Dynamics of Choice Behavior: The Logical Relation between Linear Objective Probability and Nonlinear Subjective Probability

Brady, Michael Emmett; Lee, Howard B.

doi:10.2466/pr0.1989.64.1.91

Cited by 15 publications

(7 citation statements)

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“…Scholars have known for a long time that risk taking is not based on rational calculations alone [S], with even the great Lord Keynes, a highly successful speculator himself, arguing that taking risks requires optimism and what he quaintly, if obscurely, described as "animal spirits" [4]. Yet entrepreneurs' personality differences have found that such measures of animal spirits are weak predictors of risk taking [6] [18].…”

Section: Introductionmentioning

confidence: 99%

How Believing in Ourselves Increases Risk Taking: Perceived Self-Efficacy and Opportunity Recognition

1994

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What effect does positive and negative feedback about past risk taking have on the future risk taking of decision makers? The results of an experimental study show that subjects who are led to believe they are very competent at decision making see more opportunities in a risky choice and take more risks. Those who are led to believe they are not very competent see more threats and take fewer risks. The feelings of self-competence and self-confidence on one task did not generalize to a similar task. Perception of opportunities was unexpectedly not related to the perception of threats. As executives bring their personal perceptual biases to firm decision making, our results identify a serious built-in bias in SWOT analysis (the analysis of firms' strengths and weaknesses as related to potential opportunities and threats). Executives who believe that they and their firm are very competent will take more risks and vice versa. Our results also provide evidence that the perceived likelihood of an event depends on whether the event is a loss or a gain. Human decision making is subject to the general bias that outcome expectations are not independent of outcome valuations.

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Section: Introductionmentioning

confidence: 99%

How Believing in Ourselves Increases Risk Taking: Perceived Self-Efficacy and Opportunity Recognition

1994

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“…But when lower than 1, the weight must be taken into account (note that the coefficient can be re-written as c D [p/(1 C q)][(2w/(1 C w)]). The distortion of p implied by a weight lower than 1 shows that Keynes's coefficient can account for what, after Ellsberg, has been termed ambiguity aversion (Brady and Lee 1989).…”

Section: Which Keynes For Understanding Decision-making Under Uncertamentioning

confidence: 99%

“…For instance, the famous example of the umbrella dilemma in the TP (Keynes 1973a, p. 32) is usually classified as a situation of non-comparable probabilities (Carabelli 1998). But it can also be understood as an example of conflicting evidence like in the current ambiguity literature (Cabantous 2007, Smithson 2008, and classified as something that makes decision in principle more cumbersome than under ambiguous evidence, but does not exclude that it can be made on some "rational" basis by skilled agents. 20 As already noted, this was represented by Keynes via the "risk" associated with trying to get a profit while taking part in a project that cannot yield it for sure, thus possibly originating a loss (Gerrard 2003).…”

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confidence: 98%

Whither Keynesian probability? Impolite techniques for decision-making

Zappia¹

2015

The European Journal of the History of Economic Thought

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The critical literature on Keynes has provided extensive analysis of why individual agents may find convenient to adopt a “conventional judgement”, and what he meant by “polite techniques” used to save their faces as “rational, economic men.” This paper concentrates instead on impolite techniques of thought suited to deal with Keynesian uncertainty. The paper suggests that the thread going from Keynes’s Treatise on Probability to the General Theory and its defence provides a positive analysis of decision-making under uncertainty, and that placing emphasis on this\ud positive analysis simply means adhering to Keynes’s long-standing commitment to a (surely peculiar) probabilistic set-up

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“…A,, where p, = .I, q , = .9, and A, = $900, a large majority of decision makers will choose emv, over ernv, if probability preferences are nonlinear. Only if probability preferences are linear will the decision maker be indifferent to emv, and ernv,.Brady and Lee (1989aLee ( , 1989bLee ( , 1989c demonstrated that the type of problem discussed above, called by Kahneman and Tversky the "certainty effect" and by other researchers the AUais paradox or security level problem, is easily handled by Keynes' decision rule.Unfortunately, Keynes, in his discussion of applied decision making in 'Request reprints from Dr. M. E. Brady, …”

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confidence: 99%

“…Brady and Lee (1989aLee ( , 1989bLee ( , 1989c demonstrated that the type of problem discussed above, called by Kahneman and Tversky the "certainty effect" and by other researchers the AUais paradox or security level problem, is easily handled by Keynes' decision rule.…”

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confidence: 99%

Theoretical Comparison of the Decision Theories of J. M. Keynes, Kahneman-Tversky, and Einhorn-Hogarth

Brady¹

1991

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Summary.-It is demonstrated that J. M. Keynes in 1921 provided a complete decision rule that handles both the cases of nonlinear probability preferences and ambiguity or uncertainty. The 1979 Kahneman-Tversky approach deals only with risk (nonlinear probability preferences) and does not specify a decision rule. The 1985The -1986 Einhorn-Hogarth anchoring and adjustment rule deals only with ambiguity or uncertainty and not risk. Only Keynes' rule does both. This paper is organized in the following way. After this brief historical introduction, we present Keynes' decision rule, Kahneman-Tversky's decision approach and Einhorn-Hogarth's decision rule. In another section, we demonstrate how Keynes' decision rule solves the Ellsberg Paradox and the Popper Paradox of Ideal Evidence quantitatively. One problem is presented for each paradox. A final section contains our conclusions.Keynes was concerned about the following questions:Whether . . . the 'mathematical expectation' of different courses of action accurately measures what our references ought to be-whether, that is to say, the undesirability of a given course of action increases in direct proportion to any increase in the uncertainty of its attaining its object, or whether some allowance ought to be made for 'risk,' its undesirability increasing more than in proportion to its uncertainty (Keynes, 1921, p. 313).Keynes then gives credit to D'Alembert for being the first scholar to recognize the fact that decision makers prefer high probability values to low probability values, given equal expected monetary values (emv). Thus, if emv, has a value of $90 =p, . A,, where p, = the probability of success = .9, q, = the probability of failure = .1, and A, = the monetary outcome equals $100, while ernv, also has a value of $90 = p , . A,, where p, = .I, q , = .9, and A, = $900, a large majority of decision makers will choose emv, over ernv, if probability preferences are nonlinear. Only if probability preferences are linear will the decision maker be indifferent to emv, and ernv,.Brady and Lee (1989aLee ( , 1989bLee ( , 1989c demonstrated that the type of problem discussed above, called by Kahneman and Tversky the "certainty effect" and by other researchers the AUais paradox or security level problem, is easily handled by Keynes' decision rule.Unfortunately, Keynes, in his discussion of applied decision making in 'Request reprints from Dr. M. E. Brady,

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Dynamics of Choice Behavior: The Logical Relation between Linear Objective Probability and Nonlinear Subjective Probability

Cited by 15 publications

References 20 publications

How Believing in Ourselves Increases Risk Taking: Perceived Self-Efficacy and Opportunity Recognition

How Believing in Ourselves Increases Risk Taking: Perceived Self-Efficacy and Opportunity Recognition

Whither Keynesian probability? Impolite techniques for decision-making

Theoretical Comparison of the Decision Theories of J. M. Keynes, Kahneman-Tversky, and Einhorn-Hogarth

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