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.

Risk-sensitivity in sensorimotor control.

Recent advances in theoretical neuroscience suggest that motor control can be considered as a continuous decision-making process in which uncertainty plays a key role. Decision-makers can be risk-sensitive with respect to this uncertainty in that they may not only consider the average payoff of an outcome, but also consider the variability of the payoffs. Although such risk-sensitivity is a well-established phenomenon in psychology and economics, it has been much less studied in motor control. In fact, leading theories of motor control, such as optimal feedback control, assume that motor behaviors can be explained as the optimization of a given expected payoff or cost. Here we review evidence that humans exhibit risk-sensitivity in their motor behaviors, thereby demonstrating sensitivity to the variability of "motor costs." Furthermore, we discuss how risk-sensitivity can be incorporated into optimal feedback control models of motor control. We conclude that risk-sensitivity is an important concept in understanding individual motor behavior under uncertainty.

Striatal activity underlies novelty-based choice in humans.

The desire to seek new and unfamiliar experiences is a fundamental behavioral tendency in humans and other species. In economic decision making, novelty seeking is often rational, insofar as uncertain options may prove valuable and advantageous in the long run. Here, we show that, even when the degree of perceptual familiarity of an option is unrelated to choice outcome, novelty nevertheless drives choice behavior. Using functional magnetic resonance imaging (fMRI), we show that this behavior is specifically associated with striatal activity, in a manner consistent with computational accounts of decision making under uncertainty. Furthermore, this activity predicts interindividual differences in susceptibility to novelty. These data indicate that the brain uses perceptual novelty to approximate choice uncertainty in decision making, which in certain contexts gives rise to a newly identified and quantifiable source of human irrationality.

Cortical substrates for exploratory decisions in humans.

Decision making in an uncertain environment poses a conflict between the opposing demands of gathering and exploiting information. In a classic illustration of this 'exploration-exploitation' dilemma, a gambler choosing between multiple slot machines balances the desire to select what seems, on the basis of accumulated experience, the richest option, against the desire to choose a less familiar option that might turn out more advantageous (and thereby provide information for improving future decisions). Far from representing idle curiosity, such exploration is often critical for organisms to discover how best to harvest resources such as food and water. In appetitive choice, substantial experimental evidence, underpinned by computational reinforcement learning (RL) theory, indicates that a dopaminergic, striatal and medial prefrontal network mediates learning to exploit. In contrast, although exploration has been well studied from both theoretical and ethological perspectives, its neural substrates are much less clear. Here we show, in a gambling task, that human subjects' choices can be characterized by a computationally well-regarded strategy for addressing the explore/exploit dilemma. Furthermore, using this characterization to classify decisions as exploratory or exploitative, we employ functional magnetic resonance imaging to show that the frontopolar cortex and intraparietal sulcus are preferentially active during exploratory decisions. In contrast, regions of striatum and ventromedial prefrontal cortex exhibit activity characteristic of an involvement in value-based exploitative decision making. The results suggest a model of action selection under uncertainty that involves switching between exploratory and exploitative behavioural modes, and provide a computationally precise characterization of the contribution of key decision-related brain systems to each of these functions.

风险偏好为什么是不稳定的？——后悔调节风险偏好的理论探索

Emotion is one of the most popular spots in recent decision making research, while regret is always being considered as the most relevant emotion with decision making. Current article firstly reviewed the literature of regret theory to date to profile the relation between regret and decision making under uncertainty through three mainlines: experienced regret, anticipated regret and regret orientation, respectively. And then, based on the theory of regret regulation raised by Zeelenberg recently, we came up with a theory of risk preference regulated by regret. Then three studies were conducted under the current framework, by using experiment, survey, and quasi experiment design. The major findings were below: In study 1, when playing ultimatum game, risk preference in decision making can be determined by experienced regret and anticipated regret of risk aversion, which made individual risk taking; In study 2, survey showed that risk orientation was negatively related with risk taking (health/safety, recreational and social); In study 3, when asked the Asian Disease Problem, risk preference can be determined by the coherence of the risk preference between the past decision and the current alternative. Individuals much more like alternative with the same risk preference of the past decision. A two way interaction was found, regret orientation, as a personality, was found as a moderator. Individuals with high regret orientation were more sensitive to the coherence of the risk preference than those with low regret orientation. Three studies provide fruitful evidences for the theory of risk preference regulated by regret in different prospective, show us the function of regret in decision making.

Prices versus quantities versus bankable quantities

Quantity-based regulation with banking allows regulated firms to shift obligations across time in response to periods of unexpectedly high or low marginal costs. Despite its wide prevalence in existing and proposed emission trading programs, banking has received limited attention in past welfare analyses of policy choice under uncertainty. We address this gap with a model of banking behavior that captures two key constraints: uncertainty about the future from the firm's perspective and a limit on negative bank values (e.g. borrowing). We show conditions where banking provisions reduce price volatility and lower expected costs compared to quantity policies without banking. For plausible parameter values related to U.S. climate change policy, we find that bankable quantities produce behavior quite similar to price policies for about two decades and, during this period, improve welfare by about a $1 billion per year over fixed quantities. © 2012 Elsevier B.V.

Safeguarding: A case for intelligent risk management

‘Risk’ in social work is typically read as risk-of-bads, and specifically extreme bads. This paper develops the implications of the logical objection to attempts to predict low frequency extreme events (such as child homicides). Our argument is that if we focus on these low probability high cost outcomes—these heart wrenching, but unpredictable, tragedies—we take social work away from the good that it can do, leave it open to inappropriate disapprobation, and, in terms of outcomes, do less well by the vulnerable. This point is reinforced by discussion of developments in other academic fields, and by further examination of the logic (and the morality) of protection under uncertainty. We explore the implications for the way social work should be evaluated. A proper academic understanding of risk, and decision making under uncertainty, has, we argue clear practical implications.

Adaptive Dialogue Strategy Selection through Imprecise Probabilistic Query Answering

In a human-computer dialogue system, the dialogue strategy can range from very restrictive to highly flexible. Each specific dialogue style has its pros and cons and a dialogue system needs to select the most appropriate style for a given user. During the course of interaction, the dialogue style can change based on a user’s response and the system observation of the user. This allows a dialogue system to understand a user better and provide a more suitable way of communication. Since measures of the quality of the user’s interaction with the system can be incomplete and uncertain, frameworks for reasoning with uncertain and incomplete information can help the system make better decisions when it chooses a dialogue strategy. In this paper, we investigate how to select a dialogue strategy based on aggregating the factors detected during the interaction with the user. For this purpose, we use probabilistic logic programming (PLP) to model probabilistic knowledge about how these factors will affect the degree of freedom of a dialogue. When a dialogue system needs to know which strategy is more suitable, an appropriate query can be executed against the PLP and a probabilistic solution with a degree of satisfaction is returned. The degree of satisfaction reveals how much the system can trust the probability attached to the solution.

Using Graphs to Visualise and Detect Anomalies in Access Control System Transactions

Physical Access Control Systems are commonly used to secure doors in buildings such as airports, hospitals, government buildings and offices. These systems are designed primarily to provide an authentication mechanism, but they also log each door access as a transaction in a database. Unsupervised learning techniques can be used to detect inconsistencies or anomalies in the mobility data, such as a cloned or forged Access Badge, or unusual behaviour by staff members. In this paper, we present an overview of our method of inferring directed graphs to represent a physical building network and the flows of mobility within it. We demonstrate how the graphs can be used for Visual Data Exploration, and outline how to apply algorithms based on Information Theory to the graph data in order to detect inconsistent or abnormal behaviour.

The Complexity of Approximately Solving Influence Diagrams

Influence diagrams allow for intuitive and yet precise description of complex situations involving decision making under uncertainty. Unfortunately, most of the problems described by influence diagrams are hard to solve. In this paper we discuss the complexity of approximately solving influence diagrams. We do not assume no-forgetting or regularity, which makes the class of problems we address very broad. Remarkably, we show that when both the treewidth and the cardinality of the variables are bounded the problem admits a fully polynomial-time approximation scheme.