Satisficing and Financial Investments Experimental Evidence

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Satisficing and Financial Investments-
Experimental Evidence Theoretical Problems
-byFellner / Güth / Maciejovsky / Martin
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Goal (mathematically) precise formulation of
bounded rationality based on empirical
(mostly experimental) evidence
Plan three experimental studies the
first completed, the second run, the third
preliminary a theoretical study task
transcending satisficing
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Like the Rational-Choice-Approach also Bounded
Rationality provides just a language

• which is more intuitive (satisficing, not
  optimizing)
• can be directly elicited (by asking for
  aspirations)
• mostly set-valued (even empty)
• may fail when interpreted boldly

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• 1. Study Gerlinde Fellner, Werner Güth, Boris
  Maciejovsky

Illustrate how to develop a bounded
rationality- approach and to test it! Compare it
with an equally bold rational choice-approach!
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Method of Comparing Bounded with Unbounded
Rationality

• Bounded
• direct elicitation of aspirations
• set valued, possibly empty
• fails often even when
• non-empty

• Unbounded
• using choices to infer cardinal
• utility
• can usually be fitted except for rare cases of
  irrationality
• often inconsistent parameter estimates

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Setup monetary endowment options
? idle return rate ? riskless bond return
rate ? risky asset with prob.
State 1 return rate with prob.
State 2 where
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Aspirations
intermediate aspiration with

return-aspiration for state 1
with
return-aspiration for state 2
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(Un)Bounded Rationality no idle money!
Bounded only
Exclude 1. ! or Note
due to bounded
rationality!
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2. Try to achieve ! or Note
due to
bounded
rationality!
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reasonable
Conditions
and Classification unreasonable
but no potential satisficer but only
potentially satisficing and
actual satisficer
potentially satisficing
actually satisficing
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Behavioral Risk Attitudes? ? only for actual
satisficers, e.g. by
risk shy risk tolerant risk seeking



How
to define and ? ? by (cor)relating
sum and spread with actual
choices e.g. risk seeking if sum and
spread are relatively large
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Rational Choice Fitting
if risk neutral or risk loving
in case of considerable risk
aversion bold assumption
with
risk averse risk neutral risk loving
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How is related to , sum
and spread ?
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• non-incentivized binary investment choice
• post-experimentally ( consistency of -
  data? )
• (similar to aspiration data, avoids
  diversification effect)
• (choice )

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Experimental protocol
no transformation of probabilities needed
credit line of 1000 without interest! 17
successive rounds (payment only for randomly
selected round)
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Treatments (CR)
(PR)
1st round the same later rounds
only - choice and post-exper. decision

• -
• - choice
• post-exper.
• decision

in each round
96 participants (48 in each treatment)
all independent! about 50 minutes (average
earning 12.50
standard deviation 13.20)
surplus from investment
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Descriptive Data Analysis
(CR) 41.3 (337 of 816)
(688 of 816)
(closed!)
closed (PR) 37 of 48 not all -
choices exploit credit line fully
(CR) 64 of 816 (PR) 70 of 816
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Main Regularities
? about 60 of consistency of - and
- data ? in (CR) no significant time trends of
in (PR) no - trend ? in (CR) significant
pos. correlation of and
from round 3 on (not in (PR) ) ? stronger
dependence of with than with ?
the larger the spread the smaller
, the more risk aversion!
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mainly with spread less often with
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asking for aspirations induces more consistency
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No significant time trends!
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A
A
S
S
S
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Non-Satisficing
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2nd Study (Fellner / Güth / Martin) in addition
to former choice task also the following one
idle riskless bond
state 1 state 2 state 3
two risky assets
less risky
more risky
propabilities of states
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Aspiration data
which return do you want to guarantee for state
1 2 3
(state 1)
(state 2)
(state 3)
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Satisficing
Actual Satisficing when such portfolios exist
and one is chosen
Potential Satisficing when such portfolios
exist but are not chosen
Non-Satisficing no such portfolios exist
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Prospect Theory-Fitting (assuming e. g. )
two first order conditions (for 0 lt a lt a
interior solution),
otherwise boundary solution!
a, k - optimal portfolio
use i,j - decision data to infer
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3. Study Fellner / Güth / Martin for situations
as above
Satisficing Mode (S) choice of aspirations
can feasible
must unfeasible
be revised when
Rationality Mode (R) choice of utility
parameters can be revised when learning
about its implications
Free Choice Mode (F) free choice of portfolio
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Participants engage in
Phases
half half
with several necc. tasks
1 S R
with several necc. tasks
2 R S
3 free selection of S, R or
F for each of several
tasks
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4. Study Task Transcending
Satisficing advantage of using natural
and intuitive categories satisficing in
one task provides little cues on satisficing
in other tasks Are there constant
satisficing characteristics? spread rich
ness likeliness of aspiration
adjustment . . .
of aspirations
theoretical speculations based on the three
experimental studies!