior. Through this type of research, it may be possible to systematically exploit "irrational" market behavior. ^

Research on the influence of behavioral forces that motivate trader behavior and sentiment- a prospect theory exegesis

This study focuses on empirical investigations and seeks implications by utilizing three different methodologies to test various aspects of trader behavior. The first methodology utilizes Prospect Theory to determine trader behavior during periods of extreme wealth contracting periods. Secondly, a threshold model to examine the sentiment variable is formulated and thirdly a study is made of the contagion effect and trader behavior. The connection between consumers' sense of financial well-being or sentiment and stock market performance has been studied at length. However, without data on actual versus experimental performance, implications based on this relationship are meaningless. The empirical agenda included examining a proprietary file of daily trader activities over a five-year period. Overall, during periods of extreme wealth altering conditions, traders "satisfice" rather than choose the "best" alternative. A trader's degree of loss aversion depends on his/her prior investment performance. A model that explains the behavior of traders during periods of turmoil is developed. Prospect Theory and the data file influenced the design of the model. Additional research included testing a model that permitted the data to signal the crisis through a threshold model. The third empirical study sought to investigate the existence of contagion caused by declining global wealth effects using evidence from the mining industry in Canada. Contagion, where a financial crisis begins locally and subsequently spreads elsewhere, has been studied in terms of correlations among similar regions. The results provide support for Prospect Theory in two out of the three empirical studies. The dissertation emphasizes the need for specifying precise, testable models of investors' expectations by providing tools to identify paradoxical behavior patterns. True enhancements in this field must include empirical research utilizing reliable data sources to mitigate data mining problems and allow researchers to distinguish between expectations-based and risk-based explanations of behavior. Through this type of research, it may be possible to systematically exploit "irrational" market behavior.

Predictors of young people’s charitable intentions to donate money : an extended theory of planned behavior perspective

An extended theory of planned behavior (TPB) was used to predict young people’s intentions to donate money to charities in the future. Students (N = 210; 18-24 years) completed a questionnaire assessing their attitude, subjective norm, perceived behavioral control [PBC], moral obligation, past behavior and intentions toward donating money. Regression analyses revealed the extended TPB explained 61% of the variance in intentions to donate money. Attitude, PBC, moral norm, and past behavior predicted intentions, representing future targets for charitable giving interventions.

Isotactics as a foundation for alignment and abstraction of behavioral models

There are many use cases in business process management that require the comparison of behavioral models. For instance, verifying equivalence is the basis for assessing whether a technical workflow correctly implements a business process, or whether a process realization conforms to a reference process. This paper proposes an equivalence relation for models that describe behaviors based on the concurrency semantics of net theory and for which an alignment relation has been defined. This equivalence, called isotactics, preserves the level of concurrency of aligned operations. Furthermore, we elaborate on the conditions under which an alignment relation can be classified as an abstraction. Finally, we show that alignment relations induced by structural refinements of behavioral models are indeed behavioral abstractions.

Testing a model of physical activity among mothers and fathers of young children: integrating self-determined motivation, planning, and the theory of planned behavior

Parents are at risk for inactivity; however, research into understanding parental physical activity (PA) is scarce. We integrated self-determined motivation, planning, and the theory of planned behavior (TPB) to better understand parental PA. Parents (252 mothers, 206 fathers) completed a main questionnaire assessing measures underpinning these constructs and a 1-week follow-up of PA behavior to examine whether self-determined motivation indirectly influenced intention via the TPB variables (i.e., attitude, subjective norm, and perceived behavioral control) and intention indirectly influenced behavior via planning. We found self-determined motivation on intention was fully mediated by the TPB variables and intention on behavior was partially mediated by the planning variables. In addition, slight differences in the model’s paths between the sexes were revealed. The results illustrate the range of important determinants of parental PA and provide support for the integrated model in explaining PA decision making as well as the importance of examining sex differences.

Towards an integration of the theory of planned behaviour and cognitive behavioural strategies : an example from a school-based injury prevention programme

Adolescent risk-taking behavior has potentially serious injury consequences and school-based behavior change programs provide potential for reducing such harm. A well-designed program is likely to be theory-based and ecologically valid however it is rare that the operationalisation process of theories is described. The aim of this paper is to outline how the Theory of Planned Behavior and Cognitive Behavioral Therapy informed intervention design in a school setting. Teacher interviews provided insights into strategies that might be implemented within the curriculum and provided detail used to operationalise theory constructs. Benefits and challenges in applying both theories are described with examples from an injury prevention program, Skills for Preventing Injury in Youth.

An extended theory of planned behavior intervention for older adults With Type 2 diabetes and cardiovascular disease

A randomized controlled trial evaluated the effectiveness of a 4-wk extended theory of planned behavior (TPB) intervention to promote regular physical activity and healthy eating among older adults diagnosed with Type 2 diabetes or cardiovascular disease (N = 183). Participants completed TPB measures of attitude, subjective norm, perceived behavioral control, and intention, as well as planning and behavior, at preintervention and 1 wk and 6 wk postintervention for each behavior. No significant time-by-condition effects emerged for healthy eating. For physical activity, significant time-by-condition effects were found for behavior, intention, planning, perceived behavioral control, and subjective norm. In particular, compared with control participants, the intervention group showed short-term improvements in physical activity and planning, with further analyses indicating that the effect of the intervention on behavior was mediated by planning. The results indicate that TPB-based interventions including planning strategies may encourage physical activity among older people with diabetes and cardiovascular disease.

The impact of anxiety on processing efficiency : implications for the attentional control theory

The Attentional Control Theory (ACT) proposes that high-anxious individuals maintain performance effectiveness (accuracy) at the expense of processing efficiency (response time), in particular, the two central executive functions of inhibition and shifting. In contrast, research has generally failed to consider the third executive function which relates to the function of updating. In the current study, seventy-five participants completed the Parametric Go/No-Go and n-back tasks, as well as the State-Trait Anxiety Inventory in order to explore the effects of anxiety on attention. Results indicated that anxiety lead to decay in processing efficiency, but not in performance effectiveness, across all three Central Executive functions (inhibition, set-shifting and updating). Interestingly, participants with high levels of trait anxiety also exhibited impaired performance effectiveness on the n-back task designed to measure the updating function. Findings are discussed in relation to developing a new model of ACT that also includes the role of preattentive processes and dual-task coordination when exploring the effects of anxiety on task performance.

Application of theory in developing peer-support based intervention to improve self-management for cardiac patients with diabetes

The biosafety of carbon nanomaterial needs to be critically evaluated with both experimental and theoretical validations before extensive biomedical applications. In this letter, we present an analysis of the binding ability of two dimensional monolayer carbon nanomaterial on actin by molecular simulation to understand their adhesive characteristics on F-actin cytoskeleton. The modelling results indicate that the positively charged carbon nanomaterial has higher binding stability on actin. Compared to crystalline graphene, graphene oxide shows higher binding influence on actin when carrying 11 positive surface charge. This theoretical investigation provides insights into the sensitivity of actin-related cellular activities on carbon nanomaterial.

The 4C spectrum of fundamental behavioral relations for concurrent systems

The design of concurrent software systems, in particular process-aware information systems, involves behavioral modeling at various stages. Recently, approaches to behavioral analysis of such systems have been based on declarative abstractions defined as sets of behavioral relations. However, these relations are typically defined in an ad-hoc manner. In this paper, we address the lack of a systematic exploration of the fundamental relations that can be used to capture the behavior of concurrent systems, i.e., co-occurrence, conflict, causality, and concurrency. Besides the definition of the spectrum of behavioral relations, which we refer to as the 4C spectrum, we also show that our relations give rise to implication lattices. We further provide operationalizations of the proposed relations, starting by proposing techniques for computing relations in unlabeled systems, which are then lifted to become applicable in the context of labeled systems, i.e., systems in which state transitions have semantic annotations. Finally, we report on experimental results on efficiency of the proposed computations.

Testing an extended theory of planned behavior to predict young people's intentions to join a bone marrow donor registry

An extended theory of planned behavior (TPB) was used to understand the factors, particularly control perceptions and affective reactions, given conflicting findings in previous research, informing younger people's intentions to join a bone marrow registry. Participants (N  = 174) completed attitude, subjective norm, perceived behavioral control (PBC), moral norm, anticipated regret, self-identity, and intention items for registering. The extended TPB (except PBC) explained 67.2% of variance in intention. Further testing is needed as to the volitional nature of registering. Moral norm, anticipated regret, and self-identity are likely intervention targets for increasing younger people's bone marrow registry participation.

Service encounter needs theory : a dyadic, psychosocial approach to understanding service encounters

Interactions between customers and service providers are ubiquitous. Some of these encounters are routine, but many are characterized by conflict and intense emotions. This chapter introduces a new theory, service encounter needs theory (SENT) that aims to elucidate the mechanisms through which service encounter behaviors affect outcomes for customers and employees. Evidence is presented for the preeminence within these encounters of eight psychosocial needs, and propositions are advanced regarding likely antecedents to fulfillment and violation of these needs. Emotional experiences and displays are viewed as important consequences of need fulfillment and violation, as are numerous cognitive, behavioral, and health-related outcomes.