Monetary Choices Research Articles

Artificial Intelligence Based Behavioural Finance in Shaping Investment Strategies to Analysis of Key Biases and Heuristics

This paper explores the job of behavioural finance in forming investment strategies zeroing in on key predispositions and heuristics. behavioural finance looks at what mental elements and inclinations mean for monetary choices, frequently wandering from level-headed assumptions. Conventional money expects objective way of behaving pointed toward augmenting returns while limiting dangers; in any case, genuine financial backer way of behaving habitually strays from this ideal because of mental easy routes and predispositions. This study examines critical predispositions like overconfidence, loss aversion, mental accounting, and herd behaviour, exploring their effect on market elements and individual financial backer results. By understanding these predispositions, financial backers and monetary consultants can foster techniques that adjust better to financial backer brain science, possibly prompting more predictable investment results and further developed portfolio the executives. This study explores the influence of behavioral biases on investment decision-making using the PMBAC (Probabilistic Modeling and Behavioral Analysis for Cognitive biases) framework. Key biases, such as overconfidence, loss aversion, and herding behavior, are examined to understand their impact on market performance and investor returns. The analysis reveals that overconfidence occurred in 78% of the cases, resulting in an average return impact of -25%, while loss aversion occurred in 85% of instances, leading to a -5% return impact. Herding behavior, observed in 65% of the cases, was associated with a 15% return impact, showing that following the crowd can lead to short-term gains but greater long-term risks. The study also identifies the role of other biases such as mental accounting (55% occurrence, -3% return impact), anchoring (72% occurrence, -10% return impact), and status quo bias (63% occurrence, -2% return impact). In terms of market performance, herding behavior was linked to a 40% overvaluation, while loss aversion contributed to a 10% market overvaluation. The findings highlight the pervasive nature of these biases in financial decision-making and their significant consequences on risk-adjusted returns, with some biases leading to a negative impact on returns and others fueling market bubbles.

Central banks, monetary stability, and the varieties of capital control liberalization

Abstract This article explores the differential liberalization of capital controls in advanced market economies. It shows that although finance-led economies abolished controls by the 1980s, export-led economies retained significant restrictions into the 1990s, contributing to differential financial market development. A historical comparison of Germany and the UK (1961–1985) finds that differential control use resulted from central bankers’ varying expectations of controls’ monetary functions in the domestic economic context. As capital became mobile in the 1960s, sudden capital in- and outflows jeopardized price and currency stability. In the German context of macroeconomic stability, controls effectively limited capital inflows and arrested destabilizing inflationary and exchange rate pressures. However, in the British context of macroeconomic instability and capital outflows, controls could not sufficiently restore stability: as loose fiscal and monetary choices persisted, monetary conditions deteriorated. Thus, Bank of England officials became fervent advocates for control liberalization to enforce restrictive fiscal and monetary choices via market pressures.

The influence of insight on risky decision making and nucleus accumbens activation

During insightful problem solving, the solution appears unexpectedly and is accompanied by the feeling of an AHA!. Research suggests that this affective component of insight can have consequences beyond the solution itself by motivating future behavior, such as risky (high reward and high uncertainty) decision making. Here, we investigate the behavioral and neural support for the motivational role of AHA in decision making involving monetary choices. The positive affect of the AHA! experience has been linked to internal reward. Reward in turn has been linked to dopaminergic signal transmission in the Nucleus Accumbens (NAcc) and risky decision making. Therefore, we hypothesized that insight activates reward-related brain areas, modulating risky decision making. We tested this hypothesis in two studies. First, in a pre-registered online study (Study 1), we demonstrated the behavioral effect of insight-related increase in risky decision making using a visual Mooney identification paradigm. Participants were more likely to choose the riskier monetary payout when they had previously solved the Mooney image with high compared to low accompanied AHA!. Second, in an fMRI study (Study 2), we measured the effects of insight on NAcc activity using a similar Mooney identification paradigm to the one of Study 1. Greater NAcc activity was found when participants solved the Mooney image with high vs low AHA!. Taken together, our results link insight to enhanced NAcc activity and a preference for high but uncertain rewards, suggesting that insight enhances reward-related brain areas possibly via dopaminergic signal transmission, promoting risky decision making.

In Search of Determinants of Time-Discounting in Monetary Choices: Personal Characteristics Matter Only a Little

In Search of Determinants of Time-Discounting in Monetary Choices: Personal Characteristics Matter Only a Little

No Great Convergence, but not Myth: Stabilization and Growth in East Asia, 1990-2018

Along with global economic integration through trade and financial flows, emerging market economies (EMEs) have become increasingly affected by global fluctuations and structural changes. Also, despite their apparent income convergence since the 2000s, their growth performances have become differentiated across regions. This paper overviews how EMEs in East Asia have coped with these circumstances since the 1990s, and assesses their economic performances from the aspects of both short-run macroeconomic stabilization and long-run economic growth in comparison with other regions. Scrutinizing monetary regime choices in the policy trilemma, dynamic patterns of total capital flows as well as by types of capital, saving-investment gaps and growth finance, and sources of economic growth, the exceptional income convergence of East Asian EMEs imply the following lessons, being apparently heterodox to conventional views: Given volatile global capital flows in the imperfect capital market, in small open economies such as EMEs, 1) for macroeconomic stabilization, exchange rate stability supported by managed float and capital controls is a more reasonable choice than the conventional mix of free float and open capital account, and 2) for economic growth, domestic savings are more reliable and important source of growth finance than foreign capital inflows. In fact, it turns out that 3) capital accumulation has been more important source of long-run economic growth than TFP growth throughout both advanced and emerging market economies. It should be noted, however, that 4) excessive capital accumulation could lead to relatively lower welfare levels than what income levels can attain.

Revisiting monetary policy effectiveness in Turkey using a FAVAR model

This study aims to perform a comparative analysis of the effectiveness of pass-through of policy rates in Turkey. We explore monetary transmission with different choices of instruments, i.e., the Turkish Lira Reference Interest Rate (TRLIBOR rate), BIST overnight rate, and Divisia money, and under different policy regimes, i.e., inflation targeting and new monetary policy regimes. We estimate a two-stage FAVAR model to use all of the available information set and obtain direct responses of disaggregated/sectorial series for the period 2005:12-2018:4. We extend the model setting proposed by Bernanke, Boivin, and Eliasz (2005) by considering the multiple-policy environment in Turkey. Our findings promote arguments that regard policy rate as a poor indicator of the policy stance in Turkey.

Liquidity, Asset Price Volatility, and Monetary Policy Choices: Empirical Evidence from China

This article effectively identifies the high and low volatility state of asset prices in China by constructing the MS‐AR model, and further investigates the relationship between different dimensions of liquidity and asset price volatility. Moreover, we try to incorporate liquidity into the analytical framework and adopt the TVP‐SV‐VAR model to study the time‐varying characteristics between monetary policy, liquidity, asset price volatility and macroeconomy. The results are as follows: firstly, it shows that the high or low volatility state of China’s stock market and real estate market can be clearly divided, and display the consistency with the trend of asset price volatility. Secondly, liquidity has a strong ability to explain the high and low volatility state of asset prices, but it shows some hysteresis effects. Thirdly, the time‐varying results reveal that monetary policy has a regulating effect on liquidity, and the response cycle of quantitative monetary policy is relatively short, which reflects the effects of macroeconomy precisely. However, price‐based monetary policy has a longer response cycle and plays a vital role in the anticipatory adjustment and fine‐tuning of asset price volatility. These conclusions can provide an explanation for the attention to asset price bubbles and potential financial risks, and offer decision‐making references for the central bank to implement differentiated and dynamic monetary policy choices.

The impact of self-selected short sleep on monetary risk taking.

Risky choice has been widely studied in experimental settings, but there is a paucity of research examining the effects of self-selected sleep schedules on risky choices. The current study examined incentivised risky choices of 100 young, healthy adults whose self-selected (at-home) sleep schedules were tracked via actigraphy for 1week prior to decision making. Average nightly sleep was 6.43h/night. On each trial of the decision task, individuals chose between two monetary gambles, with separate blocks of trials presenting amounts to gain versus amounts to lose for each paired gamble choice. In general, participants were risk-averse when trying to maximise gains (GAINS) and risk-seeking when trying to minimise losses (LOSSES). These tendencies were amplified in trials where gambles differed more (vs less) in their riskiness. Response times were longer for real choices (vs. dummy trials of random choice), LOSS versus GAINS trials, and when gambles were more similar versus different in risk. Gamble choices were not impacted by actigraphy measured average sleep levels, which suggests self-selected moderate sleep deprivation does not affect risky monetary choices, as has been found in studies of experimentally induced sleep deprivation. However, our data showed that sleep variability increased risk-taking behaviour in the LOSS condition. Thus, risky decision-making may relate more to variability in sleep efficiency than to overall sleep duration or quality in naturalistic settings. The current study gives insight into how decision making in experimental sleep settings may or may not translate to more ecologically valid settings of self-directed sleep.

Are Impulsive Decisions Always Irrational? An Experimental Investigation of Impulsive Decisions in the Domains of Gains and Losses.

Intertemporal choices are very prevalent in daily life, ranging from simple, mundane decisions to highly consequential decisions. In this context, thinking about the future and making sound decisions are crucial to promoting mental and physical health, as well as a financially sustainable lifestyle. In the present study, we set out to investigate some of the possible underlying mechanisms, such as cognitive factors and emotional states, that promote future-oriented decisions. In a cross-sectional experimental study, we used a gain and a loss version of an intertemporal monetary choices task. Our main behavioural result indicated that people are substantially more impulsive over smaller and sooner monetary losses compared to equivalent gains. In addition, for both decisional domains, significant individual difference predictors emerged, indicating that intertemporal choices are sensitive to the affective and cognitive parameters. By focusing on the cognitive and emotional individual factors that influence impulsive decisions, our study could constitute a building block for successful future intervention programs targeted at mental and physical health issues, including gambling behaviour.

Cognitive Predictors of Delay Discounting in Monetary Choices

Delay discounting, the tendency to choose a smaller-sooner reward over a larger-later reward, is thought of as an expression of personality and cognitive impulsivity. In our study (N = 397), we focused on the cognitive dimension and examined the associations between monetary delay discounting tasks and various individual difference cognitive measures. A higher delay discounting was associated with performance on the tasks of general cognitive ability, cognitive reflection, scientific reasoning, and objective numeracy positively, and with self-reported intuitive thinking disposition and bias susceptibility negatively. However, of all the tasks, the overall bias susceptibility predicted delay discounting over and above all other cognitive predictors we employed. The results support the assumption about a common basis of higher monetary delay discounting and susceptibility to cognitive biases. Because of the relatively low explained variance in delay discounting by cognitive predictors, however, ample room is left for other potential personality predictors in these tasks.

Appetite-Regulating Hormone Ghrelin Predicts Decision-Making in Healthy Controls but Not Individuals With Low-Weight Eating Disorders

Background: Ghrelin is an orexigenic hormone known to regulate appetite, glucose homeostasis, and other food-related functions. The potential role of ghrelin beyond energy homeostasis is not well understood. Ghrelin receptors are evident in the mesolimbic reward pathway, and preclinical research has shown that ghrelin administration increases impulsive behavior and choices in rats. However, little is known about whether and how ghrelin is associated with food-independent behavior and decision-making in humans. We investigated the relationship between ghrelin levels and monetary decision-making using a well-established behavioral paradigm in healthy individuals and individuals with a low-weight eating disorder (LWED), as patients with LWEDs have been shown to have high ghrelin levels and resistance to the effects of this hormone. We hypothesized that higher ghrelin levels would predict more impulsive choices of immediate rewards in healthy individuals, while this relationship would be less pronounced in individuals with LWEDs. Methods: Sixty-four female participants with a LWED and 34 healthy controls (HC), aged 10-22 years, presented after a 10-hour fast to undergo a standardized mixed meal followed by a delay discounting task. During this task, participants decided between smaller immediate and larger delayed monetary rewards. Based on their choices, the delay discounting parameter k was calculated as a marker of choice preferences with higher values indicating a stronger preference for the immediate smaller reward. Blood was drawn prior to and 30, 60, and 120 min after the meal for analysis of ghrelin, and area under the curve was calculated as a cumulative measurement of ghrelin levels. Results: As per study design, BMI was lower in the LWED group (17.3±1.5 kg/m2) compared to the HC group (mean±SD: 21.4±2.5 kg/m2; t[96]=11.33, p<0.0001, d=-1.99). Groups did not differ by age (LWED: 18.3±3.2 years, HC: 18.0±3.1 years; t[96]=-0.36, p=0.720, d=-0.10). Ghrelin levels were higher in the LWED compared to HC group (t[96]=-2.67, p=0.009, d=0.57). K was numerically lower in the LWED compared to the HC group, but the difference was not significant (t[96]=1.37, p=0.175, d=-0.30). Importantly, in HC higher ghrelin levels were associated with higher k values (r=0.37, p=0.032). This relationship was not observed in the LWED group (r=-0.13, p=0.304). Conclusions: In HC, higher levels of ghrelin predicted a stronger preference for smaller immediate rewards, which is consistent with increased impulsive choices shown in animal research. We did not observe this relationship in our LWED sample. Our results indicate that beyond energy homeostasis, ghrelin might play a broader role in reward-related behavior and decision-making, such as monetary choices. Future studies are required to further explore the role of ghrelin in human behavior in both clinical and non-clinical populations.

The Effect of Individual Time Preferences on Smoking Behavior: Insights from Behavioral Economics.

Background:We aimed to explore the correlation between the time and risk preferences and the smoking behavior of adult population in western Iran.Methods:Overall, 792 individuals with the age of 35 to 65 yr participating in an ongoing national cohort study (Persian Cohort) were approached to complete a pre-structured questionnaire in 2017. Time preferences were measured using a standard choice-based method. The individuals’ discount rates were identified by questions that offered binary monetary choices on immediate future and distant future, by making trade-offs between them. Probit regression model was used to investigate the relationship between time preferences and smoking when controlling for demographic and socioeconomic variables.Results:Time and risk preferences had statistically significant direct correlations with smoking. A unit increase in discount rate was associated with a 4.4% percentage point increase in the likelihood of being smoker. A present-biased individual had 5.7% percentage points lower likelihood of being smoker. Moreover, a unit increase in willingness to take the risk increased the likelihood of being a smoker by 1.5% percentage points.Conclusion:Time and risk preferences are important determinants of smoking behavior. These factors should be considered in designing effective prevention and control programs. Policies that increase the immediate costs of cigarette smoking or the immediate benefits of smoking cessation are likely to have a greater impact on reducing the prevalence of cigarette smoking.

Effects of reward magnitude frames on measures of delay discounting in a hypothetical money scenario.

The current study analyzed the effects of three frames of reward magnitude-quantity, volume, and duration-on the rate at which college students discounted hypothetical, delayed monetary rewards. Hypothetical scenarios were presented using the fill-in-the-blank discounting questionnaire and participants made choices between immediate and delayed hypothetical monetary rewards. Scenarios framed the monetary choices as (a) quantity of dollar bills, (b) height (inches) of a stack of dollar bills, and (c) duration of time spent in a hypothetical cash machine to collect dollar bills. For each scenario, participants' subjective values were used to calculate the area under the curve (AuC). Framing resulted in a moderate effect size: The duration frame yielded significantly smaller AuC values compared to the quantity and volume frames. Thus, the framing of reward magnitude was a significant variable in controlling discounting rates for hypothetical, delayed monetary rewards. Subsequent investigations should be aware of the independent effects of the reward magnitude frames on delay discounting rates.

Quantifying the immediate computational effects of preceding outcomes on subsequent risky choices

Forty years ago, prospect theory introduced the notion that risky options are evaluated relative to their recent context, causing a significant shift in the study of risky monetary decision-making in psychology, economics, and neuroscience. Despite the central role of past experiences, it remains unclear whether, how, and how much past experiences quantitatively influence risky monetary choices moment-to-moment in a nominally learning-free setting. We analyzed a large dataset of risky monetary choices with trial-by-trial feedback to quantify how past experiences, or recent events, influence risky choice behavior and the underlying processes. We found larger recent outcomes both negatively influence subsequent risk-taking and positively influence the weight put on potential losses. Using a hierarchical Bayesian framework to fit a modified version of prospect theory, we demonstrated that the same risks will be evaluated differently given different past experiences. The computations underlying risky decision-making are fundamentally dynamic, even if the environment is not.

Contribution of alcohol- and cigarette-related cues to concurrent reinforcer choice in humans

Drug-related cues have been extensively studied for their contributions to decision-making processes involving drug consumption. Less studied is how drug-related stimuli may impact decisions involving outcomes not directly related to substance use. Studies using concurrent choice tasks have demonstrated that cocaine and cannabis cues result in robust and selective biases for monetary reinforcers contiguous with those cues. The purpose of this study was to provide a conceptual replication of these findings with alcohol and cigarettes. Participants recruited using crowdsourcing completed a cued concurrent choice task involving presentation of two cues (one drug and one neutral) followed by concurrent monetary offers below each image. Alcohol (Experiment 1; N = 103) and cigarette (Experiment 2; N = 256) visual cues were evaluated. Participants with hazardous alcohol use and current cigarette use showed greater-than-indifference selection for the alcohol- (p = .004) and cigarette-cued (p = .02) monetary choices, respectively. Qualitative responses indicated that the most popular rationale for responding was “image quality” despite images having no explicit impact on the reinforcer received. Low alcohol use (p = .03) and non-cigarette using controls (p < .001) showed an avoidance bias with lower-than-indifference selection for drug-cued choices. These findings replicate and extend observations that spatially contiguous drug-related cues can bias decisions involving concurrently presented non-drug reinforcers.

Delay discounting: Discussion on an endophenotypic diagnostic tool in anorexia nervosa

Delay Discounting (DD) is a cognitive process that allows an individual to depreciate the value of a reward depending on variable delay times. Some studies have evaluated this process in Anorexia Nervosa (AN) and have identified that these patients were able to discount the value of a reward over time significantly less steeply than healthy control (HC), reflecting a stronger self-control as it could be in food intake. The aim of this study is to show that the results found in the DD task constitute a potential marker in AN and particularly in its restricting subtype (AN-R). Patients with AN meeting criteria for AN-R restricting subtype (n = 21, AN-R) or binge-purge subtype (n = 21, AN-BP), patients with bulimia nervosa (n = 21, BN) and healthy control (n = 20, HC) performed a delay discounting task consisting of a range of 60 monetary choices with variable delay times. Statistical analysis were performed using the final amounts chosen at the end of each test, indicating the “indifference points”. As expected, patients with AN-R significatively depreciated less the value of a monetary reward compared to the other groups showing some significant difference between « indifference points » (ANOVA P = 0.032, P = 0.014). When isolating the variable “anorexia” (n = 40) from patients with BN (n = 20), statistically significant differences were also found (P = 0.012, P = 0.004, P = 0.019, P = 0.008), as when isolating the variable “restricting subtype” (n = 20) from patients with bulimia (n = 40 AN-BP and BN) (P = 0.042, P = 0.015). Patients with AN have an unusual ability to delay reward compared to healthy controls and patients with BN. This ability is well enhanced in patients with AN-R compared to patients with AN-BP, and the extreme self-control highlighted by the DD task could constitute an endophenotype of this subtype of anorexia nervosa. As it appears as a diagnostic tool in anorexia nervosa, Delay Discounting could have a prognostic scope in cases of anorexia relapse and cross-over from AN to BN, requiring further longitudinal studies.

Sexually arousing ads induce sex-specific financial decisions in hungry individuals

People's financial decisions are influenced by sexual (vs. neutral) stimuli, and exposure to such stimuli makes men, more than women, eager to spend money immediately, take financial risks, and “show off” their wealth. Hunger also influences financial decisions, such that hungry (vs. satiated) individuals are more likely to exhibit financial impatience (choosing smaller-sooner over larger-later monetary rewards). In the present study, we examine the moderating roles of participant sex and hunger in the association between sexual stimuli and financial impatience. Results indicate that exposure to sexually arousing (vs. neutral or no) ads makes men more financially impatient than women. Hunger further moderates this effect, such that monetary choices do not differ across conditions for satiated individuals, whereas hungry men (women) become more impatient (patient) in their monetary choices after viewing sexually arousing ads.

Tests of an indifference rule in variable-delay and double-reward choice procedures with humans.

Four hundred and fifty participants were recruited from Amazon Mechanical Turk across 3 experiments to test the predictions of a hyperbolic discounting equation in accounting for human choices involving variable delays or multiple rewards (Mazur, 1984, 1986). In Experiment 1, participants made hypothetical choices between 2 monetary alternatives, 1 consisting of a fixed delay and another consisting of 2 delays of equal probability (i.e., a variable-delay procedure). In Experiment 2, participants made hypothetical monetary choices between a single, immediate reward and 2 rewards, 1 immediate and 1 delayed (i.e., a double-reward procedure). Experiment 3 also used a double-reward procedure, but with 2 delayed rewards. Participants in all 3 experiments also completed a standard delay-discounting task. Finally, 3 reward amounts were tested in each type of task ($100, $1000, and $5000). In the double-reward conditions (Experiments 2 and 3), the results were in good qualitative and quantitative agreement with Mazur's model (1984, 1986). In contrast, when participants made choices involving variable delays (Experiment 1), there was relatively poor qualitative and quantitative agreement with this model. These results, along with our previous findings, suggest the structure of questions in hypothetical tasks with humans can be a strong determinant of the choice pattern.

The gap between medical and monetary choices under risk persists in decisions for others

AbstractDecisions under risk in the medical domain have been found to systematically diverge from decisions in the monetary domain. When making choices between monetary options, people commonly rely on a decision strategy that trades off outcomes with their probabilities; when making choices between medical options, people tend to neglect probability information. In two experimental studies, we tested to what extent differences between medical and monetary decisions also emerge when the decision outcomes affect another person. Using a risky choice paradigm for medical and monetary decisions, we compared hypothetical decisions that participants made for themselves to decisions for a socially distant other (Study 1) and to recommendations as financial advisor or doctor (Study 2). In addition, we examined people's information search in a condition in which information about payoff distributions had to be learned from experiential sampling. Formal modeling and analyses of search behavior revealed a similarly pronounced gap between medical and monetary decisions in decisions for others as in decisions for oneself. Our results suggest that when making medical decisions, people try to avoid the worst outcome while neglecting its probability—even when the outcomes affect others rather than themselves.

Risk preference and choice stochasticity during decisions for other people

In several contexts, such as finance and politics, people make choices that are relevant for others but irrelevant for oneself. Focusing on decision-making under risk, we compared monetary choices made for one’s own interest with choices made on behalf of an anonymous individual. Consistent with the previous literature, other-interest choices were characterized by an increased gambling propensity. We also investigated choice stochasticity, which captures how much decisions vary in similar conditions. An aspect related to choice stochasticity is how much decisions are tuned to the option values, and we found that this was higher during self-interest than during other-interest choices. This effect was observed only in individuals who reported a motivation to distribute rewards unequally, suggesting that it may (at least partially) depend on a motivation to make accurate decisions for others. Our results indicate that, during decision-making under risk, choices for other people are characterized by a decreased tuning to the values of the options, in addition to enhanced risk seeking.