nep-neu New Economics Papers
on Neuroeconomics
Issue of 2021‒09‒06
two papers chosen by

  1. Sophistication about Self-Control By Deborah A. Cobb-Clark; Sarah C. Dahmann; Daniel A. Kamhöfer; Hannah Schildberg-Hörisch
  2. A decision-making model with anticipation of surprise for explaining irrational economic behaviors By Ho Ka Chan; Taro Toyoizumi

  1. By: Deborah A. Cobb-Clark; Sarah C. Dahmann; Daniel A. Kamhöfer; Hannah Schildberg-Hörisch
    Abstract: We propose a broadly applicable empirical approach to classify individuals as time-consistent versus native or sophisticated regarding their self-control limitations. Operationalizing our approach based on nationally representative data reveals that self-control problems are pervasive and that most people are at least partly aware of their limited self-control. Compared to naifs, sophisticates have higher IQs, better educated parents, and are more likely to take up commitment devices. Accounting for both the level and awareness of self-control limitations has predictive power beyond one-dimensional notions of self-control that neglect awareness. Importantly, sophistication fully compensates for self-control problems when choices involve immediate costs and later benefits. Raising people’s awareness of their own self-control limitations may thus assist them in overcoming any adverse consequences.
    Keywords: self-control; sophistication; naiveté; commitment devices; present bias
    JEL: D91 D01
    Date: 2021
  2. By: Ho Ka Chan; Taro Toyoizumi
    Abstract: Many experimental observations have shown that the expected utility theory is violated when people make decisions under risk. Here, we present a decision-making model inspired by the prediction of error signals reported in the brain. In the model, we choose the expected value across all outcomes of an action to be a reference point which people use to gauge the value of different outcomes. Action is chosen based on a nonlinear average of anticipated surprise, defined by the difference between individual outcomes and the abovementioned reference point. The model does not depend on non-linear weighting of the probabilities of outcomes. It is also straightforward to extend the model to multi-step decision-making scenarios, in which new reference points are created as people update their expectation when they evaluate the outcomes associated with an action in a cascading manner. The creation of these new reference points could be due to partial revelation of outcomes, ambiguity, or segregation of probable and improbable outcomes. Several economic paradoxes and gambling behaviors can be explained by the model. Our model might help bridge the gap between theories on decision-making in quantitative economy and neuroscience.
    Date: 2021–08

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