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ERC

BRSCDP-TEA — Result In Brief

Project ID: 230367
Funded under: FP7-IDEAS-ERC
Country: Italy

A closer look at financial decision processes

Decision-making regarding finances often brings seemingly random results and seems unpredictable. New research factors risk, uncertainty and emotion in decision-making to render it more predictable.
A closer look at financial decision processes
Financial decisions that people take often bring random results. One way of looking at this phenomenon is by dividing randomness into risk and uncertainty, rendering it more quantifiable. Randomness, such as a bet on a roulette wheel or on a horse race, is generally characterised by the absence of a viable probability law that governs realisations. Risk, on the other hand, represents a relatively recent aspect in economics, opening new avenues for research in understanding financial decision processes.

Based on this premise, the EU-funded BRSCDP-TEA (Bounded rationality and social concerns in decision processes: Theory, experiments, and applications) project documented existing literature and models on the topic to better investigate it. The project team linked the different models together to understand the choices of a decision-maker. It outlined a viable theory that successfully describes the decision-maker's uncertainty attitudes based on recently developed models.

With respect to the social choice theory, the team proposed a behavioural model that considers how other peoples' outcomes impact the welfare of the decision-maker. The model considers emotions such as pride or envy, facilitating measurement by including factors such as behaviour consistency and convenience. On the topic of bounded rationality, the team developed a model that enables predictions based on how changes in final payoffs affect choices.

Much of the project's work was reinforced through relevant research in different fields such as finance, game theory, statistics, experimental economics and general equilibrium. New mathematical results also emerged from the project, helping to shed light on bounded rationality and social concerns in decision processes. In a financially unstable world, understanding decision-making is crucial for encouraging economic sustainability.

Related information

Keywords

Decision processes, decision-making, randomness, BRSCDP-TEA, bounded rationality, social concerns
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