Theory Of Bounded Rationality Research Articles

The Behavioural Finance Revolution: Bridging the Gap between Numbers and Corporate Performance

This conceptual paper investigates the interplay between cognitive biases, financial decision-making, and corporate governance within the framework of behavioral finance. By examining a range of cognitive biases, including overconfidence bias, confirmation bias, anchoring bias, disclosure bias, and framing bias, the paper explores the complexities of human behavior and its impact on financial outcomes, especially in developing countries. The paper aims to suggest an approach for researchers by proposing an overall framework that intricately connects the subjectivity of cognitive biases with empirical research. The integration of theoretical frameworks, such as prospect theory, bounded rationality theory, agency theory, framing theory, availability heuristic, and the endowment effect, provides a comprehensive understanding of deviations from rational expectations in financial decision-making. Furthermore, the paper highlights the relevance of cognitive biases in understanding corporate scandals and their implications for shareholder value creation and long-term sustainable growth. The findings contribute to both academic research and practical implications, offering insights for practitioners, policymakers, and researchers in their endeavors to enhance transparency, improve decision-making processes, and cultivate responsible corporate behavior within organizations.

Coordinated design of multi-stakeholder community energy systems and shared energy storage under uncertain supply and demand: A game theoretical approach

Shared energy storage plays an important role in achieving sustainable development of renewable-based community energy systems. In practice, the independent or disordered planning of community energy systems and shared storage systems can lead to suboptimal design without considering the complex interactions between neighboring energy systems. Therefore, a coordinated design approach for community energy systems and shared energy storage is proposed, and a pricing mechanism for storage sharing based on bounded rationality theory is developed. A Stackelberg game is introduced to enable consideration of storage sharing among energy systems at the design phase. The uncertainties of solar irradiation, wind speed, and electrical demand on both the supply and demand sides are also considered. Then, an uncertainty model is formed to optimize the system configurations, operation strategies, and storage sharing strategies of each stakeholder, simultaneously. Furthermore, the influence of the profit margin, storage investment cost, and carbon tax on the storage rental price and system design strategies are discussed. Illustrative examples highlight the feasibility and applicability of the shared storage pricing mechanism and coordinated design approach. This paper provides references for the government with respect to the problem of coordinated design for multi-stakeholder distributed energy systems and storages in a market-oriented environment.

Does Heuristic Bias Matter for Long And Short-Term Investment Decision-Making During The COVID-19 Pandemic?

Introduction/Main Objectives: This study examines the effect of heuristic behavior on investment decision-making in the long- and short-term during the COVID-19 pandemic in the Indonesian capital market. Background Problems: Traditional finance cannot fully explain how investors behave in the capital market. Investors will tend to use heuristics when making investment decisions because humans have cognitive limitations, as explained in the bounded rationality theory. Especially during the COVID-19 pandemic, investors have shown their irrationality due to the high uncertainty and panic caused by the COVID-19 pandemic. This phenomenon can only be explained by behavioral finance. Novelty: This study examines the effect of bias on the invest­ment decision-making of investors who make long-term and short-term investments. Previous studies only tested the impact of bias directly, without differentiating the length of time of the investment. Research Methods: This study used partial least squares structural equation modelling (PLS-SEM) with WarpPLS tool. Testing the moderating effect was undertaken using multi-group analysis (MGA). Finding/ Results: The results of this study indicate that anchoring and availability bias have a positive effect on investment decision-making, while representativeness bias has no significant impact. Investment time moderates the effect of representativeness bias on irrational investment decision-making, while anchoring and availability bias are not supported. Conclusion: Anchoring and availability heuristics will increase irrational investment decisions, while the effect of representativeness heuristics on irrational investment decisions will decrease when investors make long-term investments.

Empowering retailers: A bounded rationality perspective to enhancing omnichannel journey satisfaction

We draw on bounded rationality theory to examine the drivers of omnichannel journey satisfaction. By examining the omnichannel journey as a holistic experience (as opposed to a sequence of individual channel decisions), our research demonstrates that maximisation as a goal can increase shoppers' satisfaction with the omnichannel journey. Findings of three studies lend support to the notion that shopping mindsets should not be taken exclusively as an individual trait, but also as a mindset state which can be situationally activated within the omnichannel setup. We show that omnichannel shoppers should be encouraged to maximise their decision outcomes and to embrace the superior enjoyment and achievements that the omnichannel experience has to offer. In contrast to past research, we recommend that looking back into individuals' specific channel choices, channel use and shopping journey's configuration should be discouraged. We discuss theoretical and practical implications for researchers and retailers alike.

Risk Tolerance: Heuristic Bias Towards Investment Decision Making

Objective: This study aims to examine how risk tolerance influences the role of overconfidence bias and availability bias in investment decision-making. Because of the complexities of the investment decision-making process, this study attempts to investigate psychological variables in the investment decision-making process. Design/Methods/Approach: This study used the Structural Equation Modeling Partial Least Squares (SEM-PLS) analytic approach using the SmartPLS 3 program and survey data provided online to stock investors, with a total of 303 samples obtained. The study applied CMB preventive techniques to decrease common method bias (CMB). Findings: The results indicate a positive and significant mediating role of risk tolerance on the effect of overconfidence bias and availability bias toward investment decision-making. Originality/Value: This research seeks to explore the process of making investment decisions by taking into account the psychological aspects of investors by using a more comprehensive Bounded rationality theory point of view. This study tested the mediation mechanism of risk tolerance in bridging the influence of heuristic bias on investment decision-making, which has not been explored much by previous studies. Practical/Policy implication: The findings can guide investors to consider how they make biased investment decisions and help investment managers assess the appropriate level of investment risk.

Explaining the lower usage rate of indigenous construction materials in Ghanaian public buildings using bounded rationality

Judicious use of Indigenous Construction Materials (ICM) contributes to sustainability of a local construction industry. Why has the use of ICMs not contributed to the sustainability of the Ghanaian Construction Industry (GCI), and how can the use of ICMs engender the sustainability of GCI and that of similar developing countries? This paper uses bounded rationality and mixed-method strategy to explain the ICM usage rate in the GCI, and describes measures for improving the sustainability of the local construction industry through ICMs use. Relatively high ICM cost and non-availability of alternatives have been found as factors largely responsible for constrained ICMs usage. This paper is one of the first to draw on a synergy of the bounded rationality theory and empirical findings to give advanced insight into factors constraining the use of ICMs, as well as provide a measured usage rate of local building materials using real building projects cases. The research has carved a path for nurturing sustainable construction industry in developing countries through indigenous resources.

Impact of a priori positive information on the results of voting methods

The aim of this paper is to present the results of experiments relating to voting methods based on the bounded rationality theory. The research demonstrated that a positive nudge changes the voting results. The study focused on three methods of voting: the Borda Count method, the Condorcet winner method and the anti-manipulation method. In a laboratory experiment, the subjects were asked to select the best musician. They were to manipulate their voting so that a predetermined winner is chosen. In the first voting, the subjects did not receive any a priori information, while in the second voting, some a priori information was provided, i.e. the true, objective ranking of the musicians. What followed was another voting. It was initially assumed that the participants would manipulate their voting the same way as in the first voting. The results, however, were different. The obtained second ranking of musicians was closest to the true, objective ranking, thus proving that the manipulation effect was neutralised by the a priori positive information about the true, objective order.

The Effect of Travel-Chain Complexity on Public Transport Travel Intention: A Mixed-Selection Model

With urban expansion and traffic environment improvement, travel chains continue to grow, and the combination of travel purposes and modes becomes more complex. The promotion of mobility as a service (MaaS) has positive effects on facilitating the public transport traffic environment. However, public transport service optimization requires an accurate understanding of the travel environment, selection preferences, demand prediction, and systematic dispatch. Our study focused on the relationship between the trip-chain complexity environment and travel intention, combining the Theory of Planned Behavior (TPB) with travelers' preferences to construct a bounded rationality theory. First, this study used K-means clustering to transform the characteristics of the travel trip chain into the complexity of the trip chain. Then, based on the partial least squares structural equation model (PLS-SEM) and the generalized ordered Logit model, a mixed-selection model was established. Finally, the travel intention of PLS-SEM was compared with the travel sharing rate of the generalized ordered Logit model to determine the trip-chain complexity effects for different public transport modes. The results showed that (1) the proposed model, which transformed travel-chain characteristics into travel-chain complexity using K-means clustering and adopted a bounded rationality perspective, had the best fit and was the most effective with comparison to the previous prediction approaches. (2) Compared with service quality, trip-chain complexity negatively affected the intention of using public transport in a wider range of indirect paths. Gender, vehicle ownership, and with children/without children had significant moderating effects on certain paths of the SEM. (3) The research results obtained by PLS-SEM indicated that when travelers were more willing to travel by subway, the subway travel sharing rate corresponding to the generalized ordered Logit model was only 21.25-43.49%. Similarly, the sharing rate of travel by bus was only 32-44% as travelers were more willing to travel by bus obtained from PLS-SEM. Therefore, it is necessary to combine the qualitative results of PLS-SEM with the quantitative results of generalized ordered Logit. Moreover, when service quality, preferences, and subjective norms were based on the mean value, with each increase in trip-chain complexity, the subway travel sharing rate was reduced by 3.89-8.30%, while the bus travel sharing rate was reduced by 4.63-6.03%.

Defining Investment Decision Making in the Stock Market: A Literature Review

Investment Decision Making (IDM) is closely related to the important role of stocks in the national economy. Investment decision-making becomes a research topic that is studied by researchers with various research designs. However, through initial observations, it was found many theoretical frameworks define investment decision-making. This article aims to define stock investment decision making including theoretical frameworks and their paired variables. A Systematic Literature Review (SLR) with data analysis using excel and NVivo 12 was employed as the research method. Accordingly, the results show that various definitions of IDM were used by researchers and most of which define it as IDM rational activity with varied underlying theories that were mostly based on the bounded rationality theory and determined by their paired variables.

The Strategy Selection in Financial Fraud and Audit Supervision: A Study Based on a Three-Party Evolutionary Game Model

In recent years, financial fraud of listed internet companies has emerged one after another. Under the strategic goal of full audit coverage, the problems caused by audit failure have attracted more and more attention in China. We use the bounded rationality theory to analyze the strategy selections of listed internet companies, accounting firms, and audit regulators, and put forward three hypotheses: the hypothesis of participants, the hypothesis of strategy selections, and the hypothesis of model parameters. Next, the three-party evolutionary game model is constructed, and only one stable equilibrium point is found. In numerical simulation analyses, we discuss the strategy selections of the three parties under the impact of different model parameters. The research framework of this paper enriches the existing research on financial fraud and audit supervision and deepens the evolutionary mechanism of three-party strategy selections.

An Approximation Theorem and Generic Convergence of Solutions of Inverse Quasivariational Inequality Problems

In this paper, we mainly obtain an approximation theorem and generic convergence of solutions for inverse quasivariational inequality problems. First, we define the concept of the approximate solution to inverse quasivariational inequality problems under bounded rationality theory. Afterward, an approximation theorem that satisfies fairly mild assumptions is proved. Moreover, we establish a function space and discuss the convergence properties of solutions for inverse quasivariational inequality problems by the method of set-valued analysis. Finally, we prove that most of inverse quasivariational inequality problems are stable in the case of perturbation of the objective function. These results are new, which improve the corresponding outcomes of the recent literatures.

Normalizing White-Collar Wrongdoing in Professional Service Firms

There is extensive literature on top managers committing wrongdoing, but few studies examine white-collar wrongdoing. Drawing on the experiences of a professional service firm, we examine why and how engineering consultants normalize wrongdoing. Leveraging bounded rationality theory, we find that organizational myopia promotes inadequate administrative systems that hold consultants prisoner to their rules and procedures, leading to normalized wrongdoing. Our theoretical contributions are threefold: (1) we contribute to the literature on wrongdoing, presenting the relation between organizational myopia and normalized wrongdoing, (2) we contribute to the administrative systems literature, showing their link with poor project performance, and (3) we show how administrative systems and normalized wrongdoing play a role in project scope creep. We introduce an iceberg model to show that the failed project (the tip of the iceberg) is due to organizational myopia and inefficient administrative systems that need to be addressed before starting any project.

UNREVALING SHARIA COMPLIANCE

This study is aimed at obtaining an in-depth explanation and understanding of the phenomenon of sharia compliance in an Islamic financial institution, Baitul Maal wat Tamwil (BMT) from the point of view of the members of BMT under LKSI group. The Rational Choice Theory and Bounded Rationality Theory are the two theories that used as an interpretation anchor and applied for analyzing the data. Sharia compliance of BMT members of the LKSI is reflected in every contract given to BMT clients/customers supported by regular training on the understanding of Islamic compliance on an ongoing basis. The activities are carried out with in considerations of two things, namely sharia and business science. Rational thinking based on the adherence to the religious values is an important basis in the formation of BMTs.

Bounded rationality: are higher online review ratings always better for sales?

ABSTRACT Intuitively, high online review ratings should benefit sales. However, the previous findings show mixed results. The effect of online review ratings on purchases might vary by many factors. We utilize the bounded rationality theory to predict that consumers might seek to satisfice rather than maximize when they evaluate online review ratings to make purchase decisions. The effect of online review ratings on purchase decisions is likely to be concave if bounded rationality prevails in decision-making. If consumers seek a ‘good-enough’ level of online review ratings rather than the optimal rating, the marginal merit is smaller for higher ratings that are more than satisfactory. Findings from more than ten million consumer choices on Expedia.com indicate that the marginal effect of online review ratings on consumer decisions varies and the effect is concave.

Factors Affecting to the Unethical Behavior of Insurance Salespeople: Evidence from Sri Lankan Insurance Industry

There are limited studies on the unethical behaviour of insurance salespeople in Sri Lanka that focused on organizational factors that affect for unethical behaviour of insurance salespeople. The Ethical Impact Theory (EIT) and the Theory of Bounded Rationality theory used as a unique feature in the study. The sample of 330 insurance salespeople confirmed from the top 05 life and top 05 general insurance companies in Sri Lanka based on market capitalization and simple random sampling method. The data collected via questionnaires. The Researcher used income, benefits, job satisfaction, inability to identify customer needs, failure to fulfil responsibilities, sales target, coaching by the supervisor, and ethical training as independent variables. The data analysed using correlation and multiple regression analysis. The study revealed that income, benefits, job satisfaction, failure to fulfil responsibilities, sales target and coaching by supervisors have a significant positive relationship with the unethical behaviour of insurance salespeople whereas job satisfaction indicated a strong positive relationship. Study concludes that there is a negative impact on coaching by supervisor and unethical behaviour of salespeople in the Sri Lankan Insurance industry. The study is limited only to investigating the reasons for unethical behaviour. Further scholars, can study the consequences of these unethical behaviours and can conduct in-depth interviews to find more insights.

Defining Household Typologies Based on Cropland Use Behaviors for Rural Human-Environment Systems Simulation Research: A Case Study in Southwest China.

The dynamics of rural human-environment systems in developing countries have increasingly been attracting attention. Agent-based modeling (ABM) is a valuable simulation tool for detecting complex feedback loops in rural human-environment systems with a ‘bottom-up’ approach. However, such models require the prerequisite analysis of household typology to simulate households’ decision-making process, where a gap exists between having accurate classification criteria and a simplified modeling framework. This study aimed to develop a household typology for two selected counties in southwest China based on multivariate analysis techniques and the classification tree method. Four categories of socioeconomic variables, including labor conditions, resource endowments, economic status, and social connections, were screened as possible factors impacting agriculture practice decisions. The results showed that household diversification in the study area was mainly determined by diversified livelihood strategies of off-farm work, livestock breeding, subsidy dependence, and traditional planting. Five distinct household types were identified: non-farm households, part-time households, livestock breed households, subsidized households, and traditional planting households. The household types were associated with specific cropland use behaviors, and their decision-making behaviors were verified with bounded rationality theory (where the maximization of profits is the primary goal). The quantitative classification criteria obtained in this study were clear and could be easily identified and used by ABMs. Our study provides a basis for further simulation of the complicated rural human-environment systems in southwest China.

The behavioural finance paradigm and the adaptive market hypothesis

This study tests for the applicability of the Adaptive Market Hypothesis (AMH) and Bounded rationality theories on the Johannesburg Stock Exchange (JSE). This is in order to determine the influence of behavioural risk factors on the efficiency of the stock market. Behavioural theories show a gap in the theory of Efficient Market Hypothesis. Using quantile regression, our study established the applicability of the Adaptive Market Hypothesis on the JSE. Past market returns were shown to be significant in predicting future returns and thus did not follow a random walk. The lagged return increased at higher quantiles and differed with changes in market conditions (i.e. pre-financial crisis, financial crisis and post-financial crisis). Thus, the predictability of returns varies with a change in market conditions. This paper is focused on only on the Johannesburg stock exchange in South Africa, more specifically the movement is the all share index. The findings should be able to be applied to emerging and developed economies. Business confidence is found to have a negative relationship with returns showing a lag in time for sentiment to be incorporated in prices. In contrast, consumer confidence is found to have a positive relationship with returns. In summary, investors are shown to be influenced by fundamental and behavioural factors.

The Role of the Representativeness Heuristic in Probability Judgments of Heart Attack and Coronary Heart Disease

Abstract. Background: Diabetes continues to be a major health problem around the globe, and low treatment adherence continues to hinder clinical outcomes. Risk perception has been considered to guide the decision-making processes, and in recent years, the bounded rationality theory and cognitive heuristics have proved to be a useful lens to gain insight into informal and irrational reasoning. In particular, heuristics for the estimation of event frequencies and probabilities are considered to be relevant to the field of health behaviors. It is possible that the risk perceptions that determine patients’ adherence could be generated by these heuristics. Aims: The purpose of this study is to analyze the role of the representativeness heuristic in risk perceptions related to heart attacks and coronary heart disease (CHD) in a sample of patients with type 2 diabetes (T2D). Method: Cross-sectional study with 342 patients attending a public hospital in an urban setting to treat their diabetes. Results: The heuristic was correlated through both its mechanisms with CHD and heart attack. Evidence suggests that the representativeness heuristic might play a role in probability judgments related to heart complications in patients with T2D. Limitations: Only CHD and heart attack were included in the study, and the heuristic could correlate with the risk perception of other complications as well as the perceived risks and benefits of the diabetes treatment. Conclusion: We call for researchers to further study these heuristics in the context of treatment adherence of T2D patients.

Bounded Rational Reciprocal Preference Relation for Decision Making

Fuzzy relations have been widely applied in decision making process. However, the application process requires people to have a high level of ability to compute and infer information. As people usually have limited ability of computing and inferring, the fuzzy relation needs to be adapted to fit the abilities of people. The bounded rationality theory holding the view that people have limited rationality in terms of computing and inferring meets such a requirement, so we try to combine the fuzzy relation with the bounded rationality theory in this study. To do this, first of all, we investigate four properties of fuzzy relations (i.e. reflexivity, symmetry, transitivity and reciprocity) within the bounded rationality context and find that these properties are not compatible with the bounded rationality theory. Afterwards, we study a new property called the bounded rational reciprocity of fuzzy relations, to make it possible to combine a fuzzy relation with the bounded rationality theory. Based on the bounded rational reciprocity, the bounded rational reciprocal preference relation is then introduced. A rationality visualization technique is proposed to intuitively display the rationality of experts. Finally, a bounded rationality net-flow-based ranking method is presented to solve real decision-making problems with bounded rational reciprocal preference relations, and a numerical example with comparative analysis is given to demonstrate the advantages of the proposed methods.

Inventory decision-making biases: a review and suggestions for future research

PurposeThe paper provides a comprehensive overview of the biases in inventory decisions, under the umbrella of behavioural operations, considering research findings that used experimental methods. Research in this field has gained traction but, to the best of our knowledge, review articles that summarize these research findings are scarce. Hence, there is a need to synthesize the anomalies and biases reported in inventory decision-making literature to gain a more integrated understanding.Design/methodology/approachThis study reviews themes relevant to inventory and behavioural operations management from the articles published in recognized top-tier journals during the period between 2000 and 2020 with an aim to build a classification framework. Further, using a systematic review procedure, the relevant research studies are divided into sub-sections and appropriate search strategies are adopted to pleat more information on inventory ordering biases.FindingsThis study presents a classification framework by highlighting the factors influencing the biases in inventory decisions and describes the effects of utility preferences on the decision-making behaviour. It highlights the inventory ordering pattern under unconventional settings and also for different supply chain settings. This systematic review helps in identifying the research gap and in giving directions for future researchers.Originality/valueThe study presents a systematic review and detailed analysis of the research in inventory decision making through a behavioural lens. The study shows a clear direction of progress over the years, and implies new directions for looking beyond placing orders and for moving towards a more integrated approach while making supply chain decisions. It will be useful for researchers and practitioners working on newsvendor decisions, supply chain contracts, behavioural economics, behavioural operations management, bounded rationality theory and experimental economics.