We argue that “narrow framing, ” whereby an agent who is offered a new gamble evaluates that gamble in isolation, may be a more important feature of decisionmaking than previously realized. Our starting point is the evidence that people are often averse to a small, independent gamble, even when the gamble is actuarially favorable. We find that a surprisingly wide range of utility functions, including many nonexpected utility specifications, have trouble explaining this evidence, but that this difficulty can be overcome by allowing for narrow framing. Our analysis makes predictions as to what kinds of preferences can most easily address the stock market participation puzzle. (JEL D81, G11) Economists, and financial economists in particular, have long been interested in how people evaluate risk. In this paper, we try to shed new light on this topic. Specifically, we argue that a feature known as “narrow framing ” may play a more important role in decision-making under

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Kőszegi and Rabin (forthcoming) develop a model building from prospect theory that a) combines the reference-dependent "gain-loss utility" with standard "consumption utility," b) bases the reference point on beliefs about outcomes rather than on the status quo, and, to incorporate probabilistic beliefs, c) allows for stochastic reference points. In this paper we develop an extension of that model, and apply both the original and the extension to study the taste for insurance and other preferences over monetary risk. The model predicts that the environment---through its e#ect on expectations---heavily influences risk attitudes toward modest-scale risk. When exposure to potential modest-scale changes in wealth is a surprise, the model corresponds to a form of classical prospect theory, and hence predicts a distaste for insuring surprise losses. When potential losses are anticipated, planned spending on insurance does not generate sensations of loss while uncertain bad outcomes do, leading to a very high willingness to pay for insurance. When there are risks a person cannot or does not want to avoid, insuring additional risks does not eliminate the possibility of painful loss, so her willingness to pay for insurance is reduced. The model also allows for consumption utility to dominate attitudes towards large-scale risks, predicting a general taste for insurance against large-scale risks independently of the environment.

This paper introduces a model of ‘theory of mind’, namely, how we represent the intentions and goals of others to optimise our mutual interactions. We draw on ideas from optimum control and game theory to provide a ‘game theory of mind’. First, we consider the representations of goals in terms of value functions that are prescribed by utility or rewards. Critically, the joint value functions and ensuing behaviour are optimised recursively, under the assumption that I represent your value function, your representation of mine, your representation of my representation of yours, and so on ad infinitum. However, if we assume that the degree of recursion is bounded, then players need to estimate the opponent’s degree of recursion (i.e., sophistication) to respond optimally. This induces a problem of inferring the opponent’s sophistication, given behavioural exchanges. We show it is possible to deduce whether players make inferences about each other and quantify their sophistication on the basis of choices in sequential games. This rests on comparing generative models of choices with, and without, inference. Model comparison is demonstrated using simulated and real data from a ‘stag-hunt’. Finally, we note that exactly the same sophisticated behaviour can be achieved by optimising the utility function itself (through prosocial utility), producing unsophisticated but apparently altruistic agents. This may be relevant ethologically in hierarchal game theory and coevolution.

There is a growing interest in applying market mechanisms to tackle everyday communication problems such as communication interruptions and communication overload. Prior analytic proofs have shown that a signaling and screening mechanism can make senders and recipients of messages better off. However, these proofs make certain assumptions that do not hold in real world environments. For example, these prior works assume that there are no transaction costs in a communication market and that monetary incentives are the only motivators in communication between strangers. This research builds upon prior analytic work and empirically tests the validity of the claim that signaling and screening mechanisms will improve communication welfare. Our results show that while these types of markets can indeed improve communication welfare, a simpler, less expressive fixed-price market can lead to higher welfare than a more expressive, variable pricing and screening mechanism. Findings from this study also provide valuable insights for technology designs. For example, these results suggest the need to reduce cognitive overhead in using communication markets. Author Keywords Computer mediated communication, market mechanisms, empirical studies, economics ACM Classification Keywords H5.3. Information interfaces and presentation (e.g., HCI): Group and Organization Interfaces – computer supported cooperative work

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After reviewing the evidence for status quo maintenance (SQM), I consider how to reconcile SQM with traditional consumer theory. Behavioural economists usually let agents ’ preferences change as a function of their endowments, treating the same person with different endowments as a set of distinct agents. Many properties of preferences then become immune to empirical test and it becomes impossible to judge whether an agent’s decisions make the agent better or worse off. This impedes prediction of when decision rules are likely to change. SQM can alternatively be explained with unchanging preferences if preferences are incomplete. SQM is then consistent with self-interest and there is no reason why it should not persist. The fundamental conservatism of economic agents, their reluctance to move away from what they deem to be the status quo, has been documented by several waves of academic study. Status quo bias, the endowment effect, loss aversion and the willingness to accept-willingness to pay disparity all describe agents who must be paid a premium to trade away from their endowments. I review some empirically well-established cases of status quo maintenance, show how they violate traditional consumer theory and then consider how the phenomenon

We model a system of networking agents that seek to optimize their centrality in the network while keeping their cost, the number of connections they are participating in, low. Unlike other game-theory based models for network evolution, the success of the agents is related only to their position in the network. The agents use strategies based on local information to improve their chance of success. Both the evolution of strategies and network structure are investigated. We find a dramatic time evolution with cascades of strategy change accompanied by a change in network structure. On average the network self-organizes to a state close to the transition between a fragmented state and a state with a giant component. Furthermore, with increasing system size both the average degree and the level of fragmentation decreases. We also observe that the network keeps on actively evolving, although it does not have to, thus suggesting a Red Queen-like situation where agents have to keep on networking and responding to the moves of the others in order to stay successful.