The biological basis of expected utility anomalies (original) (raw)
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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...
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.
An Experimental Investigation of the Role of Errors for Explaining Violations of Expected Utility
One possible conclusion from recent experimental research on decision making under risk is that observed behaviour can be reasonable accommodated by expected utility plus an error term. This conclusion implies that the violation rate of expected utility should decrease if errors are excluded. The present paper presents an experiment which investigates this implication. Indeed, the results show that the exclusion of errors leads to a significant reduction of the violation rate for most of the subjects and most of the choice problems under risk. However, it turns out that for decision problems under ambiguity the exclusion of errors in contrast increases the violation rate significantly. In this sense the Ellsberg paradox can be regarded as a more serious challenge of expected utility than the Allais paradox. More general, while expected utility plus error term may be regarded as a reasonable representation for choice under risk this does not seem to be true for ambiguous choice problems.
Utility maximization and melioration: Internalities in individual choice
Journal of Behavioral Decision Making, 1993
How do people go about choosing between alternatives in relatively simple settings? This study explores some of the variables that past work suggests may be relevant. Volunteer subjects worked for money in six procedures in which the probability of a payment from either of two alternatives was 1.0, but the rate of pay (i.e. the speed with which a payment was delivered or the size of the payment) interacted with the subjects' recent allocation of choices, which we define as the 'internalities'. Because of the internalities, choosing the currently more profitable alternative did not maximize total earnings. Subjects were more likely to fail to maximize when the interaction between present pay and past choices was spread over longer sequences of choices, or when the reward variable was the speed, rather than the value, of each payment. Subjects often disregarded the internalities and were instead guided by the current yields of the two alternatives, which is a frequently observed tendency, called 'melioration', in experiments on choices by animals. The tendency toward melioration was only partially counteracted by explicit instructions on how to maximize earnings. We discuss a theoretical framework for melioration that postulates both motivational and cognitive sources. KEY WORDS Choice Utility maximization Melioration Individual behavior Rational choice theory Some of the fundamental assumptions of rational choice theory have recently been challenged by controlled experiments on judgment and choice. For example, people make systematic errors in estimating probabilities (Camerer, 1987; Tversky and Kahneman, 1974), and they violate such fundamental choice axioms as transitivity (Tversky, 1969), regularity (Huber et al., 1982), or even dominance (Kahneman and Tversky, 1981). In this paper we illustrate and discuss a possibly related source of human suboptimality in decision making which has been most extensively documented in animal 0894-3257/93/030149-37S23.50 0 1993 by John Wiley 8~ Sons, Ltd.
The Allais Paradox and its Immediate Consequences for Expected Utility Theory
Throughout the evolution of economic ideas, it has often been asserted that experimentation in economics is impossible. Yet, the historical record shows that the idea of "experimentation" has, in fact, been important in the field of economics, and has been interpreted and put to use in many ways. These range from the "thought experiment", where counterfactuals are explored in the mind of the theorist, to social experiments, where alternative economic arrangements have been tried out historically, and laboratory experimentation, which is currently a burgeoning field of empirical research. This book provides testament to the great variety of ways in which experimentation has mattered in the creation of economic knowledge. The accessible essays contained within this volume will interest all those seeking to broaden their historical understanding of the discipline and will be essential reading for students who wish to acquire a greater knowledge of how economics has grown and developed.
Preference anomalies, preference elicitation and the discovered preference hypothesis
Environmental and Resource Economics, 2005
There is wide-ranging evidence, much of it deriving from economics experiments, of 'anomalies' in behaviour that challenge standard preference theories. This paper explores the implications of these anomalies for preference elicitation methods. Because methods that are used to inform public policy, such as contingent valuation, are based on standard preference theories, their validity may be called into question by the anomaly data. However, on a new interpretation, these anomalies do not contradict standard theory but are errors in stated preference that can be expected to disappear as people become more experienced in relevant decision environments. We explore the evidence for this interpretation and what implications follow for preference elicitation methodology.