ECONOMIC PSYCHOLOGY:
NEW METHODS AND FINDINGS
Friday 26th March 2010
De Vere Whites Hotel, Reebok Stadium
A workshop hosted by the Economic Psychology and Decision Research Group at the School of Health & Social Sciences of the University of Bolton
Sponsored by the International Association for Research Into Economic Psychology (IAREP) and the Society for the Advancement of Behavioural Economics (SABE).
KEYNOTE SPEAKER
A Conceptual Framework of Psychological Accounts of
Anomalies of Stock Markets
Tommy Gärling
Department of Psychology, University of Gothenburg, Sweden
This talk will present a conceptual framework showing how market anomalies that de-stabilize stock prices may result from cognitive biases. The market anomalies include (1) overreaction to news, (2) disposition effect, (3)reactions to share splits, and (4) naïve diversification of portfolio risk. Mr Gärling will argue that asymmetric risk attitude, loss aversion, money illusion, diversification heuristic, and co-variation neglect are cognitive biases that partly account for the anomalies of stock markets, and that affective and social influences exaggerating the market anomalies cause booms, bubbles and busts.
KEYNOTE SPEAKER
'When Rationality Fails: Lessons from the Credit Crisis'
Paul Ormerod
Economist and Author
It is the ideas at the heart of modern macroeconomics which provided the intellectual justification of the economic policies which helped create the crash. The specific focus of the paper is on the way in which mainstream economics deals with risk and uncertainty. It is this which is at the root of the financial crisis. We need to jettison the whole corpus of mainstream macroeconomic theory of the last 30 years.
Economic psychology offers much more realistic models of how decision makers - individuals, firms, governments - actually behave. Economics can be rebuilt on the basis of more scientifically credible rules of individual behaviour, and by restoring the importance of institutional structures.
ORAL PRESENTATIONS
(A – Z By Surname)
Deal or No Deal:
Money, What Might Have Been and Human Happiness
Peter Ayton, Meri Pesola and Lucy Freemantle
Department of Psychology, City University London.
The notion that people do not classify or judge perceived objects independently of their context has considerable economic significance when it comes to the human reaction to money. That people’s utility for money depends on its relation to a malleable reference point receives support from diverse empirical sources (cf. Tversky and Kahneman, 1992; Boyce et al, 2010). Here we explored how the happiness of TV game show contestants varies as a function of their monetary winnings - and the money that they discover that they could have won if they had chosen differently. The TV game show “Deal or No Deal” enables us to study the effects on emotions of outcomes from simple well-defined risky decisions involving real large stakes not used in experiments. We present data from three studies that evaluate the rated and reported happiness of real contestants. Unsurprisingly, the happiness of contestants was influenced by the amounts of money that they won. However the happiness of contestants was strongly moderated by the magnitude of the discrepancy between winnings and the amount they could have won had they chosen differently. In terms of its impact on happiness counterfactual money was worth about 75% of actual money won. Different kinds of counterfactual outcomes had different effects: spurned riskless winnings declined in a failed gamble for higher winnings hurt more than wins missed when contestants accepted a riskless amount rather than gamble for more. Our result confirms the notion that the impact of money on people’s happiness is context dependent.
To Deceive or Not To Deceive?
Consequences of Deception in
Group Assignment Procedures
Robert Böhm, International Graduate College, Wildstrasse, Germany
E-Mail : • Website: http://robertboehm.info
Robert Böhm 1,2 & Christina Botros1
1 International Graduate College, Friedrich Schiller University Jena, Germany
2 International Max Planck Research School “Uncertainty”
Participants of Social Psychological experiments are frequently deceived, whereas deception procedures usually are not accepted among scientists in Economics. Despite this essential difference in the research methods of Economics and (Social) Psychology that might make interdisciplinary exchange difficult, there is only little research about the effects of deception on participants and experimental behavior. The present study investigated the long-term consequences of deception in group assignment procedures. Participants were either deceived or not deceived with regard to the procedure of a group assignment. Group identification and behavioral in-group bias were measured before and after the debriefing, as well as in a second experiment one day later. Group identification of participants who have been deceived decreased significantly after the debriefing. Furthermore, deceived participants were more suspicious, showed less group identification and smaller in-group bias in a non-deceptive group assignment procedure one day later than participants who have not been deceived in the first experiment. The results are discussed with regard to the long-term effects of deception procedures in non-renewable participant pools.
Peak Impact: Financial Risk Perception
and the Peak of the Return Distribution
Darren Duxbury and Barbara Summers (equal authors)
Leeds University Business School, UK
This paper investigates financial risk perception, evaluating a proposed heuristic based on the influence of the peak of the return distribution. Results from previous research suggest that risk perception may be driven by an evaluation of the value and probability of the most likely outcome or peak, although prior studies cannot isolate movements of the peak from other distributional characteristics. We manipulate variance and skew experimentally to operationalize movement of the peak of the distribution vertically and horizontally, respectively. Our results provide strong support for the peak heuristic conjecture, with evaluations being in line with range-frequency theory.
Definition and Measurement of Numeracy:
Views from Adult Numeracy and Mathematics Education
Jeff Evans1 and Phillip Kent2
1Middlesex University London
2Institute of Education, University of London
Recently psychological frameworks used in studying decision-making have been elaborated to include the role of numeracy as a cognitive ability distinct from general intelligence (Peters et al., 2006; Reyna et al., 2009). It is interesting at this point to compare other traditions of conceptualising and measuring numeracy.
In the psychological work in this area, numeracy is broadly defined as a performance on a series of tasks, usually short questionnaire items, and is thus measured as a count of items correct (see, for example, the numeracy scale of Lipkus et al., 2001, and its updated version by Peters et al., 2007). In contrast, there is a strand of work amongst mathematics educators and adult numeracy researchers which aims to recognise the context of numerate activity as central to any attempt to specify or to measure it. We will refer to the work of PIAAC, the OECD’s new survey of adult competencies including numeracy (PIAAC Numeracy Expert group, 2009); Evans’s study of social science undergraduates (2000); and the work of Hoyles, Noss, Kent & Bakker (2010) on the changing demands for mathematics in various workplace contexts. Indeed, the concern for context, and 'situated understanding', led some researchers to embrace the term numeracy, because of its parallels to literacy, since the idea of a literate person expresses a competence in using (symbolic) language, both written and verbal, across different contexts and working (and negotiating) with different rules and conventions.
In comparing these different approaches, we shall focus on:
(i) the way that numeracy is defined / conceptualised;
(ii) the methods used to take account of context in the measurement / descriptive process;
(iii) the extent to which the changing affordances and demands of ICT have changed the type of mathematical skills required in different contexts (e.g. Hoyles et al., 2010);
(iv) the role of the concept of numeracy in the development of research programmes: as a key outcome, independent variable, individual difference, etc.
For example, one of the key drivers for the move by mathematics educators into researching the use and learning of mathematics in context was to find out what mathematics people could do in everyday and workplace situations (rather than documenting ‘misconceptions’ or failure to attain higher stages of development), how they do it, and how to support adults and students in becoming more able mathematically.
People Make Irrational Decisions... Don’t They?
John Fennell and Roland Baddeley
Department of Experimental Psychology,
University of Bristol, UK
When making decisions based on probabilistic options, people overestimate small probabilities, underestimate large probabilities, and treat positive and negative outcomes differently. This non-linear probability weighting function is a main component of Kahneman and Tversky’s Prospect Theory. Importantly, it is claimed to be irrational. We show that this function is only irrational if probability statements are associated with no uncertainty. In the real world, uncertainty is ubiquitous. In this case the optimal strategy is to combine probability statements with prior information using Bayes’ rule. We identify two forms of prior information: priors of ignorance (situations unlike those previously encountered), and priors of inference (situations similar to those previously encountered); we show that “internet blogs” can be used to estimate the relevant prior of inference. Given these priors, a “Bayesian rational” probability weighting function provides a potential mechanism that matches all important features of the irrational probability weighting function of Prospect Theory.
Sensitivity to Autocorrelation in People using Their Unaided Judgment to Make Forecasts from Time Series.
Nigel Harvey and Stian Reimers
University College London
Surveys have shown that people in many businesses and other organizations use unaided judgment to make forecasts from time series. Many natural time series are autocorrelated: observations at time t+1 are correlated with the observations at time t. But can people incorporate autocorrelation information into their judgmental forecasts? In Experiment 1, participants saw 12 trials in which autocorrelation varied within-subjects. Participants showed sensitivity to the degree of autocorrelation, but also implicitly assumed autocorrelation in uncorrelated time series. Experiment 2 used a one-shot single trial completely between-subjects design and found similar results. Experiment 3 investigated how between-trials context influenced forecasting. Results suggest that, although people are sensitive to autocorrelation when making forecasts, they are not sensitive enough: they make predictions for highly autocorrelated time series that are under-correlated with the last observation and predictions for an independent time series that are positively correlated with the last observation. Implications for heuristic and ‘Bayesian’ models of the cognitive processes underlying judgmental forecasting are discussed.
The Role of the Dorsal Striatum in the Valuation
of Risky Rewards and Losses
Presenting Author: Dr. Neal S. Hinvest, Department of Psychology, University of Bath, Bath, BA2 7AY Tel: 01225 383691 Email:
Dr. Mark Brosnan, Department of Psychology, University of Bath
Professor Gemma Calvert, WMG, University of Warwick
Professor Robert Rogers, Department of Psychiatry, John Radcliffe Hospital, University of Oxford
Dr. Tim Hodgson, School of Psychology, University of Exeter
Valuations determine the personal worth of an outcome, and by definition, occur at an early stage in decision-making. Valuation of anticipated outcomes has been localised to ventral prefrontal and limbic regions. However, little is known as to the specific contributions of these regions to the production of valuations, especially for potential losses. Participants were presented with two tasks whilst being scanned via Functional Magnetic Resonance Imaging. In the valuation task, singular “prospects”, containing a well-defined probability of winning or losing a hypothetical amount of money, were presented and participants provided valuations of the personal worth of each. Using well-defined prospects allowed the calculation of their expected value (EV). A decision-making task in which each trial consisted of two reward or loss prospects was also given in order to measure neural activity during preference formation. Activity within the lateral prefrontal cortex and horizontal inferior parietal sulcus was associated with viewing prospects in both types of task, suggesting increase function of working memory and arithmetic processing. Parametric analyses showed that, within the dorsal striatum, medial regions coded EV while lateral regions coded probability. Results from the decision-making tasks extended these findings by suggesting that similar regions of the dorsal striatum also coded the difference in EV between prospects and also motivated preference for the to-be-selected outcome. Thus, the dorsal striatum is an important structure in coding valuations of both reward and loss outcomes independent of anticipation, and is also important in coding differences between prospective payoffs in a choice.
Relative Theory of Choice:
Preference Change for Risky Choices
Kusev*, Johansson** and van Schaik***
City University London*, University College London**, Teesside University***
In three experiments we studied the extent to which theories of decision-making and memory can predict people's preferences. Studding risky decisions, we aimed to answer questions about human preferences, prompted by similarities between the leading economic theory Expected Utility Theory (EUT) and the leading psychological theory of human choice under risk - Prospect Theory (PT). People’s behaviour in the face of risk implies that they judge and weight the probability of risky events in characteristic ways that deviate from EUT. Nonetheless, both EUT and PT frameworks share a common assumption: people’s risk preferences and decisions under risk and uncertainty are independent of task. Accordingly, we studied (i) the lability of human preferences and their relation to choice justifications given in risky decision-making scenarios, (ii) the dynamics of preference formation for choice with monetary gambles and (iii) the limits of existing theoretical accounts (e.g., UT and PT) by contrasting them with a new theory of risky choice based on the impact of context, complexity and prior choices. The results of all three experiments are not anticipated by EUT, PT or experience-based decision research (Hertwig, Barron, Weber, & Erev, 2004).We found evidence that people do not have underlying preferences for risk; instead, context, complexity and prior choices determine preferences even when the utilities (risk and reward) of alternative options are known.
The Credit Crunch:
Ideological, Psychological & Epistemological Perspectives
Alan Lewis, Department of Psychology, University of Bath, 2 South, Bath, BA1 7AY, United Kingdom E-mail:
Two economic interpretations of the credit crunch are outlined and the question posed whether these are incommensurate ideological positions. Psychological perspectives are then explored including insights from cognitive and social psychology. The argument is made that policy options depend on what constitutes the ‘good society’ and whether the culture of financial institutions can be changed by government intervention, social pressure and human agency. It is concluded that those interested in economic psychology and socio-economics have a duty to engage with alternative discourses.