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Book part
Publication date: 30 October 2020

Carlo Zappia

This chapter documents an exchange between Leonard Savage, founder of the subjective probability approach to decision-making, and Karl Popper, advocate of the so-called…

Abstract

This chapter documents an exchange between Leonard Savage, founder of the subjective probability approach to decision-making, and Karl Popper, advocate of the so-called propensity approach to probability, of which there is no knowledge in the literature on probability theory. Early in 1958, just after being informally tested by Daniel Ellsberg with a test of consistency in decision-making processes that originated the so-called Ellsberg Paradox, Savage was made aware that a similar argument had been put forward by Popper. Popper found it paradoxical that two apparently similar events should be attributed the same subjective probability even though evidence supporting judgment in one case was different than in the other case. On this ground, Popper rejected the subjective probability approach. Inspection of the Savage Papers archived at Yale University Library makes it possible to document Savage’s reaction to Popper, of which there is no evidence in his published writings. Savage wrote to Popper denying that his criticism had paradoxical content and a brief exchange followed. The chapter shows that while Savage was unconvinced by Popper’s argument he was not hostile to an axiomatically founded generalization of his theory.

Details

Research in the History of Economic Thought and Methodology: Including a Symposium on Sir James Steuart: The Political Economy of Money and Trade
Type: Book
ISBN: 978-1-83867-707-7

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Book part
Publication date: 4 July 2019

Ercan Özen and Gürsel Ersoy

Introduction – Markowitz (1952) argues that individuals act rationally in their financial decisions. In contrast, Kahneman and Tversky (1979) claim that the psychological…

Abstract

Introduction – Markowitz (1952) argues that individuals act rationally in their financial decisions. In contrast, Kahneman and Tversky (1979) claim that the psychological characteristics of people significantly affect financial decisions. In making these decisions, factors such as age, gender, and educational status may have an impact.

Purpose – The purpose of this study is to determine whether financial literacy has an impact on individuals’ cognitive biases related to financial investments.

Methodology – A sample of 444 individuals were surveyed.

Findings – In the results of study (1) it was determined that financial literacy leads to differences in cognitive biases; and (2) cognitive biases of individuals who do not receive finance education are different from individuals who receive finance education and professionals in the business world. The findings indicate that the increase in the level of financial literacy of individuals will reduce the cognitive biases and heuristics, and therefore will have a positive effect on the investor behavior in financial markets.

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Contemporary Issues in Behavioral Finance
Type: Book
ISBN: 978-1-78769-881-9

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Book part
Publication date: 15 August 2002

Richard B. Stewart

Strong versions of the Precautionary Principle (PP) require regulators to prohibit or impose technology controls on activities that pose uncertain risks of possibly…

Abstract

Strong versions of the Precautionary Principle (PP) require regulators to prohibit or impose technology controls on activities that pose uncertain risks of possibly significant environmental harm. This decision rule is conceptually unsound and would diminish social welfare. Uncertainty as such does not justify regulatory precaution. While they should reject PP, regulators should take appropriate account of societal aversion to risks of large harm and the value of obtaining additional information before allowing environmentally risky activities to proceed.

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An Introduction to the Law and Economics of Environmental Policy: Issues in Institutional Design
Type: Book
ISBN: 978-0-76230-888-0

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Article
Publication date: 12 January 2015

Jianwei Gao and Huihui Liu

– The purpose of this paper is to provide a new approach to solving the interval-valued intuitionistic fuzzy stochastic multi-criteria decision-making (MCDM) problems.

Abstract

Purpose

The purpose of this paper is to provide a new approach to solving the interval-valued intuitionistic fuzzy stochastic multi-criteria decision-making (MCDM) problems.

Design/methodology/approach

To transform the interval-valued intuitionistic fuzzy number (IVIFN) into a computational numerical value, a new precision score (P-score) function is developed based on the degrees of membership, non-membership and hesitation. The prospect decision-making matrix is derived by applying P-score function and Prospect theory. A new criteria weighting model is put forward based on the least square method, the maximizing deviation method and Prospect theory. Consequently, combined criteria weighting model with the prospect decision-making matrix, the integrated prospect value is derived which presents a measurement scale for ranking the order of alternatives.

Findings

As a result, the method of the interval-valued intuitionistic fuzzy stochastic MCDM is suggested. In this method, the new P-score function responses the comprehensive information of the criteria. The prospect decision-making matrix can reflect the risk attitude of the decision maker. The new criteria weighting model can express both the subjective considerations of the decision maker and the objective information meaning.

Research limitations/implications

The research results may lack generalizability for other fuzzy decision making because of the chosen research approach for IVIFN decision making. Therefore, researchers are encouraged to test the proposed propositions further.

Practical implications

The developed approach can be applied in many decision-making fields such as selection of renewable energy alternatives, assessment of flexible manufacturing system alternatives and human resource alternatives performance evaluation, etc. where the evaluation values are IVIFNs.

Originality/value

This paper succeeds in studying the interval-valued intuitionistic fuzzy MCDM based on Prospect theory, which has not been reported in the existing academic literature.

Details

Kybernetes, vol. 44 no. 1
Type: Research Article
ISSN: 0368-492X

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Article
Publication date: 2 February 2015

Qingsheng LI and Ni Zhao

The purpose of this paper is to deal with interval grey-stochastic multi-attribute decision-making problems. It proposes a VIKOR method based on prospect theory in which…

Abstract

Purpose

The purpose of this paper is to deal with interval grey-stochastic multi-attribute decision-making problems. It proposes a VIKOR method based on prospect theory in which probabilities and the attribute value are both grey numbers.

Design/methodology/approach

In the prospect theory the results values and probability weight are used while the utility and probability values in the expected utility theory, which the more realistically reflect and describe the decision makers on the optimal process. VIKOR method makes the decision acceptable superiority and decision process stability. At the same time, a new interval grey number entropy is put forward, which is used to calculate the index weight of unknown.

Findings

The paper provides a VIKOR method based on prospect theory in which probabilities and the attribute value are both grey numbers. And the validity and feasibility of the method are illustrated by an example.

Research limitations/implications

Although VIKOR is much closer to PIS than TOPSIS, at the same time VIKOR method can get the compromise solution with priority, researchers are encouraged to carry on comparative study further.

Practical implications

The paper includes interval grey-stochastic multi-attribute decision-making method and implications. The validity and feasibility of the method are illustrated by a case.

Originality/value

This paper proposes a VIKOR method based on prospect theory in which probabilities and the attribute value are both interval grey numbers. At the same time, a new interval grey number entropy is put forward, which is used to calculate the index weight of unknown.

Details

Grey Systems: Theory and Application, vol. 5 no. 1
Type: Research Article
ISSN: 2043-9377

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Article
Publication date: 1 February 2016

Shuli Yan and Sifeng Liu

With respect to multi-stage group risk decision-making problems in which all the attribute values take the form of grey number, and the weights of stages and decision…

Abstract

Purpose

With respect to multi-stage group risk decision-making problems in which all the attribute values take the form of grey number, and the weights of stages and decision makers are unknown, the purpose of this paper is to propose a new decision-making method based on grey target and prospect theory.

Design/methodology/approach

First, the sequencing and distance between two grey numbers are introduced. Then, a linear operator with the features of the “rewarding good and punishing bad” is presented based on the grey target given by decision maker, and the prospect value function of each attribute based on the zero reference point is defined. Next, weight models of stages and decision makers are suggested, which are based on restriction of stage fluctuation, the maximum differences of alternatives and the maximum entropy theory. Furthermore, the information of alternatives is aggregated by WA operator, the alternatives are selected by their prospect values.

Findings

The comprehensive cumulative prospect values are finally aggregated by WA operator, alternatives are selected or not are judged by the sign of the comprehensive prospect theory, if the prospect value of alternative is negative, the corresponding alternative misses the group decision makers’ grey target, on the contrary, if the prospect value of alternative is positive, the corresponding alternative is dropped into the group decision makers’ grey target, the alternative with positive prospect value whose value is the maximum is selected.

Originality/value

Compared with the traditional decision-making methods using expected utility theory which suppose the decision makers are all completely rational, the proposed method is based on irrational which is more in line with the decision maker’s psychology. And this method considers the decision maker’s psychological expectation values about every attribute, different satisfactory grey target about attributes will directly affect decision-making result.

Details

Grey Systems: Theory and Application, vol. 6 no. 1
Type: Research Article
ISSN: 2043-9377

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Book part
Publication date: 1 December 2008

Soo Hong Chew, King King Li, Robin Chark and Songfa Zhong

Purpose – This experimental economics study using brain imaging techniques investigates the risk-ambiguity distinction in relation to the source preference hypothesis (Fox…

Abstract

Purpose – This experimental economics study using brain imaging techniques investigates the risk-ambiguity distinction in relation to the source preference hypothesis (Fox & Tversky, 1995) in which identically distributed risks arising from different sources of uncertainty may engender distinct preferences for the same decision maker, contrary to classical economic thinking. The use of brain imaging enables sharper testing of the implications of different models of decision-making including Chew and Sagi's (2008) axiomatization of source preference.

Methodology/approach – Using fMRI, brain activations were observed when subjects make 48 sequential binary choices among even-chance lotteries based on whether the trailing digits of a number of stock prices at market closing would be odd or even. Subsequently, subjects rate familiarity of the stock symbols.

Findings – When contrasting brain activation from more familiar sources with those from less familiar ones, regions appearing to be more active include the putamen, medial frontal cortex, and superior temporal gyrus. ROI analysis showed that the activation patterns in the familiar–unfamiliar and unfamiliar–familiar contrasts are similar to those in the risk–ambiguity and ambiguity–risk contrasts reported by Hsu et al. (2005). This supports the conjecture that the risk-ambiguity distinction can be subsumed by the source preference hypothesis.

Research limitations/implications – Our odd–even design has the advantage of inducing the same “unambiguous” probability of half for each subject in each binary comparison. Our finding supports the implications of the Chew–Sagi model and rejects models based on global probabilistic sophistication, including rank-dependent models derived from non-additive probabilities, e.g., Choquet expected utility and cumulative prospect theory, as well as those based on multiple priors, e.g., α-maxmin. The finding in Hsu et al. (2005) that orbitofrontal cortex lesion patients display neither ambiguity aversion nor risk aversion offers further support to the Chew–Sagi model. Our finding also supports the Levy et al. (2007) contention of a single valuation system encompassing risk and ambiguity aversion.

Originality/value of chapter – This is the first neuroimaging study of the source preference hypothesis using a design which can discriminate among decision models ranging from risk-based ones to those relying on multiple priors.

Details

Neuroeconomics
Type: Book
ISBN: 978-1-84855-304-0

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Book part
Publication date: 4 July 2019

Abstract

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Contemporary Issues in Behavioral Finance
Type: Book
ISBN: 978-1-78769-881-9

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Article
Publication date: 21 January 2019

Mehdi Rajabi Asadabadi and Keiran Sharpe

The purpose of this paper is to use game theory and ambiguity theory to show how “economically rational” vendors will behave in a procurement process that runs over more…

Abstract

Purpose

The purpose of this paper is to use game theory and ambiguity theory to show how “economically rational” vendors will behave in a procurement process that runs over more than one period. In light of that behavior, we have proposed “economically rational” counter-strategies on the part of purchasers.

Design/methodology/approach

Based on a perception–expectation framework, a unique game-based approach is designed. The authors have proposed “economically rational” counter-strategies on the part of purchasers, which are premised on the theory of rational agency.

Findings

Ambiguity in the procurement process is a bane for procuring principals and a boon for suppliers – for the former, it is an issue to be managed, and for the latter it provides an opportunity to extract “insurance rents” from the principals. The authors show that, under certain conditions, the contracting principal can be exploited by a rational, rent-extracting vendor. In particular, they show that there is an incentive for a vendor to delay the resolution of ambiguities in the contract until late in the procurement process, when the insurance rents are at a maximum.

Originality/value

This study contributes to the current literature by highlighting an existing problem in the procurement process and describing it using decision theory under ambiguity in a game-like setting. Specifically, the authors use game theory in a unique way to deal with imperfect information coupled with ambiguity.

Details

Journal of Business & Industrial Marketing, vol. 34 no. 4
Type: Research Article
ISSN: 0885-8624

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Article
Publication date: 27 May 2021

Nuno Silva

The study aims to show that ambiguity aversion exerts a non-negligible effect on the investors' decisions, especially due to the possibility of sharp declines in stock prices.

Abstract

Purpose

The study aims to show that ambiguity aversion exerts a non-negligible effect on the investors' decisions, especially due to the possibility of sharp declines in stock prices.

Design/methodology/approach

The vast majority of previous studies on life-cycle consumption and asset allocation assume that the equity premium is constant. This study evaluates the impact of rare disasters that shift the stock market to a low return state on investors' consumption and portfolio decisions. The author assumes that investors are averse to ambiguity relative to the current state of the economy and must incur a per period cost to participate in the stock market and solve their optimal consumption and asset allocation problem using dynamic programming.

Findings

The results show that most young investors choose not to invest in stocks because they have low accumulated wealth and the potential return from their stock market investments would not cover the participation costs. Furthermore, ambiguity-averse investors hold considerably fewer stocks throughout their lifetime than ambiguity-neutral ones. The fraction of wealth invested in stocks over the typical consumer's life is hump-shaped: it is low for a young individual, peaks at his early 30s and then decreases until his retirement age.

Originality/value

To the best of the author’s knowledge, this is the first study that assesses the impact of negative stock price jumps on the optimal portfolio of an ambiguity-averse investor.

Details

Review of Behavioral Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1940-5979

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