Economists have always prided their work on having a unifying theoretical framework based on rational choice theory. However, data from controlled experiments, which provide theory the best chance to work, refute many of the rationality assumptions that economists make. The evidence against rational choice, as traditionally defined, has forced economists to rethink their traditional models. In this paper, evidence against rational choice and the ways in which behavioral economists have responded is reviewed.
The relatively new field of behavioral finance combines insights from cognitive psychology with traditional economic theory to explain why people often make seemingly irrational financial decisions.
We present here a selection of influential publications from our own team members which explore several key topics in this exciting and ground-breaking new area of inquiry.
Rationality and Utility - Economics & Evolutionary Psychology
Expert Financial Advice Neurobiologically ‘‘Offloads’’ Financial Decision-Making under Risk
Financial advice from experts is commonly sought during times of uncertainty. While the field of Neuro-economics has made considerable progress in understanding the neurobiological basis of risky decision-making, the neural mechanisms through which external information, such as advice, is integrated during decision-making are poorly understood. In this research, the neurobiological basis of the influence of expert advice on financial decisions under risk was investigated. These results support the hypothesis that one effect of expert advice is to ‘‘offload’’ the calculation of value of decision options from the individual’s brain.
The Highly Sensitive Brain
Theory and research suggest that sensory processing sensitivity (SPS), found in roughly 20% of humans and more than 100 other species, is a trait associated with greater sensitivity and responsiveness to the environment and to social stimuli. Self-report studies have shown that high-SPS individuals are strongly affected by others’ moods, but no previous study has examined neural systems engaged in response to others’ emotions. This research provides evidence that awareness and responsiveness are fundamental features of SPS, and show how the brain may mediate these traits.
Neural Correlates of Four Broad Temperament Dimensions
Four suites of behavioral traits have been associated with four broad neural systems: the 1) dopamine and related norepinephrine system; 2) serotonin; 3) testosterone; 4) and estrogen and oxytocin system. A 56-item questionnaire, the Fisher Temperament Inventory (FTI), was developed to define four temperament dimensions associated with these behavioral traits and neural systems. The questionnaire has been used to suggest romantic partner compatibility. The dimensions were named: Curious/Energetic; Cautious/Social Norm Compliant; Analytical/Tough-minded; and Prosocial/Empathetic.
Two Minds, Three Ways
Dual system and dual process views of the human mind have contrasted automatic, fast, and non-conscious with controlled, slow, and conscious thinking. This paper integrates duality models from the perspective of consumer psychology by identifying three relevant theoretical strands: Persuasion and attitude change (e.g. Elaboration Likelihood Model), judgment and decision making (e.g. Intuitive vs. Reflective Model), as well as buying and consumption behavior (e.g. Reflective-Impulsive Model).
Emergency Purchasing Situations: Implications for Consumer Decision-Making
This article introduces the Emergency Purchasing Situation (EPS) as a distinct buying context. EPSs stem from an unexpected event (unanticipated need or timing of a need), as well as high product importance, which are associated with a short time frame for consumer decision-making. This conceptual review integrates largely disconnected strands of research and theories relevant to EPSs and offers a series of independent propositions to understand how these situations might affect consumer decision-making, specifically heuristic versus reflective information processing in product evaluation.
You Cannot Gamble on Others
This paper tests whether strategic uncertainty employs circuits in the brain that encode risk and utility, or circuits that are involved in Theory of Mind (ToM). The authors compare participants’ decisions in a stag-hunt game with an equivalent choice between Bernoulli lotteries where the probabilities are equal to the mixed Nash equilibrium of the stag hunt game. The results suggest that individuals who mentalize the other person are more likely to be cooperative than those who do not.
Can Personality Type Explain Heterogeneity in Probability Distortions?
There are two regularities learned from experimental studies of choice under risk. The first is that most people weigh objective probabilities non-linearly. The second regularity, although less commonly acknowledged, is that there is a large amount of heterogeneity in how people distort probabilities. In this paper, the possibility that personality type is linked to probability distortions is explored. Using validated psychological questionnaires, participants are clustered into distinct personality types: motivated, impulsive, and affective. The results suggest that the observed heterogeneity in probability distortions may be explained by personality profiles, which can be elicited though standard psychological questionnaires.
THE BE GUIDE
The Behavioral Economics (BE) Guide is a leading publication in the behavioral sciences with contributions from both renowned thinkers in the field of behavioral economics and practitioners in applied behavioral science.