This book offers a definitive and wide-ranging overview of developments in behavioral finance over the past ten years. In 1993, the first volume provided the standard reference to this new approach in finance--an approach that, as editor Richard Thaler put it, "entertains the possibility that some of the agents in the economy behave less than fully rationally some of the time." Much has changed since then. Not least, the bursting of the Internet bubble and the subsequent market (...) decline further demonstrated that financial markets often fail to behave as they would if trading were truly dominated by the fully rational investors who populate financial theories. Behavioral finance has made an indelible mark on areas from asset pricing to individual investor behavior to corporate finance, and continues to see exciting empirical and theoretical advances. Advances in Behavioral Finance, Volume II constitutes the essential new resource in the field. It presents twenty recent papers by leading specialists that illustrate the abiding power of behavioral finance--of how specific departures from fully rational decision making by individual market agents can provide explanations of otherwise puzzling market phenomena. As with the first volume, it reaches beyond the world of finance to suggest, powerfully, the importance of pursuing behavioral approaches to other areas of economic life. The contributors are Brad M. Barber, Nicholas Barberis, Shlomo Benartzi, John Y. Campbell, Emil M. Dabora, Daniel Kent, François Degeorge, Kenneth A. Froot, J. B. Heaton, David Hirshleifer, Harrison Hong, Ming Huang, Narasimhan Jegadeesh, Josef Lakonishok, Owen A. Lamont, Roni Michaely, Terrance Odean, Jayendu Patel, Tano Santos, Andrei Shleifer, Robert J. Shiller, Jeremy C. Stein, Avanidhar Subrahmanyam, Richard H. Thaler, Sheridan Titman, Robert W. Vishny, Kent L. Womack, and Richard Zeckhauser. (shrink)

This paper presents and illustrates the concept of sustainable corporate finance. Sustainability is a well-established concept in the disciplines of environmental economics and business ethics. The paper uses a broader definition of what is called the firm to pinpoint sustainability to the finance literature. The concept of sustainable finance is compared to traditional and behavioral finance. Four criteria are used to systematically analyze the basic differences. First on the order is the theory of the firm: (...) the definition of the firm is reconsidered by integrating behavioral aspects and by expanding financial analysis to a three-dimensional goal setting. Secondly, a closer look is taken at the assumed behavior of economic agents and its consequences for the applied methodology. The shareholders paradigm is discussed against the background of growing stakeholder importance. Finally, the fourth criterion deals with the different ethical framework and its implication for financial behavior. (shrink)

The study aimed to investigate the impact of behavioral biases on herding for Islamic financial products with the mediation of shariah literacy. An adopted questionnaire from several published studies was used to collect data. The data were collected from 410 respondents and were analyzed with SmartPLS. The results for the direct impact showed that self-attribution, illusion of control, and information availability have a positive and significant impact on herding for Islamic financial products while shariah literacy showed an insignificant impact (...) on herding. The results for mediation showed that previously significant and positive impact turned to insignificant when shariah literacy was introduced as mediating variable between the illusion of control, self-attribution, information availability, and herding. From a theoretical perspective, this study would contribute to the existing body of knowledge of financial decision making from shariah literacy point-out. On the other hand, the findings of this study may be useful for investors to avoid herding in the Islamic financial markets. The authors synthesize the contribution made by behavioral finance studies in extending the knowledge of herding behavior in Islamic financial products with a mediating role of shariah literacy. The key limitation of the study includes data that were collected from three districts of Punjab, Pakistan. (shrink)

Psychological observations are by now well integrated into economics, especially in the theory of finance, as can also be seen in the Nobel Prize awarded to Thaler. On the contrary, Simon’s attempt to reforge economic theory on the paradigm of bounded rationality failed. Starting from the birth of the neoclassical paradigm, we’ll describe the attempt to give it psychological foundations with a direct measurement of utility, then the axiomatic turn of the paradigm and its first anomalies. We’ll then sum (...) up the debate on rationality, taking place in the group of economists led by Simon, which brought to the rational expectations hypothesis. Finally, we’ll discuss the development of behavioral economics and its progressive acceptance in economic theory. This historical reconstruction allows us to understand the actual hard core of the neoclassical paradigm and the growing need of the paradigm for practical flexibility that determines how to choose arguments, methods and evidence that can be useful to its development, including psychological ones. (shrink)

Corporate governance and finance are dynamic academic fields that offer myriad opportunities for business ethics analysis. Within the corporate governance triad in recent years, shareholders have increased their power over boards of directors and executives through both regulation and movements to change corporate by-laws. The impact of board characteristics on firm performance has proven elusive, leading to questions concerning board processes and individual director beliefs and behaviors. At the same time, CEOs have lost considerable power, leaving many struggling to (...) regain their control and maintain their compensation levels, while others adopt a stewardship approach to their posts. In the field of finance, the recent financial debacle has led to a reexamination of financial regulation and of the fundamental nature and purpose of the industry. All of these issues provide business ethicists fodder for investigation and analysis. (shrink)

The efficient markets hypothesis has been the central proposition in finance for nearly thirty years. It states that securities prices in financial markets must equal fundamental values, either because all investors are rational or because arbitrage eliminates pricing anomalies. This book describes an alternative approach to the study of financial markets: behavioral finance. This approach starts with an observation that the assumptions of investor rationality and perfect arbitrage are overwhelmingly contradicted by both psychological and institutional evidence. In (...) actual financial markets, less than fully rational investors trade against arbitrageurs whose resources are limited by risk aversion, short horizons, and agency problems. The book presents and empirically evaluates models of such inefficient markets. Behavioral finance models both explain the available financial data better than does the efficient markets hypothesis and generate new empirical predictions. These models can account for such anomalies as the superior performance of value stocks, the closed end fund puzzle, the high returns on stocks included in market indices, the persistence of stock price bubbles, and even the collapse of several well-known hedge funds in 1998. By summarizing and expanding the research in behavioral finance, the book builds a new theoretical and empirical foundation for the economic analysis of real-world markets. (shrink)

This paper examines the normative ideas flowing from the contemporary theories that make up the New Finance. These theories include the Irrelevance Theorem, Efficient Market Hypothesis, Capital Asset Pricing Model, Options Pricing Model, and Agency Theory. The behavioral consequences that would ensue if everyone took the normative precepts of the New Finance seriously are subjected to a Kantian analysis to determine their ethical implications. It is concluded that the corporate world in the New Finance is a (...) place where the firm can select any operating and financial strategies that it wishes, and the investors will respond immediately through a combination of homemade portfolio diversification, clever option positions, and carefully constructed agency relationships, all of which results in a pervasive nihilism. Recommendations are offered on how these features of the New Finance might be avoided or moderated. (shrink)

The all too common sunk cost effect is apparent when an investor influenced by what has been spent already persists in a venture, committing further resources or foregoing more profitable opportunities, when the economically rational action is to quit. Less common but arguably just as much a sunk cost effect is the mistake of giving up on a failed or failing venture too readily, sometimes out of nothing but pique at what has been lost, or perhaps through the more subtle (...) psychological forces posited by Kahneman, Tversky, Thaler and others within prospect theory and related work on ``mental budgeting''. Two case examples are considered, wherein decision makers dissatisfied with the results of their investments, and having lost money, appear to compound their losses by selling out at prices less than their own estimates of the remaining financial worth of the failed assets. These decisions are evaluated from the perspectives of both behavioral and prescriptive economics, and are found to have possible explanations in both. Their prescriptive rationale assumes a portfolio theory of investment decisions, and is demonstrated within both expected utility (economics) and mean-variance (finance) frameworks. (shrink)

Economic small group research points to groups as more rational decision-makers in numerous economic situations. However, no attempts have been made to investigate whether groups are affected similarly by behavioral biases that are pervasive for individuals. If groups were also able to more effectively avoid these biases, the relevance of biases in actual economic contexts dominated by group decision-making might be questioned. We consider the case of anchoring as a prime example of a well-established, robust bias. Individual and group (...) biasedness in three economically relevant domains are compared: factual knowledge, probability estimates and price valuations. In contrast to previous anchoring studies, we find groups to successfully reduce, albeit not eliminate, anchoring in the factual knowledge domain. For the other two domains, groups and individuals are equally biased by external anchors. Group cooperation thus reduces biases for predominantly intellective tasks only, while no such reduction is achieved when judgmental aspects are involved. (shrink)

Supply chain financing guaranteed by third-party logistics firms is an effective way to solve the financing difficulties of small and medium-sized enterprises. Studies have explored factors that affect the willingness of supply chain financial credit providers under guarantee of 3PL firms. However, whether the scale of 3PL firms will affect the bank’s credit decision has not been studied, as well as the neural processing of credit decisions. To clarify these issues, this study extracted behavioral and event-related potentials data when (...) participants performed a selection task of judging whether to grant credit to guaranteed financing-seeking enterprises according to the large or small scale of the 3PL guaranteeing firms. The behavioral results showed that under the condition of a large-scale 3PL guaranteeing firm, the willingness to provide credit to SMEs was higher than that under the condition of a small-scale 3PL guaranteeing firm. This finding indicates there was credit scale discrimination against 3PL guaranteeing firms in supply chain finance. The ERP results showed that compared with the condition of a large-scale 3PL guaranteeing firm, a greater N2 amplitude was induced under the condition of a small-scale 3PL guaranteeing firm, which indicated that credit decision makers experienced greater perceived risk and more decision-making conflict. In contrast, a larger LPP amplitude was detected under the condition of a large-scale 3PL guaranteeing firm, which indicated that large-scale 3PL guaranteeing firms received more positive comments and more positive emotions from credit decision makers than small-scale 3PL guaranteeing firms. Based on these results, this study reveals the cognition process of credit decision makers regarding the impact of the 3PL guaranteeing firm scale on the willingness to provide credit in supply chain finance and explains the theory of credit scale discrimination from the perspective of decision neuroscience. (shrink)

Behavioral science research in American universities was promoted and influenced by philanthropic foundations. In the 1920s and 1930s, Rockefeller philanthropies in particular financed behavioral science research projects that promised to fulfill their mandates to `improve mankind', mandates that foundation officers transformed into an informal, loosely defined human engineering effort. Controlling behavior, especially sexual and social `dysfunction', was a major priority. The behavioral scientists at Yale University, led by president James R. Angell and `psychobiologist' Robert M. Yerkes, tapped (...) into foundation largesse by crafting research programs that promised to contribute to the `welfare of mankind' through the investigation and control of sexual and social behavior. Foundation officers supported Yerkes' primate research because they accepted his premise that analyzing chimpanzee sexual behavior would yield valuable insights into the evolutionary underpinnings of human development and would thus give investigators the necessary information to ameliorate dysfunction. Between 1925 and 1940, philanthropic foundations contributed approximately $7 million to support the Yale Institute of Human Relations and the affiliated Yerkes Laboratories of Primate Biology. Yet, disappointment with the results of the Yale appropriations ultimately contributed to foundation officers turning away from behavioral sciences and toward biological sciences as they continued their efforts to improve mankind through human engineering. This article examines the interaction between foundation officers and Yale behavioral scientists to illustrate how scientific entrepreneurs successfully crafted rationales about human sexuality to solicit funds, how philanthropic foundation officers became enmeshed in the behavioral science research projects that they funded, and how a cooperative human engineering effort at Yale developed in the 1920s and unraveled in the 1930s. (shrink)

Public comments criticizing the honesty and trustworthiness of Professionals in Finance (PIFs) are commonly seen as a way to motivate them towards engaging in more socially responsible business practices. However, the link between public views of this professional group, the self-views of individual group members, and their motivation to engage in Corporate Social Responsibility (CSR) activities has not been empirically examined. In this research, we draw on Social Identity Theory (SIT) and the Behavioral Regulation Model for social evaluation (...) (BRM) to examine how the self-views of individual group members relate to perceived characteristics of their professional group, indicating Competence and Morality. In two studies (N = 123, 191) we examined whether the self-views of high-profile and general PIFs are affected by other people's perceptions of the honesty and trustworthiness of this professional group. The results offer support for our reasoning derived from SIT and the BRM. In both studies, we first demonstrate that public concerns about the group's lack of honesty and trustworthiness impact on the moral self-views of financial professionals. Subsequently, we employ an experimental design to reveal that reinforcing moral criticism leveled at the group only reduces the motivation of individual group members to engage in CSR activities, while group-level moral affirmation enhances this motivation. The results of both studies converge to demonstrate how public critique on the moral behavior of their professional group relates to the self-views and behavioral motives of PIFs. We consider the theoretical and practical implications of these findings. (shrink)

The concept of organizational stigma has received significant attention in recent years. The theoretical literature suggests that for a stigma to emerge over a category of organizations, a “critical mass” of actors sharing the same beliefs should be reached. Scholars have yet to empirically examine the techniques used to diffuse this negative judgment. This study is aimed at bridging this gap by investigating Goffman’s notion of “stigma-theory”: how do stigmatizing actors rationalize and emotionalize their beliefs to convince their audience? We (...) answer this question by studying the stigma over the finance industry since 2007. After the subprime crisis, a succession of events put the industry under greater scrutiny, and the behaviors and values observed within this field began to be publicly questioned. As an empirical strategy, we collected opinion articles and editorials that specifically targeted the finance industry. Building on rhetorical analysis and other mixed methods of media content analysis, we explain how the stigmatizing rhetoric targets the origins of deviant organizational behaviors in the finance industry, that is, the shareholder value maximization logic. We bridge the gap between rhetorical strategies applied to discredit organizations and ones used to delegitimize institutional logics by drawing a parallel between these two literatures. Taking an abductive approach, we argue that institutional contradiction between field and societal-level logics is sufficient, but not necessary to generate organizational stigma. (shrink)

Adopting fair value measurement may bring more earnings fluctuations and induce irrational psychology and radical financing behavior of managers. Based on behavioral corporate governance theory, using the sample of Chinese A-share nonfinancial listed companies during 2007–2017, this paper empirically examines the regulatory effect of fair value measurement, that is, whether fair value measurement affects the company's financing decisions when managers have irrational psychological characteristics, i.e., overconfidence. The study found that overconfident managers of the company that have fair value measurement (...) assets will be more aggressive for debt decisions, indicating that fair value measurement has a positively regulatory effect on overconfident managers. (shrink)

Since the concept of “nudge” was introduced in 2008 by Thaler and Sunstein, proposing that small interventions based on changes in choice architectures can alter people’s behavior and make it easier for them to achieve their desired goals, the application in public policy of behavioral economics has gained significant attention. This has led to the emergence of different types of policies based on behavioral insights, which have been used in a variety of areas, including health or finance, (...) with the goal of promoting well-being and addressing social and economic issues. After providing a basic theoretical background as a frame of reference to understand gender violence, this study explores the use of tools from the field of behavioral economics as it is applied in public policy. Regulatory (paternalistic) and non-regulatory (libertarian) interventions based on behavioral insights will be considered: nudges, boosts, shoves, budges, or sludge audits, are examined as potential interventions to use in matters related to this type of violence. After evaluating these behavioral policy instruments and their potential effectiveness, the limitations of the behavioral perspective are recognized, and the need for a multifaceted approach to combating gender violence is acknowledged. The article concludes by arguing that public policies addressing gender violence should not only utilize behavioral tools but should also incorporate strategies related to education, legislation, and social norms. (shrink)

Emerging adult newlywed couples often experience many demands on their time, and three common problems may surface as couples try to balance these demands—problems related to finances, sleep, and sex. We used two waves of dyadic data from 1,001 emerging adult newlywed couples to identify four dyadic latent profiles from husbands’ and wives’ financial management behaviors, sexual satisfaction, and sleep quality: Flounderers, Financially Challenged Lovers, Drowsy Budgeters, and Flourishers. We then examined how husbands’ and wives’ marital satisfaction, in relation to (...) profile membership, varied at a later wave. We found that Financially Challenged Lovers and Flourishers had significantly higher marital satisfaction than Drowsy Budgeters and Flounderers. Whereas, Financially Challenged Lovers and Flourishers did not differ in terms of marital satisfaction, Drowsy Budgeters seemed to have slightly higher marital satisfaction than Flounderers for wives only. However, we did not find evidence that these connections meaningfully differed by sex. Implications for the efforts of clinicians and educators are discussed. (shrink)

Abstract“Comprehensive Healthcare for America” is a largely single-payer reform proposal that, by applying the insights of behavioral economics, may be able to rally patients and clinicians sufficiently to overcome the opposition of politicians and vested interests to providing all Americans with less complicated and less costly access to needed healthcare.

Prospect theory is increasingly used to explain deviations from the traditional paradigm of rational agents. Empirical support for prospect theory comes mainly from laboratory experiments using student samples. It is obviously important to know whether and to what extent this support generalizes to more naturally occurring circumstances. This article explores this question and measures prospect theory for a sample of private bankers and fund managers. We obtained clear support for prospect theory. Our financial professionals behaved according to prospect theory and (...) violated expected utility maximization. They were risk averse for gains and risk seeking for losses and their utility was concave for gains and convex for losses. They were also averse to losses, but less so than commonly observed in laboratory studies and assumed in behavioral finance. A substantial minority focused on gains and largely ignored losses, behavior reminiscent of what caused the current financial crisis. (shrink)

This study introduces a dual-channel supply chain including a supplier and a retailer with capital constraints, in which the retailer can apply for the trade credit financing from the supplier. This work investigates the effects of two typical behaviors, free riding behavior and consumer switching behavior, on inventory, ordering, and sales effort decisions in decentralized and centralized decision situations with stochastic demand. In order to achieve the optimal performance in the centralized system, this research designs a partial buyback contract to (...) coordinate the supply chain. Furthermore, numerical analysis is provided to test the feasibility of the model. The results indicate that in the dual-channel supply chain with the above two behaviors, the optimal sales effort level, optimal order quantity, the optimal offline, and online profits under the centralized decision-making are more than those under decentralized scenario, except for the optimal inventory level; the increase of the offline consumer switching rate will lead to the reduction of the offline order quantity and the offline expected profit and raise the online inventory level and the online expected profit; the increase of the online consumer switching rate will raise the offline order quantity and the offline expected profit but has no significant impact on the online inventory level and the online expected profit; the increase of the free riding coefficient of the supplier, no matter whether in decentralized or centralized systems, will reduce the offline sales effort level, the offline expected profit, and the online expected profit and raise the inventory level. Finally, this work provides some managerial implication. (shrink)

Behavioral Finance is an evolving field that studies how psychological factors affect decision making under uncertainty. This study seeks to find the influence of certain identified behavioral financial biases on the decision-making process of investors in developing countries. This research examines the moderating effect of Information asymmetry on the two most important and commonly used cognitive biases, namely Anchoring bias and Optimism bias and decision making and investigates whether Risk perception mediates the relationship between them or not. (...) Quantitative research has been conducted using a structured questionnaire for data collection. After completing the pilot study, a questionnaire was designed and sent to investors via online channels. Data has been collected from 317 real estate investors. Mediation analysis has been performed using model 4 and moderation analysis by applying model 15 of Process Macros for the interaction effect. The study investigated that both cognitive biases have a significant positive effect on investors’ decisions and Risk perception also significantly mediates the relationship between them. Consistency with other studies suggests that Information asymmetry has a significant moderating effect. The proposed conceptual model provides insight into how investors’ decisions are influenced by behavioral biases in the real estate sector and enhances the understanding of cognitive biases in the real estate sector. This study is recommended for real estate investors and policymakers of emerging and developed countries. The current study is the first of its kind, focusing on cognitive biases on investment decisions with mediating role of Risk perception and the moderating effect of Information asymmetry. (shrink)

If the classic history of events is written in the spirit of winners, the approaches of collective mental reveal that wars are disasters and collective traumas for all of the involved communities. In the following pages we will present the decantation in long term memory of a relevant fact – the deportation of German ethnics from Romania to forced labor in the Soviet Union. On the base of a secret directive, sent by Stalin, approximately 75 000 Romanian citizens of German (...) ethnicity were forced to work three-four years, some even more, at the reconstruction of the “Soviet country”. The source of the decision, its place and extent, and also the way to atone for the “collective guilt” was hidden from the deportees. At the end of the punishment, they were forbidden to speak about the deportation in the public and private space. When they returned home, all of their material evidence of the years spent in the Soviet Union was confiscated and destroyed. In a project financed by the European Union, 50 interviews with survivors of deportation and their descendants were published. The resulting accounts allowed this psycho-sociological analysis of the memory of deportation, centered on ethical and religious aspects of the behaviors and attitudes of victims and their descendants. (shrink)

Behavioural spillovers refer to the influence that a given intervention targeting behaviour 1 exerts on a subsequent, non-targeted, behaviour 2, which may or may not be in the same domain (health, finance etc.) as one another. So, a nudge to exercise more, for example, could lead people to eat more or less, or possibly even to give more or less to charity depending on the nature of the spillover. But what if spillovers also operate backwards; that is, if the (...) expectation of behaviour 1 influences behaviour 0 that precedes it? For example, a person may form an intention to exercise prompted by a policy intervention but overeat at present as a result. We define such a possibility as a "spillunder". In the proposed article, we critically review the few papers that we have identified through a narrative literature review which have demonstrated spillunder effects to date, and we propose a conceptual framework. Based on evidence about the human mind and behaviour from psychology and economics, we argue that spillunder effects may be more common than the limited empirical findings suggest. We propose six representative mechanisms through which the prospect of behaviour 1 may impact behaviour 0: executive functions, moral licensing and moral cleansing, emotion regulation, energization, construal level, and savouring and dread. We further discuss the policy and practical implications of spillunder effects and examine methodological issues that need to be considered when empirically testing these effects. As with our earlier paper on spillovers, we aim to motivate other behavioural scientists to research behavioural spillunders more systematically and extensively, and to prompt decision makers to consider these effects when designing behavioural interventions. (shrink)

Inappropriate social interactions of entrepreneurs can generate negative effects in the peer-to-peer lending market. To address this problem and assist peer-to-peer entrepreneurs in customizing their online interaction strategies, we used the cutting-edge cognitive-experiential self-system conceptual model and studied the relationship between peer-to-peer entrepreneurs’ interactions and financing levels. Online interactive information was categorized as emotional or cognitive, adding the moderator of entrepreneur popularity, and the effect of these interactions on individual investors was analyzed. We found that the entrepreneurs’ online interactive information (...) affected psychological perception of entrepreneurs and their corresponding brand image. The interaction between popularity and interactive information types was significant. The findings imply that less popular entrepreneurs should engage in emotional interactions, while more popular entrepreneurs should choose cognitive interactions. Online interaction created comparative advantages in the financing activities of peer-to-peer companies. These results expand understanding of the psychological facets of the consumer–brand relationship in the digital world, and extend the current literature. This study also highlights key areas of learning and application for both practitioners and scholars of organizational psychology. (shrink)

The view from inside improves our understanding on market failure and regulation failure in financial market. The EMH fails to understand the causes of financial bubbles and crashes. Behavioral finance introduces insight from psychology. The heuristic and biases approach studied behavioral asymmetry in static environment that leads to market irrationality and information distortion. The fast and frugal thinking in decision-making further explore more complex situation under changing environment. They argue that soft-paternalistic regulation is needed under information overload. (...) The most critical issue is information uncertainty and complexity. Lacking information in frequency domain is the main barrier in managing business cycles. Data form inside reveals current limitations of financial data mainly in the short-term price changes. Microstructure studies show that pricing process is shaped by trading rules. Quantitative analysis reveals severe instability in high frequency trading and derivative market. Feasible regulation should aim to encourage new technology and sustainable growth, rather than protect obsolete technology and short-term speculation. The most fundamental challenge to sustainable economic order is the excessive size of the derivative markets that crowding out investment in real economy. This is a more severe issue than the climate change. (shrink)

Consumer driven and globally competitive financial markets are crucial for the future prosperity of the Finnish society (Laitamäki, Lehti and Paasio 1996). The largest transfer of wealth in history is currently taking place as Baby Boomers (born 1946-1964) prepare for their retirement and inherit the assets of the previous generation. Due to cognitive limitations and emotional biases these consumers don’t always make rational decisions with financial services. This conceptual study addresses irrational financial consumer behavior and its impact on the Finnish (...) business and society. The study focuses on two research questions: 1) What type of behavioral finance concepts explain irrational consumer behavior? 2) What are the implications of these behaviors for the Finnish business and society? The purpose of this study is to assist individual consumers, business leaders and policy makers in making better financial services related decisions in Finland. The need for better decisions has been illustrated during Finnish and international financial crises including the US sub-prime loan turmoil in 2008. (shrink)

Existing research shows that people can improve their decision skills by learning what experts paid attention to when faced with the same problem. However, in domains like financial education, effective instruction requires frequent, personalized feedback given at the point of decision, which makes it time‐consuming for experts to provide and thus, prohibitively costly. We address this by demonstrating an automated feedback mechanism that allows amateur decision‐makers to learn what information to attend to from one another, rather than from an expert. (...) In the first experiment, eye movements of N = 100 subjects were recorded while they repeatedly performed a standard behavioral finance investment task. Consistent with previous studies, we found that a significant proportion of subjects were affected by decision bias. In the second experiment, a different group of N = 100 subjects faced the same task but, after each choice, they received individual, machine learning‐generated feedback on whether their pre‐decision eye movements resembled those made by Experiment 1 subjects prior to good decisions. As a result, Experiment 2 subjects learned to analyze information similarly to their successful peers, which in turn reduced their decision bias. Furthermore, subjects with low Cognitive Reflection Test scores gained more from the proposed form of process feedback than from standard behavioral feedback based on decision outcomes. (shrink)

This paper comments on the history of the search for better election procedures, then discusses dimensions relevant to the evaluation and comparison of ompeting procedures. Its aim is to indicate the variety of factors involved in the search and to suggest an integrative perspective that could aid further research. The dimensions examined include the nomination process, agenda formation, candidate strategy, voter psychology and strategy, ballot forms and methods of aggregation, evaluative aspects of aggregation, incentive compatibility, costs and financing, and institutional (...) effects. (shrink)

We extend the deceptive advertising model of Piccolo et al. :611–624, 2015) to a framework in which consumers may be loss averse. There are two sellers, competing on prices and offering experience goods with some differences in quality. Prospective customers may be harmed by deceptive advertising: a marketing practice that can induce them to make bad purchases. We show that although deceptive advertising occurs depending on the degree of consumers’ loss aversion, this behavioral bias does not reflect on firms’ (...) prices. Nevertheless, the presence of loss-averse consumers crucially changes the optimal deterrence rule that a Public Authority should adopt against false claims and misleading advertising. Unlike Piccolo et al., in this more general model, strong enforcements may improve the buyer welfare according to the degree of loss aversion. (shrink)

This paper presents a very simple model in which situational cues associated with a particular consumption good compel an agent—who may have otherwise been “thinking about” something else—to consider the decision to consume that good. Within this framework, it is shown how an endowment effect and a present bias can arise through a common mechanism. The analysis points to a novel, contributing role for inattention in understanding both of these behavioral anomalies while also speaking to evidence that they are (...) often cue-induced. (shrink)

Often in insurance decision making, there are risk factors on which the insurer has an informational advantage over the consumer. But when the insurer sets and posts a premium for the consumer to consider, the consumer can potentially use the premium as an informational cue for the loss probability, and thereby to reduce the insurer’s informational advantage. We study, by means of a behavioral model, how consumers would use the premium as an informational cue in such contexts. The belief (...) formation process in our model assumes that both prior knowledge and the premium might have an impact on the consumer’s estimate of the loss probability. Moreover, the premium impacts the estimate through an anchoring-and-adjustment process. The model potentially leads to violations of rational expectations, with which the consumer overestimates the loss probability beyond what could be inferred from the premium, given the premise that the insurer must seek to break even or earn an expected profit. Our model analysis moreover implies that the frequency of such violations is non-increasing as the premium increases. Last, the model implies a generally inverted-U relationship between insurance demand and the premium so that the demand is upward sloping at low premium levels and downward sloping at high premium levels. A pilot field study and a laboratory experiment provide robust evidence for our model implications and calibrations for its parameters. (shrink)

The general importance of negotiations and bargaining as means of decision making has given rise to considerable research within two broad paradigms. The behavioral paradigm has attempted to discover rationality in specific situations in order to generalize. The formal paradigm has assumed a general rationality which could be applied to specific problems. This strict dichotomy imposes unnecessary restrictions on the use of formal approaches to structure, represent, and support negotiators. Logic-based approaches, such as rule-based formalism, make it possible to (...) blend unique and specific aspects of a problem, with general reasoning mechanisms and rationality postulates. This paper introduces rule-based formalism and discusses its advantages and disadvantages. It attempts to present its ability to represent complex decision processes and to reason using formal structures. The approach is illustrated with several simple examples. (shrink)

Anger has traditionally been associated with aggression and antagonistic behavior. A series of studies revealed that experiences of third-party anger can also lead to prosocial behavior. More specifically, three studies, hypothetical scenarios as well as a behavioral study, revealed that third-party anger can promote compensation of the victim. The results also showed a preference for such prosocial behaviors over antagonistic behaviors. We conclude that behaviors stemming from anger, whether antagonistic or prosocial, are reactions to inequity, albeit determined by the (...) constraints of the situation. (shrink)

Previous papers have introduced the idea of a Dialectical Inquiring System (DIS), i.e., an Information System which for any issue presents strong pro and con arguments. The previous papers showed how the DIS could be made scientifically operational in terms of Russell Ackoff's Behavioral Theory of Communication. In this paper we show how the DIS can be represented in terms of Egon Brunswik's Lens Model. The Brunswik Lens Model formulation is most appropriate for the design of Behavioral Science (...) experiments. It also illuminates further properties of the DIS. We discuss both the use and current limitations of the model in terms of an example currently under experimental investigation. The paper, in effect, argues vigorously for a new methodology of science that is founded on anexplicit, systematic, andcontrolled use of conflict. (shrink)

Imposing “sin” taxes has been the preferred way governments tried to discourage the over-consumption of temptation goods for decades. However numerous evidence shows that consumers exhibit behavioral biases which can affect their reaction to taxes. This paper investigates a potential bias and how it affects demand for temptation: financial worries associated with poverty have been shown to shift attention towards pressing needs, often at the expense of forward-looking decisions. In an online experiment with UK participants, we randomly induce financial (...) worries and ask participants to allocate a budget between basic necessities and temptation goods in an experimental market. We randomly impose “taxes” on temptation by increasing its price. We find that, in the absence of any tax, inducing financial worries lowers demand for temptation, effect stronger for lower-income participants. However, when financial concerns are salient, increasing the tax does not lower demand among lower-income participants. While financial worries might protect against over-consumption of temptation in the absence of tax changes, they also might hurt the poor the most when additional taxes are introduced. (shrink)

The economic globalization process has integrated different competitive markets and pushes firms in different countries to improve their managerial and operational efficiencies. Given the recent empirical evidence for the benefits to firms and stakeholders of good corporate governance (CG) practice, it is expected that good CG practice would be a common strategy for firms in different countries to meet the increasingly intense competition; however, this is not the case. This study examines the differences in CG practices in firms across different (...) countries using the concept of ethical sensitivity. Through the regression analysis of 271 firms in 12 countries and regions, it is found that Hofstede’s cultural dimensions can explain the differences in CG practices. Furthermore, the results demonstrate the influence of culture on ethical sensitivity, which eventually determines the CG practices in different regions. (shrink)

Canonical economic agents act so as to maximize a single, representative, utility function. However, there is accumulating evidence that heterogeneity in thought processes may be an important determinant of individual behavior. This paper investigates the implications of a vector-valued generalization of the Expected Utility paradigm, which permits agents either to deliberate as per Homo economics, or to act impulsively. This generalized decision theory is applied to explain the crowding-out effect, irrational educational investment decisions, persistent social inequalities, the pervasive influence of (...) non-cognitive ability on socio-economic outcomes, and the dynamic relationships between non-cognitive ability, cognitive ability, and behavioral biases. These results suggest that the generalized decision theory warrants further investigation. (shrink)

This paper develops a model of individual decision-making under bounded rationality in which discretionary cognitive adjustment creates a durable stock that complements choice of action. While it increases utility, adjustment also entails a cost, because focusing attention optimally is effortful and mental resources are scarce. Associated behavioral phenomena are categorized based on whether the operative motivation in adjusting is forward-looking utility maximization or justification of prior action. The theory is in line with prior conceptions of cognitive dissonance, but also (...) offers a more empirically consistent explanation of the endowment effect, persuasive advertising, and sunk-cost effects than existing accounts. (shrink)

Economics bases the choice theory on the mental experiment that introduces the choice correspondence, which associates to every set of possible actions the subset of preferred actions. If some conditions are satisfied, then the choice correspondence implies a binary preference ordering on actions and an ordinal utility function. This approach applies both to decisions under certainty and decisions under uncertainty. The preference ordering depends on the consequence of actions. Under certainty, there is only one consequence to every action, while, under (...) uncertainty, many consequences are possible, associated with the states of the world. These consequences are represented by the action itself, the states of the world, and the corresponding outcomes. Current theories consider only outcomes, but some theories include state dependent preference. Preference for the action itself is not considered, but it might be relevant. The rationality of the theory is a different question from the rationality of the decision-maker. Moreover, the rationality of the theory may imply the rationality of a preference ordering, but this does not require the rationality of the decision-maker. It is only assumed that he/she behaves according to the calculation made by the theorist. The rationality of the preference ordering requires the rationality of the preference on outcomes, of the expectations on the events, and of their connection with the preference ordering on actions. The normative relevance of rational preferences is removed by the introduction of many alternative rational theories, which justify contrasting behaviors in identical situations. (shrink)

Discounting is a manifestation of behavioral impulsivity, which is closely related to self-regulation processes. The decision-making process for intertemporal choices is governed by the inhibition of impulses, which can influence both risk and time-related attitudes. This paper utilizes self-reported measures of risk, impatience, and impulsivity attitudes to examine their impact on the implicit discount rate used when weighing the current purchase cost against future energy savings of appliances. It analyzes and tests the interplay between these attitudes using specific functional (...) forms and causal models. The results highlight the role of risk, impatience and impulsivity on the discount rate and the biases that arise from omitting impulsive attitudes. In addition, other factors such as environmental and social preferences, attitudes, and financial constraints contribute to the implicit discount rate. (shrink)

Prospect theory emerged as one of the leading descriptive decision theories that can rationalize a large body of behavioral regularities. The methods for eliciting prospect theory parameters, such as its value function and probability weighting, are invaluable tools in decision analysis. This paper presents a new simple method for eliciting prospect theory’s value function without any auxiliary/simplifying parametric assumptions. The method is applicable both to choice under ambiguity (Knightian uncertainty) and risk (when events are characterized by objective probabilities). Our (...) new elicitation method is implemented in a simple paper-and-pencil experiment (via an iterative multiple price list format). This is one of the first experiments that elicits non-parametric prospect theory’s value function with salient rewards. The collected data generally confirm findings in the existing literature: the value function is S-shaped (concave in the gain domain and convex in the loss domain) though there is a weaker loss aversion on the aggregate level and a substantial heterogeneity in loss aversion on the individual level (41% loss averse, 6% loss neutral and 53% gain seeking). (shrink)

This study investigates and compares the impact of spiritual leadership on organizational citizenship behavior in finance and retail service industries to determine the possibility of generalizing and applying spiritual leadership to other industries. This study used multi-sample analysis of structural equation modeling. The results show that values, attitudes, and behaviors of leaders have positive effects on meaning/calling and membership of the employees, and further facilitate employees to perform excellent organizational citizenship behaviors, including the altruism of assisting colleagues and the (...) responsible conscientiousness toward organization. The effect of altruism toward colleagues is especially stronger. Finally, the effect of leaders’ values, attitudes, and behaviors on the spiritual survival of employees is stronger in retail than that in finance. (shrink)

Loss aversion can occur in riskless and risky choices. We present novel evidence on both in a non-student sample (660 randomly selected customers of a car manufacturer). We measure loss aversion in riskless choice in endowment effect experiments within and between subjects and find similar levels of average loss aversion in both. The subjects of the within study also participate in a simple lottery choice task which arguably measures loss aversion in risky choices. We find substantial heterogeneity in both measures (...) of loss aversion. Loss aversion in riskless choice and loss aversion in risky choice are strongly positively correlated, but on average riskless loss aversion is higher than risky loss aversion. We find that in both choice tasks, loss aversion increases in age, income, and wealth, and decreases in education. Our results provide novel supportive input to the debate about the reality of loss aversion. (shrink)

Post-conflict economies often prove daunting for foreign investors. Many of these nations are reaching out to diasporans, emigrants, and their descendants living abroad, for much-needed foreign investment capital. Little is known about why diasporans invest in their countries of origin. Recent scholarly inquiry regarding investment decision making has suggested that non-pecuniary, psychological concerns often motivate investment decisions. We develop a conceptual model identifying three types of investment return expectations — financial, emotional, and those related to social status — that may (...) drive diaspora investment interest. We contend that the psychological realities and social-status structure of the diaspora experience generate greater salience for non-pecuniary investment motivations, particularly when the origin country emerges from a period of conflict. We outline an agenda for future research and discuss the implications of our model for policies seeking to promote peace utilizing diaspora investment. (shrink)

Abstract There are two kinds of beliefs. If the ultimate objective is wellbeing (util- ity), the generated beliefs are “practical.” If the ultimate objective is truth, the generated beliefs are “scientific.” This article defends the practical/scientific belief distinction. The proposed distinction has been ignored by standard rational choice theory—as well as by its two major critics, viz., the Tversky/Kahneman program and the Simon/ Gigerenzer program. One ramification of the proposed distinction is clear: agents who make errors with regard to scientific (...) beliefs (e.g., the conjunction fallacy) should not be taken as committing irrationality—because they are most probably engaging the other kind of maximization, the pursuit of wellbeing. (shrink)