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We examine a type of behavioral regularities in insurance decision making, namely instances when consumers do not fully take into account the informational value of the insurer's offered premium. Specifically, we study scenarios when the consumer is less informed about the loss probability than the insurer. We examine basic violations of rational expectations, with which the consumer overestimates the loss probability beyond what could be inferred from the premise that the insurer must seek to break even or earn a profit over the risk to be covered. We report a field study and an experiment that reveal systematic occurrence of such violations. Violations were especially frequent at low premium levels, and the demand for insurance had an inverted-U dependence on the premium. Our findings suggest that, when consumers form beliefs over the loss probability, they take into account the offered premium to some extent, but often insufficiently so.
This handbook in two parts covers key topics of the theory of financial decision making. Some of the papers discuss real applications or case studies as well. There are a number of new papers that have never been published before especially in Part II.Part I is concerned with Decision Making Under Uncertainty. This includes subsections on Arbitrage, Utility Theory, Risk Aversion and Static Portfolio Theory, and Stochastic Dominance. Part II is concerned with Dynamic Modeling that is the transition for static decision making to multiperiod decision making. The analysis starts with Risk Measures and then discusses Dynamic Portfolio Theory, Tactical Asset Allocation and Asset-Liability Management Using Utility and Goal Based Consumption-Investment Decision Models.A comprehensive set of problems both computational and review and mind expanding with many unsolved problems are in an accompanying problems book. The handbook plus the book of problems form a very strong set of materials for PhD and Masters courses both as the main or as supplementary text in finance theory, financial decision making and portfolio theory. For researchers, it is a valuable resource being an up to date treatment of topics in the classic books on these topics by Johnathan Ingersoll in 1988, and William Ziemba and Raymond Vickson in 1975 (updated 2 nd edition published in 2006).
This book examines the behavior of individuals at risk and insurance industry policy makers involved in selling, buying and regulation.
Offering alternative models based on such concepts as satisficing (acceptance of viable choices that may not be the undiscoverable optimum) and bouded rationality (the limited extent to which rational calculation can direct human behaviour), Simon shows why more empirical research based on experiments and direct observation, rather than just statistical analysis of economic aggregates, is needed.
Collective Household Consumption Behavior: Revealed Preference Analysis presents a nonparametric `revealed preference' methodology for analyzing collective consumption behavior in practical applications, while possibly accounting for externalities, public consumption and the use of assignable quantity information. Collective Household Consumption Behavior: Revealed Preference Analysis considers two types of collective models: The general collective model considers general preferences of the individual household members, which allow for externalities and public consumption within the household. The special collective models that do not allow for consumption externalities. After the introduction, section 2 sets the stage by introducing the revealed preference characterizations of the unitary model. Section 3 presents a collective model that allows for general individual preferences and discusses its revealed preference characterization. Sections 4 and 5 show how to bring this theoretical characterization to observational data. More specifically, Section 4 introduces the mixed integer programming characterizations for special collective models that impose restrictions on the household members' preferences. Section 5 does the same for the general collective model. Throughout Section 2 to Section 5, the authors illustrate the most relevant concepts by means of numerical examples. In Section 6 we subsequently illustrate our main results for data drawn from the Russian Longitudinal Monitoring Survey.
Argues that public finance--the study of the government's role in economics--should incorporate principles from behavior economics and other branches of psychology.
Offering alternative models based on such concepts as satisficing(acceptance of viable choices that may not be the undiscoverableoptimum) and bounded rationality (the limited extent to which rationalcalculation can direct human behavior), Simon shows concretely whymore empirical research based on experiments and direct observation, rather than just statistical analysis of economic aggregates, isneeded.
In a complex and uncertain world, humans and animals make decisions under the constraints of limited knowledge, resources, and time. Yet models of rational decision making in economics, cognitive science, biology, and other fields largely ignore these real constraints and instead assume agents with perfect information and unlimited time. About forty years ago, Herbert Simon challenged this view with his notion of "bounded rationality." Today, bounded rationality has become a fashionable term used for disparate views of reasoning. This book promotes bounded rationality as the key to understanding how real people make decisions. Using the concept of an "adaptive toolbox," a repertoire of fast and frugal rules for decision making under uncertainty, it attempts to impose more order and coherence on the idea of bounded rationality. The contributors view bounded rationality neither as optimization under constraints nor as the study of people's reasoning fallacies. The strategies in the adaptive toolbox dispense with optimization and, for the most part, with calculations of probabilities and utilities. The book extends the concept of bounded rationality from cognitive tools to emotions; it analyzes social norms, imitation, and other cultural tools as rational strategies; and it shows how smart heuristics can exploit the structure of environments.
Conventional economic theory assumes that consumers are fully rational, that they have well-defined preferences and easily understand the market environment. Yet, in fact, consumers may have inconsistent, context-dependent preferences or simply not enough brain-power to evaluate and compare complicated products. Thus the standard model of consumer behavior-which depends on an ideal market in which consumers are boundlessly rational-is called into question. While behavioral economists have for some time confirmed and characterized these inconsistencies, the logical next step is to examine the implications they have in markets. Grounded in key observations in consumer psychology, Bounded Rationality and Industrial Organization develops non-standard models of “boundedly rational” consumer behavior and embeds them into familiar models of markets. It then rigorously analyses each model in the tradition of microeconomic theory, leading to a richer, more realistic picture of consumer behavior. Ran Spiegler analyses phenomena such as exploitative price plans in the credit market, complexity of financial products and other obfuscation practices, consumer antagonism to unexpected price increases, and the role of default options in consumer decision making. Spiegler unifies the relevant literature into three main strands: limited ability to anticipate and control future choices, limited ability to understand complex market environments, and sensitivity to reference points. Although the challenge of enriching the psychology of decision makers in economic models has been at the frontier of theoretical research in the last decade, there has been no graduate-level, theory-oriented textbook to cover developments in the last 10-15 years. Thus, Bounded Rationality and Industrial Organization offers a welcome and crucial new understanding of market behavior-it challenges conventional wisdom in ways that are interesting and economically significant, and which in the end effect the well-being of all market participants.
WINNER, Business: Personal Finance/Investing, 2015 USA Best Book Awards FINALIST, Business: Reference, 2015 USA Best Book Awards Investor Behavior provides readers with a comprehensive understanding and the latest research in the area of behavioral finance and investor decision making. Blending contributions from noted academics and experienced practitioners, this 30-chapter book will provide investment professionals with insights on how to understand and manage client behavior; a framework for interpreting financial market activity; and an in-depth understanding of this important new field of investment research. The book should also be of interest to academics, investors, and students. The book will cover the major principles of investor psychology, including heuristics, bounded rationality, regret theory, mental accounting, framing, prospect theory, and loss aversion. Specific sections of the book will delve into the role of personality traits, financial therapy, retirement planning, financial coaching, and emotions in investment decisions. Other topics covered include risk perception and tolerance, asset allocation decisions under inertia and inattention bias; evidenced based financial planning, motivation and satisfaction, behavioral investment management, and neurofinance. Contributions will delve into the behavioral underpinnings of various trading and investment topics including trader psychology, stock momentum, earnings surprises, and anomalies. The final chapters of the book examine new research on socially responsible investing, mutual funds, and real estate investing from a behavioral perspective. Empirical evidence and current literature about each type of investment issue are featured. Cited research studies are presented in a straightforward manner focusing on the comprehension of study findings, rather than on the details of mathematical frameworks.