The biological basis of expected utility anomalies (original) (raw)
Anomalies: Utility Maximization and Experienced Utility
Journal of Economic Perspectives, 2006
In this column, we discuss a version of the utility maximization hypothesis that can be tested—and we find that it is false. We review empirical challenges to utility maximization, which return to the old question of whether preferences optimize the experience of outcomes. Much of this work has focused on a necessary condition for utility-maximizing choices: an ability of economic agents to make accurate, or at least unbiased, forecasts of the hedonic outcomes of potential choices. The research we review shows that this condition is not satisfied: people do not always know what they will like; they often make systematic errors in predicting their future experience of outcomes and, as a result, fail to maximize their experienced utility. We discuss four areas in which errors of hedonic forecasting and choice have been documented: 1) where the emotional or motivational state of the agent is very different at t0 and at t1; 2) where the nature of the decision focuses attention on aspect...
The Journal of Socio-Economics, 2010
Attachment values Allais paradox Insurance paradox Ellsberg paradox Coalescing paradox Violations of stochastic dominance Cash segregation paradox Risk preferences for losses paradox a b s t r a c t The expected utility (EU) model is widely used for predicting and describing choices under uncertainty. Its usefulness, however, is limited because of its widely acknowledged inconsistencies and paradoxes. This paper describes how important EU model paradoxes can be resolved by accounting for the influences of socio-emotional goods (SEGs) embedded in word and other symbolic frames.
Scientific Reports, 2020
people's choices are often found to be inconsistent with the assumptions of rational choice theory. over time, several probabilistic models have been proposed that account for such deviations from rationality. However, these models have become increasingly complex and are often limited to particular choice phenomena. Here we introduce a network approach that explains a broad set of choice phenomena. We demonstrate that this approach can be used to compare different choice theories and integrates several choice mechanisms from established models. A basic setup implements bounded rationality, loss aversion, and inhibition in a natural fashion, which allows us to predict the occurrence of well-known choice phenomena, such as the endowment effect and the similarity, attraction, compromise, and phantom context effects. Our results show that this network approach provides a simple representation of complex choice behaviour, and can be used to gain a better understanding of how the many choice phenomena and key theoretical principles from different types of decision-making are connected. The response behaviour of humans on (discrete) choice problems has been extensively studied in many fields of science, such as economics 1-4 , psychology 5-8 , psychometrics 9,10 , cognitive science 11-14 , neuroscience 15,16 , and engineering 17,18. Traditional theories of choice assume the decision-maker as a homo economicus 19,20 , i.e., rational 1,5,21. For choices to be rational all choice alternatives must be comparable and have transitive preference relations, so they can be ordered by the decision-maker. A second feature, and a central principle of rational choice theory, is that a rational decision-maker consistently chooses the outcome that maximises utility, or expected utility for risky or uncertain choices 5,22-24. These assumptions clearly fail the scrutiny of everyday experience. To account for the observed inconsistencies, most models nowadays characterise choice as a probabilistic process 6,9,21,24-29. A prominent group of probabilistic choice models, such as Luce's strict utility model 6,24 and the multinomial logit model 21 for preference, and Bock's nominal categories model 30 for aptitude, are characterised by the following distribution for the choices: in which p S (x) ∈ [0, 1] represents the probably of choosing alternative x from the set of possible alternatives S as a function of the utility of alternative x, exp(π x) , where π x ∈ R. This distribution is also known as the Boltzmann distribution 31,32 from statistical mechanics. For binary choice problems (S = {x, y}) Eq. (1) takes a form known as the Bradley-Terry-Luce model in the decision-making literature 33,34 , or as the Rasch model 9 in psychometrics: (1) p S (x) = exp (π x) y∈S exp π y ,
Dissecting the random component of utility
2002
We illustrate and discuss several general issues associated with the random component of utility, or more generally “unobserved variability”. We posit a general conceptual framework that suggests a variance components view as an appropriate structure for unobserved variability. This framework suggests that “unobserved heterogeneity” is only one component of unobserved variability; hence, a more general view is required.
An expected utility theory that matches human performance
2012
Maximising expected utility has long been accepted as a valid model of rational behaviour, however, it has limited descriptive accuracy simply because, in practice, people do not always behave in the prescribed way. This is considered evidence that either people are not rational, expected utility is not an appropriate characterisation of rationality, or combination of these. This thesis proposes that a modified form of expected utility hypothesis is normative, suggesting how people ought to behave and descriptive of how they actually do behave, provided that: a) most utility has no meaning unless it is in the presence of potential competitors; b) there is uncertainty in the nature of competitors; c) statements of probability are associated with uncertainty; d) utility is marginalised over uncertainty, with framing effects providing constraints; and that e) utility is sensitive to risk, which, taken with reward and uncertainty suggests a three dimensional representation. The first part of the thesis investigates the nature of reward in four experiments and proposes that a three dimensional reward structure (reward, risk, and uncertainty) provides a better description of utility than reward alone. It also proposes that the semantic differential, a well researched psychological instrument, is a representation or description of the reward structure. The second part of the thesis provides a mathematical model of a value function and a probability weighting function, testing them together against extant problem cases for decision making. It is concluded that utility, perhaps more accurately described as advantage in the present case, when construed as three dimensions and the result of a competition, provides a good explanation of many of the problem cases that are documented in the decision making literature. Declaration I declare that the work in this thesis was carried out in accordance with the requirements of the University's Regulations and Code of Practice for Research Degree Programmes and that it has not been submitted for any other academic award. Except where indicated by specific reference in the text, the work is the candidate's own work.
A New Type of Preference Reversal
2006
The classic preference reversal phenomenon arises in a comparison between a choice and a matching task. We present a new type of preference reversal which is entirely choice-based. Because choice is the basic primitive of economics, the preference reversal we observe is more troubling for economics. The preference reversal was observed in two experiments, both involving large representative samples from the Spanish population. The data were collected by professional interviewers in face-to-face interviews. Possible explanations for the preference reversal are the anticipation of disappointment and elation in risky choice and the impact of ethical considerations.