Posts in Category: paper

Paper: Heuristics for financial regulation

It simply wasn’t true that a world with almost perfect information
was very similar to one in which there was perfect information.
J. E. Stiglitz (2010). Freefall: America, free markets,
and the sinking of the world economy, p. 243

Hansjörg Neth, Björn Meder, Amit Kothiyal, Gerd Gigerenzer

Homo heuristicus in the financial world: From risk management to managing uncertainty

Abstract: What — if anything — can psychology and decision science contribute to risk management in financial institutions? The turmoils of recent economic crises undermine the assumptions of classical economic models and threaten to dethrone Homo oeconomicus, who aims to make decisions by weighing and integrating all available information. But rather than proposing to replace the rational actor model with some notion of biased, fundamentally flawed and irrational agents, we advocate the alternative notion of Homo heuristicus, who uses simple, but ecologically rational strategies to make sound and robust decisions. Based on the conceptual distinction between risky and uncertain environments this paper presents theoretical and empirical evidence that boundedly rational agents prefer simple heuristics over more flexible models. We provide examples of successful heuristics, explain when and why heuristics work well, and illustrate these insights with a fast and frugal decision tree that helps to identify fragile banks.  We conclude that all members of the financial community will benefit from simpler and more transparent products and regulations.

Paper: Melioration as rational choice

Maximization (…) is not a general explanatory principle for behavior. (…)
Melioration (…) is the dynamic process controlling allocation of time across response alternatives.
Herrnstein & Vaughan (1980). Melioration and behavioral allocation, p. 143+172

Chris R. Sims, Hansjörg Neth, Robert A. JacobsWayne D. Gray

Melioration as rational choice: Sequential decision making in uncertain environments

Abstract:  Melioration — defined as choosing a lesser, local gain over a greater longer term gain — is a behavioral tendency that people and pigeons share.  As such, the empirical occurrence of meliorating behavior has frequently been interpreted as evidence that the mechanisms of human choice violate the norms of economic rationality.  In some environments, the relationship between actions and outcomes is known. In this case, the rationality of choice behavior can be evaluated in terms of how successfully it maximizes utility given knowledge of the environmental contingencies.  In most complex environments, however, the relationship between actions and future outcomes is uncertain and must be learned from experience.  When the difficulty of this learning challenge is taken into account, it is not evident that melioration represents suboptimal choice behavior. 

Paper: Interactive coin addition

‘Can you do Addition?’ the White Queen asked.
‘What’s one and one and one and one and one
and one and one and one and one and one?’
‘I don’t know,’ said Alice. ‘I lost count.’
Lewis Carroll, Through the Looking-Glass, Chapter IX.

[Copyright, 1999–2014]:

Hans Neth and Steve Payne (2011): Interactive coin addition: How hands can help us think. Paper presented at CogSci2011.

Hansjörg Neth, Stephen J. Payne

Interactive coin addition: How hands can help us think

Abstract:  Does using our hands help us to add the value of a set of coins?

Paper: Competitive mate choice

Hansjörg Neth, Simeon Schächtele, Sulav Duwal, Peter M. Todd

Competitive mate choice: How need for speed beats quests for quality and harmony

Abstract:  The choice of a mate is made complicated by the need to search for partners at the same time others are searching. What decision strategies will outcompete others in a population of searchers? We extend previous approaches using computer simulations to study mate search strategies by allowing direct competition between multiple strategies, evaluating success on multiple criteria. In a mixed social environment of searchers of different types, simple strategies can exploit more demanding strategies in unexpected ways. We find that simple strategies that only aim for speed can beat more selective strategies that aim to maximize the quality or harmony of mated pairs.