Archivio per giugno 2012



26
Giu
12

Testing Bounded Rationality against Full Rationality in Job Changing Behavior

See on Scoop.itBounded Rationality and Beyond

In this paper we question the hypothesis of full rationality in the context of job changing behaviour, via simple econometric explorations on microdata drawn from WHIP (Worker Histories Italian Panel). Workers’ performance is compared at the end of a three-year time window that starts when choices are expressed, under the accepted notion that the main driving forces of job change are future real wages and expected job quality. Bounded rationality suggests that individuals will search for new options capable to attain “satisfactory” targets (aspirations levels, standards, norms), based on conditions prevailing in their own local environments. Our empirical strategy consists of appropriately defining such environments (cells) and observing the ex-post individual performance in relation to the degree of dispersion, clustering and mobility within and between cells. Under full rationality the following are to be expected: high inter-cell mobility, large dispersion around the targets, and clustering in the vicinity of the efficiency frontier. None of the above expectations are confirmed in this exploration. Our conclusion is that workers behave according to principles of rationality that seem distant from those of “full rationality” assumed in the vast majority of contemporary empirical (and theoretical) studies. The idea of “bounded rationality” à la Simon provides a better fit to our observations.

See on ideas.repec.org

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26
Giu
12

Economics and psychology.Perfect rationality versus bounded rationality – Munich Personal RePEc Archive

See on Scoop.itBounded Rationality and Beyond

Classical mathematical algorithms often fail to identify in time when the international financial crises occur although, as the classical theory of choice would suggest, the economic agents are rational and the markets are or should be efficient and behave also rationally. This contribution does not pretend to give a complete answer to these questions, but it will highlight some well-known limits of the classical theory of rational choice and compare this theory of choice with the approach that seeks to combine economics and psychology and that has established itself as cognitive or behavioral economics. In particular, the present paper will focus on the juxtaposition of the concepts of perfect rationality and bounded rationality. It concludes with some references to the literature of behavioral finance which has given important contributions in explaining the behavior and the anomalies of financial markets.

See on mpra.ub.uni-muenchen.de

25
Giu
12

Antonio Damasio – On Consciousness | tools4mind

See on Scoop.itBounded Rationality and Beyond

Here is a wonderful and concise description of consciousness and the self. I am listening/reading by Antonio Damasio‘s book “Self Comes to Mind” and then found this video. I’d recommend the book. The video is a good preview.

See on www.tools4mind.com

23
Giu
12

Economics and psychology.Perfect rationality versus bounded rationality – Munich Personal RePEc Archive

See on Scoop.itBounded Rationality and Beyond

Classical mathematical algorithms often fail to identify in time when the international financial crises occur although, as the classical theory of choice would suggest, the economic agents are rational and the markets are or should be efficient and behave also rationally. This contribution does not pretend to give a complete answer to these questions, but it will highlight some well-known limits of the classical theory of rational choice and compare this theory of choice with the approach that seeks to combine economics and psychology and that has established itself as cognitive or behavioral economics. In particular, the present paper will focus on the juxtaposition of the concepts of perfect rationality and bounded rationality. It concludes with some references to the literature of behavioral finance which has given important contributions in explaining the behavior and the anomalies of financial markets.

See on mpra.ub.uni-muenchen.de

23
Giu
12

Behavioral Economics by Erik Angner, George Loewenstein :: SSRN

See on Scoop.itBounded Rationality and Beyond

Behavioral economics is the effort to increase the explanatory and predictive power of economic theory by providing it with more psychologically plausible foundations. Behavioral economics, which recently emerged as a bona fide subdiscipline of economics, raises a number of questions of a philosophical, methodological, and historical nature. This chapter offers a survey of behavioral economics, including its historical origins, results, and methods; its relationship to neighboring fields; and its philosophical and methodological underpinnings. Our central thesis is that the development of behavioral economics in important respects parallels the development of cognitive science. Both fields are based on a repudiation of the positivist methodological strictures that were in place at their founding and a belief in the legitimacy of making reference to unobservable entities such as beliefs, emotions, and heuristics. And both fields adopt an interdisciplinary approach, admitting evidence of many kinds and using a variety of methods to generate such evidence. Moreover, there are in fact more direct links between the two fields. The single most important source of inspiration for behavioral economists has been behavioral decision research, which can in turn be seen as an integration of ideas from cognitive science and economics. Exploring the parallels between the two endeavors, we attempt to show, can shed light on the historical origins of, and the specific form taken by, behavioral economics.

See on papers.ssrn.com

23
Giu
12

Darwin’s Mind: The Evolutionary Foundations of Heuristics and Biases by James Montier :: SSRN

See on Scoop.itBounded Rationality and Beyond

The catalogue of biases that cognitive psychologists have built up over the last three decades seem to have stem from one of three roots – selfdeception, heuristic simplification (including affect), and social interaction. This paper attempts to explore the evolutionary basis of each of these roots. The simple truth is that we aren’t adapted to face the world as it is today. We evolved in a very different environment, and it is that ancestral evolutionary environment that governs the way in which we think and feel. We can learn to push our minds into alternative ways of thinking, but it isn’t easy as we have to overcome the limits to learning posed by self-deception. In addition, we need to practice the reframing o

See on papers.ssrn.com

23
Giu
12

Option Traders Use (very) Sophisticated Heuristics, Never the Black–Scholes–Merton Formula by Espen Haug, Nassim Taleb :: SSRN

See on Scoop.itBounded Rationality and Beyond

Option traders use a heuristically derived pricing formula which they adapt by fudging and changing the tails and skewness by varying one parameter, the standard deviation of a Gaussian. Such formula is popularly called “Black–Scholes–Merton” owing to an attributed eponymous discovery (though changing the standard deviation parameter is in contra- diction with it). However, we have historical evidence that: (1) the said Black, Scholes and Merton did not invent any formula, just found an argument to make a well known (and used) formula compatible with the economics establishment, by removing the “risk” parameter through “dynamic hedging”, (2) option traders use (and evidently have used since 1902) sophisticated heuristics and tricks more compatible with the previous versions of the formula of Louis Bachelier and Edward O. Thorp (that allow a broad choice of probability distributions) and removed the risk parameter using put-call parity, (3) option traders did not use the Black–Scholes–Merton formula or similar formulas after 1973 but continued their bottom-up heuristics more robust to the high impact rare event. The paper draws on historical trading methods and 19th and early 20th century references ignored by the finance literature. It is time to stop using the wrong designation for option pricing.

See on papers.ssrn.com




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