de/ls_schmidt/index.html

www.people.cornell.edu/pages/edo1/.

We review extensive evidence about how psychological biases affect investor behavior and prices. Systematic mispricing probably causes substantial resource misallocation. We argue that limited attention and overconfidence cause investor credulity about the strategic incentives of informed market participants. However, individuals as political participants remain subject to the biases and self-interest they exhibit in private settings. Indeed, correcting contemporaneous market pricing errors is probably not government’s relative advantage. Government and private planners should establish rules ex ante to improve choices and efficiency, including disclosure, reporting, advertising, and default-option-setting regulations. Especially

Abstract. This paper presents a truthful sponsored search auction based on an incentive-compatible multi-armed bandit mechanism. The mechanism described combines several desirable traits. The mechanism gives advertisers the incentive to report their true bid, learns the click-through rate for advertisements, allows for slots with different quality, and loses the minimum welfare during the sampling process. The underlying generalization of the multi-armed bandit mechanism addresses the interplay between exploration and exploitation in an online setting that is truthful in high probability while allowing for slots of different quality. As the mechanism progresses the algorithm more closely approximates the hidden variables (click-though rates) in order to allocate advertising slots to the best advertisements. The resulting mechanism obtains the optimal welfare apart from a tightly bounded loss of welfare caused by the bandit sampling process. Of independent interest, in the field of economics it has long been recognized that preference elicitation is difficult to achieve, mainly as people are unaware of how much happiness a particular good will bring to them. In this paper we alleviate this problem somewhat by introducing a valuation-discovery process to the mechanism which results in a preference-elicitation mechanism for advertisers and search engines. 1

The economic conception of human behavior assumes that a person has a single set of well-defined goals, and that the person’s behavior is chosen to best achieve those goals. We develop a model in which a person’s behavior is the outcome of an interaction between two systems: a deliberative system that assesses options with a broad, goal-based perspective, and an affective system that encompasses emotions and motivational drives. Our model provides a framework for understanding many departures from full rationality discussed in the behavioral-economics literature, and captures the familiar feeling of being “of two minds. ” And by focusing on factors that moderate the relative influence of the two systems, our model also generates a variety of novel testable predictions.

Centre de recherche et développement en économique (C.R.D.E.) and Département de sciences économiques, Université de Montréal, and Centre interuniversitaire de recherche en analyse des organisations (CIRANO)

Under prospect theory, three components influence the risk attitude of a decision maker: the utility function, the probability weighting function, and loss aversion. Loss aversion reflects the observed behavior of decision makers' being more sensitive to losses than to gains, resulting in a utility function that is steeper for losses than for gains. Much of the empirically observed risk aversion is due to loss aversion. This paper proposes an index of loss aversion. It also demonstrates how the degree of loss aversion of two decision makers can be compared and how its influences on comparative risk aversion can be examined. The main result characterizes comparative loss aversion in terms of preferences.

The roles of loss aversion and inhibition among alternatives are examined in models of the similarity, compromise, and attraction effects that arise in choices among 3 alternatives differing on 2 attributes. R. M. Roe, J. R. Busemeyer, and J. T. Townsend (2001) have proposed a linear model in which effects previously attributed to loss aversion (A. Tversky & D. Kahneman, 1991) arise from attention switching between attributes and similarity-dependent inhibitory interactions among alternatives. However, there are several reasons to maintain loss aversion in a theory of choice. In view of this, an alternative theory is proposed, integrating loss aversion and attention switching into a nonlinear model (M. Usher & J. L. McClelland, 2001) that relies on inhibition independent of similarity among alternatives. The model accounts for the 3 effects and makes testable predictions contrasting with those of the Roe et al. (2001) model. Several interesting empirical discoveries have emerged from studies of how people choose between several objects that differ on two or more attributes. For example, someone might be given a choice among three automobiles, varying in performance quality and driving economy (Roe, Busemeyer, & Townsend, 2001).

Two studies examined age differences in recall and recognition memory for positive, negative, and neutral stimuli. In Study 1, younger, middle-aged, and older adults were shown images on a computer screen and, after a distraction task, were asked first to recall as many as they could and then to identify previously shown images from a set of old and new ones. The relative number of negative images compared with positive and neutral images recalled decreased with each successively older age group. Recognition memory showed a similar decrease with age in the relative memory advantage for negative pictures. In Study 2, the largest age differences in recall and recognition accuracy were also for the negative images. Findings are consistent with socioemotional selectivity theory, which posits greater investment in emotion regulation with age. The past decade witnessed a major shift in the way theorists view emotional functioning in old age. Early theories portrayed later life as a time of blunted affect and emotional dysregulation. Because emotions were conceptualized primarily as physiological processes, they were presumed to follow the same downward trajectory observed in other biological arenas (Banham, 1951;

This paper explores the implications of a simple and intuitive restriction on reference dependent preferences assuming the status quo serves as the reference point. The condition imposed rules out situations in which a decision maker has a choice between two prospects, selects one, subsequently changes her mind and selects the other – even if the change is costly. It is shown that a surprising number of models in a riskless and risky setting violate this behavioral assumption, including Cumulative Prospect Theory as well as any theory exhibiting local nonsatiation in which all reference dependent indifference surfaces are smooth. It is also shown that one can construct simple alternative models that do satisfy the condition, axiomatically derived or otherwise. These alternative theories take the form of maxmin representations over a set of expected (or Choquet-expected) utility differences, where utility difference is measured between the prospect evaluated and the reference point.