Bounded rationality in individual decision making

Camerer, Colin F.

doi:10.1007/bf01669302

Cited by 133 publications

(92 citation statements)

References 38 publications

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“…This assumes that individuals correctly assess the likelihoods of adverse events and that they process probabilities linearly. The descriptive failure of expected utility theory in explaining individual behaviour under risk is well documented, and several alternative theories have been developed of which prospect theory is the most important (Camerer 1998;Starmer 2000). Prospect theory of individual decision making under risk provides a theoretical basis for weighting of probabilities by individuals (Kahneman and Tversky 1979).…”

Section: Elevating Buildings As a Sustainable Long Run Water Managemementioning

confidence: 99%

Individual preferences for reducing flood risk to near zero through elevation

Botzen

Aerts

Bergh

2012

Mitig Adapt Strateg Glob Change

132

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Climate change is expected to increase the frequency and intensity of natural disasters. Adaptation investments are required in order to limit the projected increase in natural disaster risks. Adaptation measures can reduce risk partially or completely eliminate risk. The literature on behavioural economics suggests that individuals rarely undertake measures that limit risk partially, while they may place a considerable value on measures that reduce risk to zero. This is studied for a case of adaptation to climate change and its effects on flood risk in the Netherlands. In particular, we examine whether households are willing to invest in elevating newly built structures when this is framed as eliminating flood risk. The results indicate that a majority of homeowners (52%) is willing to make a substantial investment of €10,000 to elevate a new house to a level that is safe to flooding. Differences between willingness to pay (WTP) for flood insurance and WTP for risk elimination through elevation indicate that individuals place a considerable value on the latter adaptation option. This study estimates that the "safety premium" which individuals place on risk elimination is approximately between €35 and €45 per month. The existence of a safety premium has Mitig Adapt Strateg Glob Change (2013)

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Section: Elevating Buildings As a Sustainable Long Run Water Managemementioning

confidence: 99%

Individual preferences for reducing flood risk to near zero through elevation

Botzen

Aerts

Bergh

2012

Mitig Adapt Strateg Glob Change

132

View full text Add to dashboard Cite

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“…Because of these successes, CPT has been recommended as the new standard for economic analysis (Camerer, 1998;Starmer, 2000), and it was recognized in the Nobel Prize in Economics in 2002.…”

mentioning

confidence: 99%

New paradoxes of risky decision making.

Birnbaum¹

2008

Psychological Review

343

387

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During the last 25 years, prospect theory and its successor, cumulative prospect theory, replaced expected utility as the dominant descriptive theories of risky decision making. Although these models account for the original Allais paradoxes, 11 new paradoxes show where prospect theories lead to self-contradiction or systematic false predictions. The new findings are consistent with and, in several cases, were predicted in advance by simple "configural weight" models in which probability-consequence branches are weighted by a function that depends on branch probability and ranks of consequences on discrete branches. Although they have some similarities to later models called "rank-dependent utility," configural weight models do not satisfy coalescing, the assumption that branches leading to the same consequence can be combined by adding their probabilities. Nor do they satisfy cancellation, the "independence" assumption that branches common to both alternatives can be removed. The transfer of attention exchange model, with parameters estimated from previous data, correctly predicts results with all 11 new paradoxes. Apparently, people do not frame choices as prospects but, instead, as trees with branches.

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“…Therefore, she finds it an inherently complex task to determine the precise payoff of linking choice options. As humans are boundedly rational (Camerer, 1998), they cope with complexity in decision making by simplification, which commonly involves assessing a judgment object (e.g., linking choice option) using only the subset of properties of the object that are most accessible, that is, that come most readily to mind, rather than using all relevant properties (Gigerenzer et al, 1999), as long as this leads them to a satisfying situation (Simon, 1956). This is clearly illustrated in the literature about the effects of task complexity in several other contexts, like job candidate selection (Timmermans, 1993), audit judgment (Bonner, 1994), consumer choice (Swait & Adamowicz, 2001;Dellaert et al, 2012), and betting markets (Sung et al, 2009), but no empirical research to date has addressed such effects in making complex network formation decisions.…”

Section: Hypothesesmentioning

confidence: 99%

Heuristic decision making in network linking

Hout

Dellaert

Herings

2016

European Journal of Operational Research

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Network formation among individuals constitutes an important part of many OR processes, but relatively little is known about how individuals make their linking decisions in networks. This article provides an investigation of heuristic effects in individual linking decisions for network formation in an incentivized lab-experimental setting.Our mixed logit analysis demonstrates that the inherent complexity of the network linking setting causes individuals' choices to be systematically less guided by payoff but more guided by simpler heuristic decision cues, and that this shift is systematically stronger for social payoff than for own payoff. Furthermore, we show that the specific complexity factors value transferability and social tradeoff aggravate the former effect.These heuristic effects have important research and policy implications in areas that involve network formation.JEL Classification: A14, C25, C91, D85

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Bounded rationality in individual decision making

Cited by 133 publications

References 38 publications

Individual preferences for reducing flood risk to near zero through elevation

Individual preferences for reducing flood risk to near zero through elevation

New paradoxes of risky decision making.

Heuristic decision making in network linking

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