Have you ever read Frank Knight, or the Austrians, and wondered what this distinction is all about? Neuroscience comes to the rescue:
In the
experiment, test subjects made ambiguous bets while their brains were
scanned using a functional magnetic resonance imager (fMRI).In one
example, the subjects were given the choice between betting money on
the chances of drawing a red card from a "risky" deck that had 20 red
cards and 20 black cards–that is, where the probability of choosing
either color was 50:50–and making the same bet with an "ambiguous" deck
where the color composition of the cards was unknown.In
most cases, the subjects chose to make the risky bet. Logically,
however, both bets would have been equally good because in both cases,
the chance of pulling a red card on the first draw was 50:50.The
brain scans revealed that ambiguous wagers were often accompanied by
activation of the amygdala and orbitofrontal cortex (OFC), two areas of
the brain that are involved in the processing of emotions. In
particular, the amygdala has been found to be closely associated with
fear.A
correlation between aversion to ambiguous decisions and activation of
emotional parts of the brain makes sense from an evolutionary point of
view, Camerer said. "Freezing in the face of danger is an old,
emotional response which probably was evolutionarily adaptive in our
ancestral past."In the modern human brain, this translates into a reluctance to bet on or against an event if it seems at all ambiguous.
Could this help explain the absence of various long-term insurance markets? Thanks to Chris Masse for the pointer.
Since the test subject had to bet on red, the offer to bet on a draw from the “ambiguous” deck sounds a lot like a sucker bet. If someone offered that bet in a bar, I’d assume the deck was full of black cards.
No wonder the subjects chose the “risky” bet.
I think most people would assume you are maximizing information by choosing the deck with the known distribution (That was my gut feeling). I am sure it would take some explanation and convincing that the the maximum likelyhood criterion assumes the distribution of the unknown deck at 50:50 given no observations and therefore both choices are equal. I imagine the counter argument would be “but we don’t know so perhaps it is worse…”
Is it just me or is the main lesson from the current fad for MRI experiments in economics just that we know amazingly little about how the brain works? Different stimuli, different lights go on. My computer is that way too – I press different buttons and different things happen on the screen. Somehow I thought we were farther along than this.
Jeff Smith, still working on making my web page as cool as Gary King’s, so that I can get a link too.
I have a pretty big problem with their characterization of the experiment:
“In one example, the subjects were given the choice between betting money on the chances of drawing a red card from a “risky” deck that had 20 red cards and 20 black cards, †that is, where the probability of choosing either color was 50:50″ and making the same bet with an “ambiguous” deck where the color composition of the cards was unknown.
“In most cases, the subjects chose to make the risky bet. Logically, however, both bets would have been equally good because in both cases, the chance of pulling a red card on the first draw was 50:50.”
That’s just plain wrong unless they are leaving out very important information: what’s the process from which the “ambiguous” deck is created? In other words, what is the distribution of expected number of red cards in that deck?
Sure, if the “ambiguous” deck is built by 40 coin flips, then the statement is true. But there are plenty of other processes, not least of which is an evil experimenter secretly loading it with all blacks, that vary from this result. In fact, I think the process to generate the deck needs to provide a distribution of expected values of red cards with a median and mean of 20 and no skew (with a 40 card deck, that is). That cuts out plenty of real world processes.
I think the psychological insight might just be that people realize correctly that there are two levels of risk in the “ambiguous” deck. First, the risk that you’ve correctly estimated the distribution of expected red cards in the “ambiguous” deck, and second, the risk of picking a red card from that deck.
The relatively simple 50:50 deck doesn’t sound so bad in comparison.
A mathematical friend pointed out to me that the only requirement is that the mean of the expected value be 20 red cards (the median is not required to be 20, nor is skew an issue). On second thought, that makes sense — a process that generates an “ambiguous” deck with 10 red cards twice as often as 40 red cards would still give you a 50/50 chance.
He also points out that if the subject can choose the color he/she wants to pick, and does it by flipping a coin, then you’ve removed the need to know anything about how the “ambiguous” deck is generated.
Since the test subject had to bet on red, the offer to bet on a draw from the “ambiguous” deck sounds a lot like a sucker bet. If someone offered that bet in a bar, I’d assume the deck was full of black cards.
According to the study, subjects were allowed to bet on either red or blue. This is the Ellsberg Paradox. A rational decision-maker should not prefer BOTH bets from the risky urn to those from the ambiguous urn.
Ciao!vi vorrei chiedere una cosa..?volevo chiedervi come mai non si sente piu’ l’audio al mio pc?mi sapete dire anke cosa devo fare o rinstallare qualcosa?grazie…
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