On the Qualitative Comparison of Decisions Having Positive and Negative Features

Making a decision is often a matter of listing and comparing positive and negative arguments. In such cases, the evaluation scale for decisions should be considered bipolar, that is, negative and positive values should be explicitly distinguished. That is what is done, for example, in Cumulative Prospect Theory. However, contrary to the latter framework that presupposes genuine numerical assessments, human agents often decide on the basis of an ordinal ranking of the pros and the cons, and by focusing on the most salient arguments. In other terms, the decision process is qualitative as well as bipolar. In this article, based on a bipolar extension of possibility theory, we define and axiomatically characterize several decision rules tailored for the joint handling of positive and negative arguments in an ordinal setting. The simplest rules can be viewed as extensions of the maximin and maximax criteria to the bipolar case, and consequently suffer from poor decisive power. More decisive rules that refine the former are also proposed. These refinements agree both with principles of efficiency and with the spirit of order-of-magnitude reasoning, that prevails in qualitative decision theory. The most refined decision rule uses leximin rankings of the pros and the cons, and the ideas of counting arguments of equal strength and cancelling pros by cons. It is shown to come down to a special case of Cumulative Prospect Theory, and to subsume the “Take the Best” heuristic studied by cognitive psychologists.

When opportunity matters: Comparing the risk taking attitudes of prisoners and recently released ex-prisoners

Risk-taking tendencies and environmental opportunities to commit crime are two key features in understanding criminal behavior. Upon release from prison, ex-prisoners have a much greater opportunity to engage in risky activity and to commit criminal acts. We hypothesized that ex-prisoners would exhibit greater risk-taking tendencies compared to prisoners who have fewer opportunities to engage in risky activity and who are monitored constantly by prison authorities. Using cumulative prospect theory to compare the risky choices of prisoners and ex-prisoners our study revealed that ex-prisoners who were within 16 weeks of their prison release made riskier choices than prisoners. Our data indicate that previous studies comparing prisoners behind bars with nonoffenders may have underestimated the risk-taking tendencies of offenders. The present findings emphasize the central role played by risk-taking attitudes in criminal offending and highlight a need to examine offenders after release from prison.

Three essays on the psychology of investment and financial markets

Préface My thesis consists of three essays where I consider equilibrium asset prices and investment strategies when the market is likely to experience crashes and possibly sharp windfalls. Although each part is written as an independent and self contained article, the papers share a common behavioral approach in representing investors preferences regarding to extremal returns. Investors utility is defined over their relative performance rather than over their final wealth position, a method first proposed by Markowitz (1952b) and by Kahneman and Tversky (1979), that I extend to incorporate preferences over extremal outcomes. With the failure of the traditional expected utility models in reproducing the observed stylized features of financial markets, the Prospect theory of Kahneman and Tversky (1979) offered the first significant alternative to the expected utility paradigm by considering that people focus on gains and losses rather than on final positions. Under this setting, Barberis, Huang, and Santos (2000) and McQueen and Vorkink (2004) were able to build a representative agent optimization model which solution reproduced some of the observed risk premium and excess volatility. The research in behavioral finance is relatively new and its potential still to explore. The three essays composing my thesis propose to use and extend this setting to study investors behavior and investment strategies in a market where crashes and sharp windfalls are likely to occur. In the first paper, the preferences of a representative agent, relative to time varying positive and negative extremal thresholds are modelled and estimated. A new utility function that conciliates between expected utility maximization and tail-related performance measures is proposed. The model estimation shows that the representative agent preferences reveals a significant level of crash aversion and lottery-pursuit. Assuming a single risky asset economy the proposed specification is able to reproduce some of the distributional features exhibited by financial return series. The second part proposes and illustrates a preference-based asset allocation model taking into account investors crash aversion. Using the skewed t distribution, optimal allocations are characterized as a resulting tradeoff between the distribution four moments. The specification highlights the preference for odd moments and the aversion for even moments. Qualitatively, optimal portfolios are analyzed in terms of firm characteristics and in a setting that reflects real-time asset allocation, a systematic over-performance is obtained compared to the aggregate stock market. Finally, in my third article, dynamic option-based investment strategies are derived and illustrated for investors presenting downside loss aversion. The problem is solved in closed form when the stock market exhibits stochastic volatility and jumps. The specification of downside loss averse utility functions allows corresponding terminal wealth profiles to be expressed as options on the stochastic discount factor contingent on the loss aversion level. Therefore dynamic strategies reduce to the replicating portfolio using exchange traded and well selected options, and the risky stock.

Décisions et perspectives : de la théorie de l'utilité à la philosophie de la volonté.

Les implications philosophiques de la Théorie de la Perspective de 1979, notamment celles qui concernent l’introduction d’une fonction de valeur sur les résultats et d’un coefficient de pondération sur les probabilités, n’ont à ce jour jamais été explorées. Le but de ce travail est de construire une théorie philosophique de la volonté à partir des résultats de la Théorie de la Perspective. Afin de comprendre comment cette théorie a pu être élaborée il faut étudier la Théorie de l’Utilité Attendue dont elle est l’aboutissement critique majeur, c’est-à-dire les axiomatisations de la décision de Ramsey (1926), von Neumann et Morgenstern (1947), et enfin Savage (1954), qui constituent les fondements de la théorie classique de la décision. C’est entre autres la critique – par l’économie et la psychologie cognitive – du principe d’indépendance, des axiomes d’ordonnancement et de transitivité qui a permis de faire émerger les éléments représentationnels subjectifs à partir desquels la Théorie de la Perspective a pu être élaborée. Ces critiques ont été menées par Allais (1953), Edwards (1954), Ellsberg (1961), et enfin Slovic et Lichtenstein (1968), l’étude de ces articles permet de comprendre comment s’est opéré le passage de la Théorie de l’Utilité Attendue, à la Théorie de la Perspective. À l’issue de ces analyses et de celle de la Théorie de la Perspective est introduite la notion de Système de Référence Décisionnel, qui est la généralisation naturelle des concepts de fonction de valeur et de coefficient de pondération issus de la Théorie de la Perspective. Ce système, dont le fonctionnement est parfois heuristique, sert à modéliser la prise de décision dans l’élément de la représentation, il s’articule autour de trois phases : la visée, l’édition et l’évaluation. À partir de cette structure est proposée une nouvelle typologie des décisions et une explication inédite des phénomènes d’akrasie et de procrastination fondée sur les concepts d’aversion au risque et de surévaluation du présent, tous deux issus de la Théorie de la Perspective.

Der Einfluss von Ankern auf Verkaufsergebnisse in telefonischen Verkaufsgesprächen

Numerische Urteile wie Schätzungen oder Prognosen sind anfällig für Ankereffekte. Ein in eine Entscheidungssituation willkürlich eingeführter numerischer Wert – der Anker – beeinflusst oft das Urteil im Sinne einer Assimilation des Urteils an diesen Wert. Bei Kaufentscheidungen fließt das Ergebnis eines Vergleichs des Produktpreises mit einem Referenzpreis, einem numerischen Wert, in die Kaufentscheidung mit ein. Unter Orientierung an die Prospekttheorie von Kahneman & Tversky kann dieser Referenzpreis in Form eines implementierten Ankers variiert werden. Die vorgelegte interdisziplinäre Arbeit wendet psychologisches Fachwissen in den Wirtschaftswissenschaften an. Sie beschäftigt sich mit den Möglichkeiten bei telefonischen Verkaufsgesprächen, gezielt Anker zu Erhöhung der Verkaufsquote einzusetzen. Der Anker wird in drei unterschiedlichen Experimenten entweder durch den Preis eines zusätzlich angebotenen Produkts, durch das Einbringen eines belanglos scheinenden numerischen Wertes, wie die Anzahl an bereits getätigten Anrufen, oder in Form einer Schätzfrage in das Verkaufsgespräch implementiert. Es wird dabei festgestellt, dass durch einen im Vergleich zum verkaufenden Produkt höheren numerischen Wert, dem Anker, die Verkaufsquote erhöht werden kann. Das Neuartige an der Arbeit liegt vor allem im Aufzeigen der Einfachheit solcher ökonomisch effektiver Ankersetzungen in Verkaufsgesprächen. Willkürlich in eine Kaufsituation eingeführte numerische Werte können - analog zu ihrem Einfluss in Urteilssituationen - auch Kaufentscheidungen in einem realen Markt beeinflussen.

Asymmetries in Business Cycles

Esta disertación busca estudiar los mecanismos de transmisión que vinculan el comportamiento de agentes y firmas con las asimetrías presentes en los ciclos económicos. Para lograr esto, se construyeron tres modelos DSGE. El en primer capítulo, el supuesto de función cuadrática simétrica de ajuste de la inversión fue removido, y el modelo canónico RBC fue reformulado suponiendo que des-invertir es más costoso que invertir una unidad de capital físico. En el segundo capítulo, la contribución más importante de esta disertación es presentada: la construcción de una función de utilidad general que anida aversión a la pérdida, aversión al riesgo y formación de hábitos, por medio de una función de transición suave. La razón para hacerlo así es el hecho de que los individuos son aversos a la pérdidad en recesiones, y son aversos al riesgo en auges. En el tercer capítulo, las asimetrías en los ciclos económicos son analizadas junto con ajuste asimétrico en precios y salarios en un contexto neokeynesiano, con el fin de encontrar una explicación teórica de la bien documentada asimetría presente en la Curva de Phillips.

Poor people and risky business

We try to explain why economic conflicts and illegal business often take place in poor countries. We use the concept of subsistence level of consumption (d) and assume a regular concave utility function for consumption levels higher than d. For consumption levels lower than d utility is constant and equal to zero. Under this framework poor agents are risk-lovers. This result helps to explain why economic conflicts are more likely to appear in poor economies and why poor agents are more willing to undertake illegal business.

Ciencias de la complejidad: estado actual

Los aportes teóricos y aplicados de la complejidad en economía han tomado tantas direcciones y han sido tan frenéticos en las últimas décadas, que no existe un trabajo reciente, hasta donde conocemos, que los compile y los analice de forma integrada. El objetivo de este proyecto, por tanto, es desarrollar un estado situacional de las diferentes aplicaciones conceptuales, teóricas, metodológicas y tecnológicas de las ciencias de la complejidad en la economía. Asimismo, se pretende analizar las tendencias recientes en el estudio de la complejidad de los sistemas económicos y los horizontes que las ciencias de la complejidad ofrecen de cara al abordaje de los fenómenos económicos del mundo globalizado contemporáneo.

La disonancia cognitiva y trampa de la memoria en decisiones de Inversión: caso colombiano

Este documento es el resultado de una investigación bajo el enfoque de Finanzas Corporativas del Comportamiento, disciplina relevante en el mundo financiero desde el 2002 y que hasta el momento poco se ha investigado en Colombia. Esta difiere del supuesto tradicional de la racionalidad de los individuos en la toma de decisiones financieras, ya que pueden ser influenciadas por sesgos cognitivos y emocionales que la teoría ortodoxa no tiene en cuenta en sus supuestos. Esta investigación busca indagar, desde el punto de vista conceptual y mediante el análisis de resultados de estudio de campo con operadores del mercado bursátil colombiano, sobre la posible presencia de elementos comportamentales en las decisiones de inversión. Los sesgos que se evaluaron fueron: disonancia cognitiva, heurístico de disponibilidad y sesgo de confirmación. Para la recolección de fuentes primarias, una encuesta fue enviada a los operadores Colombianos, categorizados en operadores con experiencia y operadores jóvenes. Después del filtro, 142 encuestas fueron seleccionadas para el análisis. Los principales hallazgos fueron que los jóvenes son más propensos a experimentar disonancia cognitiva y heurístico de disponibilidad y en ambas categorías, los sesgos analizados influencian medianamente la toma de decisiones de inversión.

Does uncertainty cause inertia in decision making? An experimental study of the role of regret aversion and indecisiveness

Previous research has shown that often there is clear inertia in individual decision making---that is, a tendency for decision makers to choose a status quo option. I conduct a laboratory experiment to investigate two potential determinants of inertia in uncertain environments: (i) regret aversion and (ii) ambiguity-driven indecisiveness. I use a between-subjects design with varying conditions to identify the effects of these two mechanisms on choice behavior. In each condition, participants choose between two simple real gambles, one of which is the status quo option. I find that inertia is quite large and that both mechanisms are equally important.

Risk, ambiguity, and diversification

Attitudes toward risk influence the decision to diversify among uncertain options. Yet, because in most situations the options are ambiguous, attitudes toward ambiguity may also play an important role. I conduct a laboratory experiment to investigate the effect of ambiguity on the decision to diversify. I find that diversification is more prevalent and more persistent under ambiguity than under risk. Moreover, excess diversification under ambiguity is driven by participants who stick with a status quo gamble when diversification among gambles is not feasible. This behavioral pattern cannot be accommodated by major theories of choice under ambiguity.

Parametric preference functionals under risk in the gain domain: a Bayesian analysis

The performance of rank dependent preference functionals under risk is comprehensively evaluated using Bayesian model averaging. Model comparisons are made at three levels of heterogeneity plus three ways of linking deterministic and stochastic models: the differences in utilities, the differences in certainty equivalents and contextualutility. Overall, the"bestmodel", which is conditional on the form of heterogeneity is a form of Rank Dependent Utility or Prospect Theory that cap tures the majority of behaviour at both the representative agent and individual level. However, the curvature of the probability weighting function for many individuals is S-shaped, or ostensibly concave or convex rather than the inverse S-shape commonly employed. Also contextual utility is broadly supported across all levels of heterogeneity. Finally, the Priority Heuristic model, previously examined within a deterministic setting, is estimated within a stochastic framework, and allowing for endogenous thresholds does improve model performance although it does not compete well with the other specications considered.

Responsibility effects in decision making under risk

We systematically explore decision situations in which a decision maker bears responsibility for somebody else's outcomes as well as for her own in situations of payoff equality. In the gain domain we confirm the intuition that being responsible for somebody else's payoffs increases risk aversion. This is however not attributable to a 'cautious shift' as often thought. Indeed, looking at risk attitudes in the loss domain, we find an increase in risk seeking under responsibility. This raises issues about the nature of various decision biases under risk, and to what extent changed behavior under responsibility may depend on a social norm of caution in situations of responsibility versus naive corrections from perceived biases. To further explore this issue, we designed a second experiment to explore risk-taking behavior for gain prospects offering very small or very large probabilities of winning. For large probabilities, we find increased risk aversion, thus confirming our earlier finding. For small probabilities however, we find an increase of risk seeking under conditions of responsibility. The latter finding thus discredits hypotheses of a social rule dictating caution under responsibility, and can be explained through flexible self-correction models predicting an accentuation of the fourfold pattern of risk attitudes predicted by prospect theory. An additional accountability mechanism does not change risk behavior, except for mixed prospects, in which it reduces loss aversion. This indicates that loss aversion is of a fundamentally different nature than probability weighting or utility curvature. Implications for debiasing are discussed.

Ensaio sobre o agente racional: esparadrapos para um paciente terminal?

The Rational Agent model have been a foundational basis for theoretical models such as Economics, Management Science, Artificial Intelligence and Game Theory, mainly by the ¿maximization under constraints¿ principle, e.g. the ¿Expected Utility Models¿, among them, the Subjective Expected Utility (SEU) Theory, from Savage, placed as most influence player over theoretical models we¿ve seen nowadays, even though many other developments have been done, indeed also in non-expected utility theories field. Having the ¿full rationality¿ assumption, going for a less idealistic sight ¿bounded rationality¿ of Simon, or for classical anomalies studies, such as the ¿heuristics and bias¿ analysis by Kahneman e Tversky, ¿Prospect Theory¿ also by Kahneman & Tversky, or Thaler¿s Anomalies, and many others, what we can see now is that Rational Agent Model is a ¿Management by Exceptions¿ example, as for each new anomalies¿s presentation, in sequence, a ¿problem solving¿ development is needed. This work is a theoretical essay, which tries to understand: 1) The rational model as a ¿set of exceptions¿; 2) The actual situation unfeasibility, since once an anomalie is identified, we need it¿s specific solution developed, and since the number of anomalies increases every year, making strongly difficult to manage rational model; 3) That behaviors judged as ¿irrationals¿ or deviated, by the Rational Model, are truly not; 4) That¿s the right moment to emerge a Theory including mental processes used in decision making; and 5) The presentation of an alternative model, based on some cognitive and experimental psychology analysis, such as conscious and uncounscious processes, cognition, intuition, analogy-making, abstract roles, and others. Finally, we present conclusions and future research, that claims for deeper studies in this work¿s themes, for mathematical modelling, and studies about a rational analysis and cognitive models possible integration. .

Finanças comportamentais: o comportamento do agente decisório nos cenários de ganhos, perdas, riscos e incertezas

Pós-graduação em Economia - FCLAR