
on Neuroeconomics 
Issue of 2010‒05‒02
five papers chosen by 
By:  L. Ingber; P.L. Nunez 
URL:  http://d.repec.org/n?u=RePEc:lei:ingber:10nd&r=neu 
By:  Cadogan, Godfrey 
Abstract:  We augment Tversky and Khaneman (1992) (“TK92”) Cumulative Prospect Theory (“CPT”) function space with a sample space for “states of nature”, and depict a commutative map of behavior on the augmented space. In particular, we use a homotopy lifting property to mimic behavioral stochastic processes arising from deformation of stochastic choice into outcome. A psychological distance metric (in the class of DudleyTalagrand inequalities) for stochastic learning, was used to characterize stopping times for behavioral processes. In which case, for a class of nonseparable spacetime probability density functions, we find that behavioral processes are uniformly stopped before the goal of fair gamble is attained. Further, we find that when faced with a fair gamble, agents exhibit submartingale [supermartingale] behavior, subjectively, under CPT probability weighting scheme. We show that even when agents’ have classic von NeumanMorgenstern preferences over probability distribution, and know that the gamble is a martingale, they exhibit probability weighting to compensate for probability leakage arising from the their stopped behavioral process. 
Keywords:  commutative prospect theory; homotopy; stopping time; behavioral stochastic process 
JEL:  D81 D70 C0 C02 
Date:  2010–04–26 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:22342&r=neu 
By:  Ali alNowaihi; Sanjit Dhami 
Abstract:  Evidence shows that (i) people overweight low probabilities and underweight high probabilities, but (ii) ignore events of extremely low probability and treat extremely high probability events as certain. The main alternative decision theories, rank dependent utility (RDU) and cumulative prospect theory (CP) incorporate (i) but not (ii). By contrast, prospect theory (PT) addresses (i) and (ii) by proposing an editing phase that eliminates extremely low probability events, followed by a decision phase that only makes a choice from among the remaining alternatives. However, PT allows for the choice of stochastically dominated options, even when such dominance is obvious. We propose to combine PT and CP into composite cumulative prospect theory (CCP). CCP combines the editing and decision phases of PT into one phase and does not allow for the choice of stochastically dominated options. This, we believe, provides the best available alternative among decision theories of risk at the moment. As illustrative examples, we also show that CCP allows us to resolve three paradoxes: the insurance paradox, the Becker paradox and the St. Petersburg paradox. 
Keywords:  Decision making under risk; Composite Prelec probability weighting functions; Composite cumulative prospect theory; Composite rank dependent utility theory; Insurance; St. Petersburg paradox; Becker.s paradox 
JEL:  C60 D81 
Date:  2010–04 
URL:  http://d.repec.org/n?u=RePEc:lec:leecon:10/11&r=neu 
By:  Sanjit Dhami; Ali alNowaihi 
Abstract:  The Becker proposition (BP) is one of the founding pillars of the modern literature on Law and Economics. It states that it is optimal to impose the severest possible punishment (to maintain effective deterrence) at the lowest possible probability (to economize on enforcement costs). The BP is not consistent with the evidence. This is known as the Becker paradox. Using evidence from a wide range of phenomena we show that none of the proposed explanations for the Becker paradox are satisfactory. The BP has largely been considered within an expected utility framework. We clarify the Becker proposition and its welfare implications under expected utility. We show that BP also holds under rank dependent expected utility and cumulative prospect theory, the two main alternatives to expected utility. alNowaihi and Dhami (2010a) recently propose composite cumulative prospect theory that combines prospect theory with cumulative prospect theory. Under plausible conditions CCP is able to resolve the Becker paradox. Our article opens the way for incorporating nonexpected utility theories into an economic analysis of criminal activity. 
Keywords:  Behavioral economics; Illegal activity; Expected utility theory; Rank dependent expected utility; Prospect theory; Prelec and composite Prelec probability weighting functions; Composite cumulative prospect theory; Punishment functions 
JEL:  D81 K42 
Date:  2010–04 
URL:  http://d.repec.org/n?u=RePEc:lec:leecon:10/14&r=neu 
By:  Mannberg, Andréa (Department of Economics, Umeå University) 
Abstract:  This paper analyzes the mechanisms underlying excessive sexual risk taking in the presence of HIV. Drawing ideas from psychology on decisionmaking processes and risk evaluation, a theoretical model interacting affectinduced myopia and cognitive dissonance is developed and analyzed. The results of the theoretical analysis suggest that the effect of rationalization of personal risk depends on the risk of being HIV positive. Although rationalization causes excessive risk taking behavior for individuals with a relatively low lifetime risk, it may prevent fatalism among individuals whose lifetime risk of HIV is perceived as overwhelming. 
Keywords:  HIV/AIDS; Selfcontrol; Time inconsistency; Dissonance theory; Regret 
JEL:  D81 D84 D91 I12 
Date:  2010–04–21 
URL:  http://d.repec.org/n?u=RePEc:hhs:umnees:0803&r=neu 