Action Bias and Environmental Decisions

Individuals have a penchant for action, often for good reasons. But action bias arises if that penchant is carried over to areas where those reasons do not apply, hence is nonrational. Action bias is explored theoretically, and then empirically, using data from surveys of hypothetical environmental decisions. Quite apart from agency considerations, individuals like to affect outcomes when gains are reaped. Given the ability to help one of two sites, we find that decision makers choose to foster improvement rather than prevent deterioration, despite framing that makes it arbitrary which site is improved, which preserved. Strong action bias—individuals choosing to reap gains even though they must impose losses—is also observed. These concepts are related to loss aversion, status quo bias, omission bias for losses, and bright-line behavior.     

Taste uncertainty and status quo effects in consumer choice

We use reference-dependent expected utility theory to develop a model of status quo effects in consumer choice. We hypothesise that, when making their decisions, individuals are uncertain about the utility that will be yielded by their consumption experiences in different ‘taste states’ of the world. If individuals have asymmetric attitudes to gains and losses of utility, the model entails acyclic reference-dependent preferences over consumption bundles. The model explains why status quo effects may vary substantially from one decision context to another and why some such effects may decay as individuals gain market experience.     

The disgust-promotes-disposal effect

Individuals tend toward status quo bias: preferring existing options over new ones. There is a countervailing phenomenon: Humans naturally dispose of objects that disgust them, such as foul-smelling food. But what if the source of disgust is independent of the object? We induced disgust via a film clip to see if participants would trade away an item (a box of unidentified office supplies) for a new item (alternative unidentified box). Such “incidental disgust” strongly countered status quo bias. Disgusted people exchanged their present possession 51% of the time compared to 32% for people in a neutral state. Thus, disgust promotes disposal. A second experiment tested whether a warning about this tendency would diminish it. It did not. These results indicate a robust disgust-promotes-disposal effect. Because these studies presented real choices with tangible rewards, their findings have implications for everyday choices and raise caution about the effectiveness of warnings about biases.     

A note on decisions under uncertainty: the impact of the choice of the welfare measure

The paper addresses the question, how policy decisions under uncertainty depend on the underlying welfare concept. We study three different welfare measures: The first is directly based on the ex ante (expected) utility of a representative consumer whereas the second relies on an ex ante and the third on an ex post valuation of policy changes compared to the status quo. We show that decisions based on these measures coincide if and only if risk-neutral expected utility maximization is applied. Differences between the decisions are analyzed for both, risk-averse expected utility maximization and the MaxiMin criterion. For risk-averse decision makers, differences between the first and the second concept arise if the absolute risk-aversion of the decision maker is not constant in income. For risk-aversion and the MaxiMin criterion, the effort levels to provide a public good based on an optimization of ex post utility changes exceed those based on the first or second concept. Implications for environmental policy decisions based on the concepts of abatement costs and benefits from abatement are discussed.     

The Endowment Effect,Status Quo Bias and Loss Aversion: Rational Alternative Explanation

The endowment effect, status quo bias, and loss aversion are robust and well documented results from experimental psychology. They introduce a wedge between the prices at which one is willing to sell or buy a good. The objective of this paper is to address this wedge. We show that the presence of asymmetric information in a rational-agent framework can also account for the endowment effect, status quo bias and loss aversion without invoking psychology-based explanations proposed in the past.     

Status-quo and omission biases

Bias toward the status quo, found in choice and in emotional reactions to adverse outcomes, has been confounded with bias toward omission. We unconfounded these effects with scenarios in which change occurs unless action is taken. Subjects reacted more strongly to adverse outcomes caused by action, whether the status quo was maintained or not, and subjects preferred inaction over action even when inaction was associated with change. No status-quo bias was found in a matching task, which did not require action. The observed status-quo bias is at least partly caused by a bias toward omissions.     

The impact of risk attitude,uncertainty and disequilibria on optimal production and inventory

Summary The empirical facts seem to indicate that in real economies the effect of uncertainty tends to decrease production. The limitations of empirical investigations presented should be stressed: they were performed mainly on an aggregate level, they mainly refer to Austrian manufacturing, they rely heavily on questionnaires. Above all empirical investigation will never be able to decide normative questions or to explain the behavior in the general equilibrium. Nevertheless in the short run, given all the rigidities and disequilibria which exist, uncertainty tends to lower optimal production even in absence of risk aversion. Risk aversion becomes important for large, for once-for-all decisions, but it is not the only channel through which uncertainty changes decisions.Technological concavity created by concave marginal revenues or by convex marginal costs, marginal costs of uncertainty in disequilibria model or asymmetric costs of revisions of the preliminary decision are able to bias the decision downward in a real world economy without invokingPaper presented to the 2nd Conference on the Foundations of Risk and Utility (FUR), Venezia, 1984.     

Positive confirmation bias in the acquisition of information

An experiment is reported which tests for positive confirmation bias in a setting in which individuals choose what information to buy, prior to making a decision. The design – an adaptation of Wason's selection task – reveals the use that subjects make of information after buying it. Strong evidence of positive confirmation bias, in both information acquisition and information use, is found; and this bias is found to be robust to experience. It is suggested that the bias results from a pattern of reasoning which, although producing sub-optimal decisions, is internally coherent and which is self-reinforcing.     

On arbitration schemes for a wealth distribution problem

This paper develops an arbitration scheme for resolving a distribution of wealth problem by applying Nash's assumptions to marginal rather than to total utilities. The problem considered is that of distributing a fixed amount of wealth between two claimants, and the paper compares properties of this problem's Nash solution with those of the marginal utility solution. The Nash solution is shown to emphasize application of symmetry considerations to the status quo ante, the marginal utility solution their application to the players' post arbitration positions (as measured by functions that fully describe the players' utilities but that are independent of positive linear transformations). It is argued that while the Nash assumptions are appropriate for many arbitration problems in which a solution reflects the players' status quo ante positions, the marginal utility assumptions are useful when it is desired that a solution attempt to minimize post-arbitration differences between the players' positions. The latter seems to be preferable in contexts where an arbitrator weights the solution's effects on out-comes more heavily than he weights considerations of the status quo ante. Examples are situations such as those involving income redistribution, where attempts to reduce inequality may guide the redistribution decisions. The effects on each type of solution of changes in the status quo ante are also investigated and related to the risk preference properties of the players' utilities.     

Combining strength and uncertainty for preferences in the graph model for conflict resolution with multiple decision makers

A hybrid preference framework is proposed for strategic conflict analysis to integrate preference strength and preference uncertainty into the paradigm of the graph model for conflict resolution (GMCR) under multiple decision makers. This structure offers decision makers a more flexible mechanism for preference expression, which can include strong or mild preference of one state or scenario over another, as well as equal preference. In addition, preference between two states can be uncertain. The result is a preference framework that is more general than existing models which consider preference strength and preference uncertainty separately. Within the hybrid preference structure, four kinds of stability are defined as solution concepts and a post-stability analysis, called status quo analysis, which can be used to track the evolution of a given conflict. Algorithms are provided for implementing the key inputs of stability analysis and status quo analysis within the extended preference structure. The new stability concepts under the hybrid preference structure can be used to model complex strategic conflicts arising in practical applications, and can provide new insights for the conflicts. The method is illustrated using the conflict over proposed bulk water exports from Lake Gisborne in Newfoundland, Canada.     

Failures of the reduction principle in an Ellsberg-type problem

Segal (1987) suggested that the Ellsberg paradox might be explained in terms of individuals mentally representing the decision problem as a two-stage lottery which they evaluated according to a non-expected utility model. This paper describes an experiment involving an explicitly two-stage analogue to an Ellsberg-type problem. This design substantially reduces the frequency of classic Ellsberg behaviour, but reveals other systematic violations of conventional theory. The paper discusses the particular patterns of choice and raises the more general problem of modelling individual decisions when the reduction principle does not hold.     

购房：制度变迁下的住房分层与自我选择性流动

本文基于2010年广州市的千户问卷调查数据,利用内生转换回归模型,发现了住房市场化改革过程中住房分层机制中的自我选择性：在1998年前的体制内,能力强的人倾向于不购房,而在1998年前的体制外和1998年以后,能力强的人倾向于购房。在1998年前的体制内,不购房者如果购房,其住房等级会下降;购房者如果不购房,其住房等级会上升。在1998年前体制外和1998年后,那些人力资本或政治资本高的居民实际购房时,其住房等级会更高;购房者如果不购房,其住房等级会下降。由此可知,权力机制与市场机制是影响住房分层的结构因素,政治资本或人力资本的高低是住房分层的必要条件,而非充分条件。“政治资本或人力资本高的居民住房等级也高”的论断从某种意义上忽视了居民的自我选择过程。     

Decision theory with prospect interference and entanglement

We present a novel variant of decision making based on the mathematical theory of separable Hilbert spaces. This mathematical structure captures the effect of superposition of composite prospects, including many incorporated intentions, which allows us to describe a variety of interesting fallacies and anomalies that have been reported to particularize the decision making of real human beings. The theory characterizes entangled decision making, non-commutativity of subsequent decisions, and intention interference. We demonstrate how the violation of the Savage’s sure-thing principle, known as the disjunction effect, can be explained quantitatively as a result of the interference of intentions, when making decisions under uncertainty. The disjunction effects, observed in experiments, are accurately predicted using a theorem on interference alternation that we derive, which connects aversion-to-uncertainty to the appearance of negative interference terms suppressing the probability of actions. The conjunction fallacy is also explained by the presence of the interference terms. A series of experiments are analyzed and shown to be in excellent agreement with a priori evaluation of interference effects. The conjunction fallacy is also shown to be a sufficient condition for the disjunction effect, and novel experiments testing the combined interplay between the two effects are suggested.     

The implications of irreversibility in emergency response decisions

The irreversibility effect implies that a decision maker who neglects the prospect of receiving more complete information at later stages of a sequential decision problem will in certain cases too easily take an irreversible decision, as he ignores the existence of a positive option value in favour of reversible decisions. This option value represents the decision maker's flexibility to adapt subsequent decisions to the obtained information. In this paper we show that the economic models dealing with irreversibility as used in environmental and capital investment decision making can be extended to emergency response decisions that produce important irreversible effects. In particular, we concentrate on the decision whether or not to evacuate an industrial area threatened by a possible nuclear accident. We show in a simple two-period evacuation decision model that non-optimal conclusions may be drawn when evacuation is regarded as a `now or never decision'. The robustness of these results is verified by means of a sensitivity analysis of the various model parameters. The importance of `options thinking' in this decision context is illustrated in an example.     

Beyond Condorcet: optimal aggregation rules using voting records

In certain judgmental situations where a “correct” decision is presumed to exist, optimal decision making requires evaluation of the decision-makers’ capabilities and the selection of the appropriate aggregation rule. The major and so far unresolved difficulty is the former necessity. This article presents the optimal aggregation rule that simultaneously satisfies these two interdependent necessary requirements. In our setting, some record of the voters’ past decisions is available, but the correct decisions are not known. We observe that any arbitrary evaluation of the decision-makers’ capabilities as probabilities yields some optimal aggregation rule that, in turn, yields a maximum-likelihood estimation of decisional skills. Thus, a skill-evaluation equilibrium can be defined as an evaluation of decisional skills that yields itself as a maximum-likelihood estimation of decisional skills. We show that such equilibrium exists and offer a procedure for finding one. The obtained equilibrium is locally optimal and is shown empirically to generally be globally optimal in terms of the correctness of the resulting collective decisions. Interestingly, under minimally competent (almost symmetric) skill distributions that allow unskilled decision makers, the optimal rule considerably outperforms the common simple majority rule (SMR). Furthermore, a sufficient record of past decisions ensures that the collective probability of making a correct decision converges to 1, as opposed to accuracy of about 0.7 under SMR. Our proposed optimal voting procedure relaxes the fundamental (and sometimes unrealistic) assumptions in Condorcet’s celebrated theorem and its extensions, such as sufficiently high decision-making quality, skill homogeneity or existence of a sufficiently large group of decision makers.     

Does inflation bias stabilize real growth? Evidence from Pakistan

The motive of a typical discretionary central banker to accommodate excess inflation (inflation bias) is either to stabilize real growth or to spur it beyond natural rate. To what extent inflation bias helps to materialize this intention warrants empirical investigation. A more direct empirical probe into this issue, however, requires observable inflation bias indicators, which we model through desirable and threshold inflation rates as well as their respective society’s preferences. While examining the effects of inflation bias for a typical case of the discretionary monetary policy strategy of Pakistan, we found that contrary to the desired boost/stabilization in real growth, the policy (via. inflation bias) produced counterproductive results. Inflation bias was not merely ineffective in inducing real growth but significantly destabilized it. Moreover, the results, which are robust to different inflation bias indicators and subsample analysis, indicate that the higher the inflation bias, the higher is the intensity (magnitude) of its destabilizing effect and vice versa. This suggests that a policy that would minimize/constrain inflation bias would be a better choice as it would not only help achieve low and stable inflation but also a sustainable real economic growth.