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on Cognitive and Behavioural Economics |
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Issue of 2026–02–16
three papers chosen by Marco Novarese, Università degli Studi del Piemonte Orientale |
| By: | Palumbo, Riccardo; Bortolotti, Alessandro; Sacco, Pier Luigi |
| Abstract: | Prospect theory's characteristic patterns (loss aversion, reference dependence, and nonlinear probability weighting) have generally been interpreted as cognitive biases, i.e. as evidence of bounded rationality. This paper proposes a conceptual framework for understanding these phenomena through the lens of active inference and the free energy principle. We argue that prospect theory's central features are consistent with computationally efficient solutions to decisionmaking under uncertainty within the thermodynamic constraints of neural computation. Loss aversion implements adaptive precision-weighting of prediction errors, allocating greater computational resources to negative deviations that threaten survival. Reference dependence implements efficient predictive coding, transmitting only surprising deviations from expectations. Probability weighting reflects optimal precision allocation across the probability range when maintaining full Bayesian representations would exceed metabolic budgets. This framework is supported by converging evidence: neuroimaging studies show unified value coding with asymmetric precision for losses; pharmacological manipulations reveal dissociable neurotransmitter systems for value encoding versus loss sensitivity; and metabolic manipulations including hypoxia, glucose depletion, and circadian mismatch modulate prospect theory parameters in predicted directions. Developmental evidence shows that children display probability weighting patterns opposite to adults, with gradual transformation through experience pointing at calibration rather than to genetic determination. We propose that prospect theory patterns reflect how biological systems navigate uncertainty under fundamental energetic constraints, with implications for understanding decision-making architecture and reconceptualizing rationality. |
| Date: | 2026–01–30 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:2d9v5_v1 |
| By: | Brandon Yee; Krishna Sharma |
| Abstract: | Behavioral parameters such as loss aversion, herding, and extrapolation are central to asset pricing models but remain difficult to measure reliably. We develop a framework that treats large language models (LLMs) as calibrated measurement instruments for behavioral parameters. Using four models and 24{, }000 agent--scenario pairs, we document systematic rationality bias in baseline LLM behavior, including attenuated loss aversion, weak herding, and near-zero disposition effects relative to human benchmarks. Profile-based calibration induces large, stable, and theoretically coherent shifts in several parameters, with calibrated loss aversion, herding, extrapolation, and anchoring reaching or exceeding benchmark magnitudes. To assess external validity, we embed calibrated parameters in an agent-based asset pricing model, where calibrated extrapolation generates short-horizon momentum and long-horizon reversal patterns consistent with empirical evidence. Our results establish measurement ranges, calibration functions, and explicit boundaries for eight canonical behavioral biases. |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2602.01022 |
| By: | Alexander Bertermann; Hannah Schildberg-Hörisch |
| Abstract: | This paper provides the first evidence that children’s economic preferences vary systematically with parental mental health. Using experimentally elicited measures of economic preferences from more than 4, 500 children in Bangladesh, we document that children of parents with indications of mental illness are less prosocial but more patient than their peers with mentally healthy parents. Attitudes toward risk remain unchanged. We discuss potential pathways through which parental mental health may influence the formation of children’s preferences, documenting that children of parents with indication of mental illness assume greater responsibilities within the family, experience less parental involvement, and are exposed to a more adverse home environment. |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ifowps:_424 |