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时间:2016-05-14 10:36来源:www.ukassignment.org 作者:留学作业网 点击:

Heuristics and Biases are two important terms of behavioral finance,which play a very important influence in household daily decision-making process. This essay will firstly introduce the different views about heuristics and biases. Following this, we will concern some topics about heuristics and biases. Finally, we introduce four theories to study these two specific terms. 
The view about heuristics and biases
Heuristics is widely used which is also the psychological educational world widely recognized fact. However, for the heuristics, people have two completely different points of view. One is, heuristics plays a positive role in our life, which is an effective method for added intelligence or insufficient information. A lot of research results show that the decision based on the heuristics judge will get unexpected results. The heuristics, by contrast, has a negative aspect which would lead people to get the wrong conclusion. The behavioral economics is outlined holding this view. 
There are two types of Biases. One is the Confirmatory bias, which Investors will be to find more information that supported its original idea, eliminate those who didn't agree with his opinion; Rear view bias. Rear view bias, which people tend to think they can predict in advance. 
Heuristics as biases, we should think about the availability, the anchoring, the adjustment and the representativeness. Heuristics as intelligence, we should research the recognition, “fast and frugal” and tit-for-tat (social heuristics).
Some topics we should concern  
Now, we will introduce some topics to help us clear the role of Heuristics and Biases in decision- making process.
Many of our daily decisions are based on memory. Behavioral studies suggest that for such decisions we often use simple strategies (heuristics) that rely on controlled and limited information search.
An analysis based on social decision scheme theory suggests that groups did not support individual judgment because groups did not use anchoring and adjustment to make estimates. (Heuristics, 2002)Rather, group decisions reflected the majority point of view as it existed at the outset of group discussion. ( Khader, 2011) If no majority existed, groups tended to reach consensus by averaging the pre-group estimates of individuals. 
Perception and processing constraints may cause an important role in household daily decision-making process. Consumption is not a neutral act. It is the customer process, positive and negative two emotions collisions are emotional contact. Clients before the consumer psychological expectations will affect their expectations, and experience will be decided in the process of consumer impression. While this impression is whether customers will cross, repeat purchase the decisive factor. So we can learn that people see: (1)what they want to see. (2)Expectations influence perceptions. (3)People experience cognitive dissonance when they simultaneously hold two thoughts which are psychologically inconsistent.
Now we take one example to study the important role of perception and processing constraints may cause an important role in household daily decision-making process.
Type 1: Autonomic and non-cognitive, conserving on effort.
Used when very quick choice called for or when it’s “no big deal”.
Type 2: Cognitive and requiring effort, we should know.
Used when you have more time to ponder.
Type 2 can overrule Type 1.
Hear a noise with an unknown source?
Move away till you know more.
Food tasting off ?
Stop eating it.
These make good sense.
Other heuristics, which are more cognitive, are related to comfort with the familiar. Heuristics or rules-of-thumb: decision-making shortcuts. Heuristics often make sense but falter when used outside of their natural domain.
Which theory should be cited?
By these factors, we can make use of the Rational Choice Theory, Utility Theory, Probability Theory and Bounded Rationality to explain these economic behaviors.
(1)Rational Choice Theory
The "rationality" described by rational choice theory is different from the colloquial and most philosophical use of the word. Typically, "rationality" means "sane" or "in a thoughtful clear-headed manner" (Pachur, 2011). Rational choice theory uses a specific and narrower definition of "rationality" simply to mean that an individual acts as if balancing costs against benefits to arrive at action that maximizes personal advantages. In rational choice theory, all decisions, crazy or sane, are postulated as mimicking such a "rational" process. Thus rationality is seen as a property of patterns of choices, rather than of individual choices: there is nothing irrational in preferring fish to meat the first time, but there is something irrational in preferring fish to meat and preferring meat to fish, regularly.
Early neoclassical economists writing about rational choice, e.g. William Stanley Jevons, did assume that agents make consumption choices as to maximize their happiness. (Fararo,1993)Twentieth century refinements of rational choice theory have eliminated such presumptions. In essence, the rationality assumed under modern rational choice theory is considerably narrower than its name might suggest. It mandates just a consistent ranking of choice alternatives. Contemporary work done under the rational choice theory paradigm typically does not investigate the origins, nature, or validity of the vast array of human motivations of human desire.
John von Neumann & Morgenstern attempted to remove psychological assumptions from the theory of decision making: individuals have precise information about the consequences of their actions; Individuals have sufficient time and capability to weigh alternatives; All decisions are “forward looking” (e.g., the “sunk-cost fallacy”) (Tversky, 1974); “Game theory” is RCT in practice.
It may not be possible to empirically test or falsify the rationality assumption, so that the theory leans heavily toward being a tautology since there is no use to clear individual goals. In recent years the theoretical vision of rational choice theory has been subject to more and more doubt by the experimental results of behavioral economics. This criticism has encouraged many social scientists to utilize concepts of bounded rationality to replace the "absolute" rationality of rational choice theory: these points to the difficulties of data-processing and decision-making associates with many choices in economics, political science, and sociology. More economists are learning other knowledge to get a more accurate view of human decision-making than offered by rational choice theory. For example, the behavioral economist and experimental psychologist Daniel Kahneman won the Nobel Memorial Prize in Economic Sciences in 2002 for his work in this field.
Rational decision making entails choosing a "rational" action given one's preferences. The actions one could take, and expectations about the outcomes of those actions. Actions are often expressed as a set, for example a set of exhaustive and exclusive actions:
For example, if a person is to vote for either Roger or Sara or to abstain, their set of possible voting actions is:
Individuals can also have similar sets of possible outcomes. Rational choice theory makes three assumptions about individuals' preferences for actions: all actions can be ranked in an order of preference (indifference between two or more is possible).
Transitivity – if action a1 is preferred to a2, and action a2 is preferred to a3, then a1 is preferred to a3. In other words, all actions can be compared with other actions. 
(2)Utility Theory
UT determines how preferences are determined within RCT; A response to the St. Petersburg Paradox; strictly construed, UT assigns a common currency to disparate outcomes.
In finance, utility is used to generate an individual's price for an asset called the indifference price. Utility functions are also related to risk measures, with the most common example being the entropic risk measure.(Gilovich, 2002)In economics, utility is a representation of preferences over some set of goods and services. Preferences have a (continuous) utility representation so long as they are transitive, complete, and continuous.(Quiggin,1982)When coupled with production or commodity constraints, under some assumptions, these functions can be used to analyze Pareto efficiency, such as illustrated by Edge worth boxes in contract curves. Such efficiency is a central concept in welfare economics.

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