{"title":"Rational Polarization","authors":"Kevin Dorst","doi":"10.2139/ssrn.3918498","DOIUrl":"https://doi.org/10.2139/ssrn.3918498","url":null,"abstract":"Predictable polarization is everywhere: we can often predict how people’s opinions—including our own—will shift over time. Empirical studies suggest that this is so when evidence is ambiguous. That fact is often thought to demonstrate human irrationality. It doesn’t. Bayesians will predictably polarize iff their evidence is ambiguous. And ours often is: the process of cognitive search—searching a cognitively-accessible space for an item of a particular profile—yields ambiguous evidence that can predictably polarize beliefs, despite being expected to make them more accurate. A series of such rational updates can lead to polarization that is predictable, profound, and persistent. This process is not only theoretically possible, but also empirically plausible. I present an experiment supporting the polarizing effect of cognitive search, and then use models and simulations to show how such ambiguous evidence can help explain two of the core causes of polarization: confirmation bias and the group polarization effect.","PeriodicalId":342152,"journal":{"name":"DecisionSciRN: Rational Decision-Making (Topic)","volume":"34 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126856160","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Scalarized utility-based multi-asset risk measures","authors":"Sascha Desmettre, Christian Laudagé, Jörn Sass","doi":"10.2139/ssrn.3924271","DOIUrl":"https://doi.org/10.2139/ssrn.3924271","url":null,"abstract":"Financial institutions have to satisfy capital adequacy tests required, e.g., by the Basel Accords for banks or by Solvency II for insurers. If the financial situation of an institution is tight, then it can happen that no reallocation of the initial endowment would pass the capital adequacy test. The classical portfolio optimization approach breaks down and a capital increase is needed. We introduce the scalarized utility-based multi-asset (SUBMA) risk measure which optimizes the hedging costs and the expected utility of an agent simultaneously subject to the capital adequacy test. We find that the SUBMA risk measure is coherent if the utility function has constant relative risk aversion and the capital adequacy test leads to a coherent acceptance set. In a one-period financial market model we present a sufficient condition for the SUBMA risk measure to be finite-valued and continuous. Under further assumptions on the utility function we obtain existence and uniqueness results for the optimal hedging strategies. Finally, we calculate the SUBMA risk measure in a continuous-time financial market model for two benchmark capital adequacy tests.","PeriodicalId":342152,"journal":{"name":"DecisionSciRN: Rational Decision-Making (Topic)","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-09-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124126340","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"How Long-Term Contracts can Mitigate Inefficient Renegotiation Arising Due to Loss Aversion","authors":"D. Göller","doi":"10.2139/ssrn.3208561","DOIUrl":"https://doi.org/10.2139/ssrn.3208561","url":null,"abstract":"A loss-averse buyer and seller face an uncertain environment. Should they write a long-term contract or wait until the state of the world is realized? I show that simple long-term contracts perform better than insinuated in Herweg and Schmidt (2015), even though loss aversion makes renegotiation sometimes inefficient. During renegotiation, the outcome induced by the long-term contract constitutes the reference point to which the parties compare gains and losses induced by the renegotiated transaction. Whereas Herweg and Schmidt consider that the long-term contract is always performed, it should not in \"bad'' states. This alters the threat point in renegotiation, making it easier to renegotiate and thus improves the performance of long-term contracts. <br><br>Specific performance contracts perform better than in Herweg and Schmidt but are still problematic. Option contracts perform much better since only one party has the ex-post trade decision making it much easier to prevent the contract is inefficiently enforced due to loss aversion. My findings suggest that loss aversion alone cannot explain why parties sometimes abstain from writing beneficial long-term contracts but give important insights on how long-term contracts should be written when parties are aware they are loss averse.","PeriodicalId":342152,"journal":{"name":"DecisionSciRN: Rational Decision-Making (Topic)","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128089268","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"When to Quit Gambling, if You Must!","authors":"Sang Hu, J. Obłój, X. Zhou","doi":"10.2139/ssrn.3779900","DOIUrl":"https://doi.org/10.2139/ssrn.3779900","url":null,"abstract":"We develop an approach to solve Barberis (2012)'s casino gambling model in which a gambler whose preferences are specified by the cumulative prospect theory (CPT) must decide when to stop gambling by a prescribed deadline. We assume that the gambler can assist their decision using an independent randomization, and explain why it is a reasonable assumption. The problem is inherently time-inconsistent due to the probability weighting in CPT, and we study both precommitted and naive stopping strategies. We turn the original problem into a computationally tractable mathematical program, based on which we derive an optimal precommitted rule which is randomized and Markovian. The analytical treatment enables us to make several predictions regarding a gambler's behavior, including that with randomization they may enter the casino even when allowed to play only once, that whether they will play longer once they are granted more bets depends on whether they are in a gain or at a loss, and that it is prevalent that a naivite never stops loss.","PeriodicalId":342152,"journal":{"name":"DecisionSciRN: Rational Decision-Making (Topic)","volume":"4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-02-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128574548","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"The Value of Choice in Mandatory Health Insurance","authors":"C. Biener, Lan Zou","doi":"10.2139/ssrn.3778635","DOIUrl":"https://doi.org/10.2139/ssrn.3778635","url":null,"abstract":"Giving consumers choice can improve welfare in principle. In this study, we explore the financial consequences of choice and information provision in the Swiss mandatory health insurance market that entails non-optimal options by design. This market is characterized by a significant redistribution of welfare due to the approximately 36 percent of the adult population participating in such non-optimal plans. We run a laboratory experiment in which we contrast choices under an increased information and a restricted choice setting to the control choice situation as it is currently observed in the market. We find that financial losses resulting from poor choice are economically meaningful and amount to 9.4 percent of total annual health costs and that decision quality cannot be easily improved by interventions. We suggest several policy changes in light of our findings.","PeriodicalId":342152,"journal":{"name":"DecisionSciRN: Rational Decision-Making (Topic)","volume":"106 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122977101","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"A Prospect Theory Nash Bargaining Solution and Its Stochastic Stability","authors":"Ryoji Sawa","doi":"10.2139/ssrn.3739547","DOIUrl":"https://doi.org/10.2139/ssrn.3739547","url":null,"abstract":"Abstract We consider the long-run outcomes of bargaining games when players obey prospect theory. We extend the evolutionary bargaining model of Young (1993) to a two-stage Nash demand game. Two players simultaneously choose whether to exercise an outside option in the first stage and play the Nash demand game in the second stage, which will be reached only if neither player exercises the outside option. We address the influence on the stochastically stable division of reference-dependent preferences where the reference point is the value of the outside option. We show that the division consistently differs from the Nash bargaining solution under expected utility theory. Inspired by this, we propose a prospect theory Nash bargaining solution, which coincides with the stochastically stable division.","PeriodicalId":342152,"journal":{"name":"DecisionSciRN: Rational Decision-Making (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129052442","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"On Queue-Length Information in a Tandem Queueing System","authors":"Jingwei Ji, Ricky Roet-Green","doi":"10.2139/ssrn.3728894","DOIUrl":"https://doi.org/10.2139/ssrn.3728894","url":null,"abstract":"We consider a system where customers have to go through two service phases. For example, patients who arrive to an ER first wait for being admitted and then wait to be seeing by a physician. Assuming patients are served according to the order of their arrival (FCFS), we study the case where queue-length information is available at arrival: customers observe the state of the entire system and decide whether to join or not. We calculate the equilibrium strategy and show that customer strategy is not necessarily a function of the total number of customers in the system. We also show that when customers join the system they might balk in front of the second queue, but never renege from the first queue. To learn the value of information we compare the observable system with a system in which queue-length information is only partially available: instead of observing the full system state, customers observe queue length only at arrival to each queue.","PeriodicalId":342152,"journal":{"name":"DecisionSciRN: Rational Decision-Making (Topic)","volume":"4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132008751","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Impact of Consequence Information on Insurance Choice","authors":"A. Samek, Justin R. Sydnor","doi":"10.3386/w28003","DOIUrl":"https://doi.org/10.3386/w28003","url":null,"abstract":"Insurance choices are often hard to rationalize by standard theory and frequently appear sub-optimal. A key reason may be that people are unable to map the cost-sharing features of plans to their distribution of financial consequences. We develop and experimentally test a decision aid that provides this mapping to simplify comparisons of plan options. In two experiments mirroring typical health insurance decisions, we find that when people choose plans using standard feature-based information, they violate dominance at high rates. Our distribution-based decision aid substantially reduces dominance violations, and also changes choice patterns in situations where there is no dominant option. Choice patterns under feature-based menus can be most easily rationalized by models of heuristic choices, such as minimizing premium or deductible. With the decision aid, though, significantly more people have choice patterns that are better explained by expected utility theory. We compare our distribution-based approach to an alternative of providing estimates of the expected value of costs, which is the most common decision-support available in most insurance markets. Providing expected values affects choices in a similar direction as our consequence-based approach, but in a more muted fashion, and is only about half as effective at reducing dominance violations.","PeriodicalId":342152,"journal":{"name":"DecisionSciRN: Rational Decision-Making (Topic)","volume":"1 ","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133912390","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Behavioral Tourism Economics","authors":"Matteo Maria Cati","doi":"10.2139/ssrn.3685059","DOIUrl":"https://doi.org/10.2139/ssrn.3685059","url":null,"abstract":"Recently, many applications of behavioral economics (BE) have arisen from the union of psychology and of economics in many areas including product marketing (Thaler (2015), policy design (Madrian (2014), and Howlett (2019). Some examples are nudge units, which prestigious international institutions such as OECD (2017) or governmental ones (the Behavioral Insight Team (BIT) of the UK Government or the Behavioral Economic Team of the Australian Government (BETA) have established. <br><br>This article first presents a systematic treatment of the main contributions of the literature on the subject with particular reference to heuristics, Kahneman (2003) and Shah and Oppenheimer (2008), and the cognitive biases Ariely (2008) and about its future trends Stjepanovic and Mihic (2018). Secondly, this paper considers real world situations to study the feasibility of BE as an instrument for describing the decision making process for tourists, entrepreneurs in the tourism sector, and how BE is used for marketing tourism products and policy design in the tourism sector. <br><br>For this purpose, three case studies are examined as follows: <br><br>1. ‘Loss Aversion’ bias can affect decision-making in the tourism sector (tourists tend to give more emphasis on what may go wrong and prefer the default option rather than risk a little and choose something new); <br><br>2. ‘Scale Perception Bias’ in Tourist Satisfaction Surveys can give biased results and negatively affect entrepreneurs choices; <br><br>3. ‘Nudge approach’ (Thaler and Sunstein (2008) and Sunstein and Reisch (2017)) can is used to lessen the environmental impact of over tourism. <br><br>Those instances, of what I label as Behavioral Tourism Economics on the basis of the literature on the topic (Nikolova (2019)), will show that the consideration of behavioral issues into the study of Tourism Economics will increase the explanatory power of traditional models. <br>","PeriodicalId":342152,"journal":{"name":"DecisionSciRN: Rational Decision-Making (Topic)","volume":"130 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132593259","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Leilei Shi, Bingtuan Wang, Xinshuai Guo, Honggang Li
{"title":"A Price Dynamic Equilibrium Model with Trading Volume Weights Based on a Price-Volume Probability Wave Differential Equation","authors":"Leilei Shi, Bingtuan Wang, Xinshuai Guo, Honggang Li","doi":"10.2139/ssrn.3496068","DOIUrl":"https://doi.org/10.2139/ssrn.3496068","url":null,"abstract":"Guided by a price-volume probability wave differential equation in a new mathematical method, we study intraday market dynamic equilibrium in stock market. We select intraday cumulative trading volume distribution over a price range for individual mental representation and determine a price equilibrium point by the maximum volume utility price. We propose the hypothesis that a stock price can deviate away from the equilibrium point in momentum and restore to it in reversal, and the volume distribution embodies market dynamic equilibrium. Then, we examine it by a set of explicit price dynamic equilibrium models with trading volume weights from the differential equation against a large number of the price-volume distribution using tick-by-tick high frequency data in Chinese stock market in 2019. It holds true. We can infer that the theory is applied for a broader scope because it embraces core mathematical components in expected utility theory, prospect theory, and reflexivity theory.","PeriodicalId":342152,"journal":{"name":"DecisionSciRN: Rational Decision-Making (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-08-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129999733","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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