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Decisions, Decisions: The Ellsberg Paradox and The Neural Foundations of Decision-Making under Uncertainty

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Title: Decisions, Decisions: The Ellsberg Paradox and The Neural Foundations of Decision-Making under Uncertainty


1
Decisions, DecisionsThe Ellsberg Paradox and
The Neural Foundations of Decision-Making
under Uncertainty
  • Ming Hsu
  • Everhart Lecture

2
Simple Decisions Blackjack
3
Simple Decisions Blackjack
4
More Complicated Investing
Stock? Bond? Domestic? Foreign?
Diversify Think long-term
5
Complicated Love/Marriage
Whether? Who? When? Where?
37 Rule (Mosteller, 1987) Dozen Rule (Todd,
1997)
6
Little knowledge of probabilities
Precise knowledge of probabilities
7
Uncertainty about uncertainty?
8
Ellsberg Paradox
1961
9
Urn I Risk
Most people indifferent between betting on red
versus blue
10
Urn II Ambiguity
?
?
?
?
?
?
?
?
?
?
Most people indifferent between betting on red
versus blue
11
Choose Between Urns
Urn II (Ambiguous)
Urn I (Risk)
?
?
?
?
?
?
?
?
?
?
Many people prefer betting on Urn I over Urn II.
12
Where Is The Paradox?
sadly but persistently, having looked into
their hearts, found conflict with the axioms and
decided to satisfy their preferences and let
the axioms satisfy themselves. --Daniel
Ellsberg, Quarterly Journal of Economics (1961)
13
Ellsberg Paradox
Urn II (Ambiguous)
Urn I (Risk)
  • P(RedII)P(BlueII)
  • P(RedII) lt 0.5
  • P(BlueII) lt 0.5

P(RedI) P(BlueI) P(RedI) 0.5 P(BlueI) 0.5
?
?
?
?
?
?
?
?
?
?
P(RedI) P(BlueI) 1 P(RedII) P(BlueII) 1
14
Verizon
Jennifer
or Deutsche Telekom
or Angelina
15
Verizon or Deutsche Telecom?
French Poterba, American Economic Review (1991).
16
Explaining Ambiguity Aversion
Like physicists, economists like laws of
nature (Law of Demand, Walras Law, etc.)
Murphys Law If anything can go wrong, it will.
People consider the worst possible outcome of
each action.
17
Explaining Ambiguity Aversion
18
Explaining Ambiguity Aversion
P(RedIIBetRed) 0 P(BlueIIBetBlue) 0
P(RedI) 0.5 P(BlueI) 0.5
19
What Are We Missing?
Gilboa Schmeidlers model is a model of
ambiguity aversion. There are a number of other
models of ambiguity aversion.
Unanswered
Do these models really reflect actual
decision-making process? How are the relevant
variables interpreted and choices produced? Look
in the brain.
20
The Bigger Picture
Economics formal, axiomatic, global.
Human Behavior
Psychology intuitive, empirical, local.
Neuroscience biological, circuitry, evolutionary.
21
The Bigger Picture
Economics formal, axiomatic, global.
Neuroeconomics A mechanistic, behavioral, and
mathematical explanation of choice that
transcends each field separately. - Glimcher
and Rustichini. Science (2004)
Human Behavior
Psychology intuitive, empirical, local.
Neuroscience biological, circuitry, evolutionary.
22
The Story of Phineas Gage
Cavendish, Vermont (September 13, 1848)
23
The Story of Phineas Gage
fitful, irreverent, indulging at times in the
grossest profanity... -- Gages physician
  • Impulsiveness
  • Poor insight
  • Impaired decision-making
  • Both social and financial

24
Fiorillo, Tobler, and Schultz. Science. (2003)
25
Fiorillo, Tobler, and Schultz. Science. (2003)
26
Fiorillo, Tobler, and Schultz. Science. (2003)
27
Tools That We Used
Functional Magnetic Resonance Imaging (fMRI)
Brain Lesion Patients
28
MRI Magnetization of Tissue
29
fMRI Changes in Magnetization
Basal State
30
fMRI Time Series Data
intensity
Time
voxel time series
31
Statistical Modeling of fMRI Data

Time
Intensity
32
Random Effects/Hierarchical Models
pdf
?21
Subj. 1
0
?1
Distribution of population effect
?2Pop
?Pop
33
fMRI Experiment
Hsu, Bhatt, Adolphs, Tranel, and Camerer.
Science. (2005)
34
fMRI Experiment
Hsu, Bhatt, Adolphs, Tranel, and Camerer.
Science. (2005)
35
fMRI Experiment
Hsu, Bhatt, Adolphs, Tranel, and Camerer.
Science. (2005)
36
Expected Reward Region
y - Brain response A(.) - Ambiguity
trials R(.) - Risk trials E(.) - Expected value
of choices W(.) - Nuisance parameters
37
Lower Activity under Ambiguity
38
Lower Activity under Ambiguity
Signal Change
39
Region Reacting to Uncertainty
y - Brain response A(.) - Ambiguity
trials R(.) - Risk trials E(.) - Expected value
of choices W(.) - Nuisance parameters
N.B. This region does not correlate with expected
reward.
40
Link Between Brain and Behavior
Brain Imaging Data
Behavioral Choice Data
41
A Signal for Uncertainty?
?
Late
Early
42
Lesion Subjects
43
Lesion Experiment
100 Cards 50 Red 50 Black
100 Cards x Red 100-x Black
Choose between gamble worth 100 points OR Sure
payoffs of 15, 25, 30, 40 and 60 points.
44
Lesion Patient Behavioral Data
45
Estimated Risk and Ambiguity Attitudes
Orbitofrontal lesion patients more rational!
46
Linking Neural, Behavioral, and Lesion Data
Brain Imaging Data
Behavioral Choice Data
47
What have we learned?
48
One System, Not Two
Signal Change
49
Reward Value of Ambiguous Gambles
50
Signal for Uncertainty
51
No OFC ? No Ambiguity/Risk Aversion
52
Where are we going?
53
Neural Circuitry
?
54
The Brain and Home Bias
55
Why Ambiguity Averse?
he was a gambler at heartand assumed that he
could always beat the odds.
On Jeffrey Skilling From Bethany McLean and
Peter Elkind, Smartest Guys in the Room (2003).
56
Acknowledgements
Colin Camerer Ralph Adolphs Daniel Tranel Steve
Quartz Peter Bossaerts
Meghana Bhatt Cédric Anen Shreesh Mysore
ELS Committee
57
END
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