BE 3: Non-standard beliefs

• Created by: charlie
• Created on: 30-04-18 12:33
Standard expected utility model
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Puzzle: Subjective Probabilities
Since the probabilities attached to the individuals utility in different states of the world are subjective, they are prone to number of systematic biases
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Patch 1) Over-confidence
1) Over-optimism (overestimate ones ability) 2) Over-precision (overestimate precision of ones estimate)
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Patch 1) Empirics: Over-confidence in male traders
Men trade more than women (Over-optimism?) + Men choose riskier securities to invest in (Over-precision?), issue of OVB in gender
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Patch 1) Empirics: Over-confidence in men using priming (1) risk-tolerance
D-I-D: priming increases risk tolerance (male only)/ Triple D-I-D: priming increases risk tolerance more in men than in women
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Patch 1) Empirics: Over-confidence in men using priming: D-I-D
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Patch 1) Empirics: Over-confidence in men using priming (2) Beliefs
D-I-D: priming increases your own beliefs (only in males) on number of wins of lottery (not when guessing peer wins)
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Patch 1) Empirics: Over-confidence in men using priming (3) risk-tolerance using investment primes
D-I-D: priming of power increases risk tolerance (male only) with no effect for success priming (beliefs hold when using own money + old lady next door's money)
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Patch 2) Law of small numbers
Individuals expect random draws to represent overall distribution (holds for very large N) + update probabilities (despite still being random)
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Patch 2) Law of small numbers: Bayes Theorem
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Patch 2) Empirics: Gamblers fallacy
Random draw from urn of 'Up,Up' what is prob. of another Up? : LOSN p(Up) < Bayesian p(Up) due to belief that balls are used up (despite them being replaced)
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Patch 2) Empirics: Over-inference in ability
Unknown fund manager achieves return from random balls drawn from urn of 'Up, Up, Up' what is prob. he's good? : LOSN p(good|Up,Up,Up) > Bayesian p(good|Up,Up,Up) due to belief balls used up
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Patch 2) Empirics: Employee investment in own company
Based on LT prior performance more employees invest in their own company (over-inference on future performance)
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Patch 3) Projection bias
1) Beliefs on future preferences will be biased towards their current state 2) People under-appreciate adaption to future circumstances
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Patch 3) Projection bias towards current state model
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Patch 3) Empirics: Temperature fluctuations impact on order returns
Cold weather when ordering will increase probability of returns (projection bias as mis-predict future utility)
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Patch 3) Empirics: Temperature fluctuations impact on order returns (probit model + issues)
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Other cards in this set

Card 2

Front

Puzzle: Subjective Probabilities

Back

Since the probabilities attached to the individuals utility in different states of the world are subjective, they are prone to number of systematic biases

Card 3

Front

Patch 1) Over-confidence

Card 4

Front

Patch 1) Empirics: Over-confidence in male traders

Card 5

Front

Patch 1) Empirics: Over-confidence in men using priming (1) risk-tolerance

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