the causes of preference reversal observed preference reversal cannot be adequately explained by violations of independence the reduction axiom or transitivity the primary cause of preference reversal is the failure of procedure invariance especially the overpricing of low probability high payoff bets this result violates regret theory and generalized nonindependent utility models preference reversal and a new reversal involving time preferences are explained by scale compatibility which implies that payoffs are weighted more heavily in pricing than in choice copyright 1990 by american economic association

networks of foreign affiliates evidence from japanese micro data the paper provides evidence on the investment patterns of japanese multinational enterprises mnes across countries and industries and analyses the main drivers of japanese fdi location strategies using detailed micro data on japanese parents and affiliates statistics the main stylised facts point to the high degree of concentration of the activity of japanese multinationals and differences in size and productivity depending on parents and affiliates main industry groups the breakdown of affiliate sales by destination markets reveals that japanese mnes establish services affiliates primarily to maximise the proximity to local customers while foreign affiliates in manufacturing sectors tend to engage more with third countries yet some economies emerge as strategic gateways to other destinations in the region the econometric analysis further analyses the drivers of japanese mnes expansion abroad in search of new markets production efficiency and regional or global platforms important factors shaping japanese fdi decisions include firm characteristics and host market specificities such as market size proximity labour costs technology and trade policy barriers the largest and most productive parents are more likely to invest in fdi export platforms particularly in host countries with efficient customs procedures and more favourable services trade and investment regulation distance and comparative advantage in terms of skills and digital infrastructure play a stronger role in intra firm trade while the size of the domestic market and the local regulatory environment are important attractive points for affiliates that sell mostly locally overall the paper stresses the importance of better integration into global production networks and the policy priorities to attract and maximise the benefits of fdi inflows

the psychology of early institutional economics the instinctive approach of thorstein veblen s conspicuous consumer theory abstract thorstein veblen a founder of original or old institutional economics combined social and evolutionary thought in his institutionalist approach to dealing with psychological social and economic issues the psychological content of veblen s writings takes instinct and habits into consideration the economic literature on the psychological content of veblen s writings has focused on habits despite the importance of instincts in veblen s works this paper attempts to discuss veblen s notion of instincts in order to make its role clearer in his approach to conspicuous consumer decision making it discusses the role of instincts the instinct of workmanship the relationship between habits and instincts and their influence on the conspicuous consumer consequently this paper contributes to a better understanding of how inner forces and socialization culminate in behavior in veblen s conspicuous consumer approach

attitudes to uncertainty in a strategic setting much uncertainty in life relates to the behaviour of others in interactive environments this article tests some implications of subjective expected utility theory savage 1954 in an experimental strategic setting where there is uncertainty about the actions of other players in this environment a large majority of our participants violate subjective expected utility theory however they do not exhibit the sorts of consistent attitude to ambiguity found in individual decision experiments we discuss three possible explanations of their behaviour non linear transformation of probabilities noise in responses and or systematic biases in the way that individuals generate subjective probabilities

asymmetric effects of favorable and unfavorable information on decision making under ambiguity most daily decisions involve uncertainty about outcome probabilities arising from incomplete knowledge i e ambiguity we explore how the addition of partial information affects these types of choices using theoretical and empirical methods our experiments in both gain and loss domains demonstrate that when such information supports a favorable outcome it strongly increases valuation of an ambiguous financial prospect however when information supports an unfavorable outcome it has significantly less impact we find that two mechanisms drive this asymmetry first unfavorable information decreases estimates of a good outcome occurring but also reduces aversive uncertainty these factors act in opposition minimizing the effects of unfavorable information second when information can be subjectively interpreted unfavorable information is less likely to be integrated into evaluations our findings reveal mechanisms not captured by traditional models of decision making under uncertainty and highlight

small worlds modeling attitudes toward sources of uncertainty abstract we introduce the concept of a conditional small world event domain an extension of savage s the foundations of statistics wiley new york 1954 notion of a small world as a self contained collection of comparable events under weak behavioral conditions we demonstrate probabilistic sophistication in any small world event domain without relying on monotonicity or continuity probabilistic sophistication within though not necessarily across small worlds provides a foundation for modeling a decision maker that has source dependent risk attitudes this also helps formalize the idea of source preference and suggests an interpretation of ambiguity aversion often associated with ellsberg type behavior in terms of comparative risk aversion across small worlds

prudence with respect to ambiguity under expected utility prudence is equivalent to a positive third derivative of utility and plays a crucial role in precautionary saving behaviour eeckhoudt and schlesinger 2006 proposed behavioural definitions of prudence and of higher order risk preferences the present paper proposes a similar definition for prudence with respect to ambiguity i e situations in which objective probabilities are not available implications for several ambiguity models are derived ambiguity prudence is implied by hansen and sargent s 2001 multiplier preferences empirically correlates with financial behaviour and plays a key role in prevention behaviour this article is protected by copyright all rights reserved

preference reversals under ambiguity preference reversals have been widely studied using risky or riskless gambles however little is known about preference reversals under ambiguity unknown probabilities subjects were asked to make a binary choice between ambiguous p bets big likelihood of giving small prize and ambiguous bets small likelihood of giving large prize and their willingness to accept was elicited subjects then performed the same two tasks with risky bets where the probability of winning for a given risky bet is the center of the probability interval of the corresponding ambiguous bet preference reversals are not only replicated under ambiguity but are even stronger than are those under risk this is due to higher elicited prices for the bet and lower elicited prices for the p bet under ambiguity than under risk this result can be explained by the shape of the weighting function for different levels of uncertainty and for different elicitation modes this paper was accepted by peter wakker decision analysis

risk taking for others under accountability we let subjects take risky decisions that affect themselves and a passive recipient adding a requirement to justify their choices significantly reduces loss aversion this indicates that such an accountability mechanism may be effective at debiasing loss aversion in agency relations

economic theory of choice and the preference reversal phenomenon a reexamination in a recent issue of this review david grether and charles plott 1979 hereinafter referred to as g p presented a series of experiments that show that individual decisions are made in a manner inconsistent with standard preference theory this inconsistency can be illustrated by the following example individuals under suitable laboratory conditions first have a choice between a lottery with a high probability of winning a small sum of money the p bet probability bet and a lottery with a high stake but low probability of winning the m bet money bet after indicating a preference for one of the lotteries in the pair the same subjects are then asked to place a monetary value on each of the individual lotteries grether and plott found that a large number of participants stated a preference for the p bet in the first round but placed a higher value on the other lottery the m bet in the second round this behavior a preference reversal is inconsistent with the traditional statements of preference theory

decisions error and heterogeneity probabilistic choices or choice errors may play an important supporting role in shaping observed risky choices and a variety of restrictions on such choice probabilities play the role of identifying restrictions in empirical decision research we test six restrictions in the context of common ratio effect data for a general class of theories of risky choice two restrictions one for aggregate and one for individual data are supported but none of the heterogeneity restrictions that make the aggregate data model powerful survive scrutiny nor do estimable parametric versions of the individual data model there is room for new stochastic identifying restrictions in empirical decision research

ambiguity aversion and comparative ignorance decisions under uncertainty depend not only on the degree of uncertainty but also on its source as illustrated by ellsberg s observation of ambiguity aversion in this article we propose the comparative ignorance hypothesis according to which ambiguity aversion is produced by a comparison with less ambiguous events or with more knowledgeable individuals this hypothesis is supported in a series of studies showing that ambiguity aversion present in a comparative context in which a person evaluates both clear and vague prospects seems to disappear in a noncomparative context in which a person evaluates only one of these prospects in isolation

financial crises and cross border banking new evidence the surge in cross border banking prior to global financial crises took place not only in the interbank market but also in the retail market e g between banks and their private customers abroad we utilize confidential data to estimate for the first time the effects of banking currency and twin crises on the geography of cross border deposits and loans we show that each crisis type has its own specific effects that these effects themselves lead to sustained increases in cross border banking and that they are different for cross border loans and deposits respectively

attitudes to risk and attitudes to uncertainty experimental evidence in a series of experiments the interactions among individual attitudes towards risk and uncertainty the sign of the outcome domain and the way uncertainty is represented are tested this is done in a unified framework eliciting individual values by means of a second price auction results confirm the presence of the well known fourfold pattern of risk attitude risk aversion for gains and risk seeking for losses at high probability and risk seeking for gains and risk aversion for losses at low probability and show that this pattern can also be extended to uncertainty in the valuation of losses the modal pattern is decreasing risk and uncertainty aversion as the probability of loss increases while increasing risk and uncertainty aversion is observed for gains moreover it is found that the size of reaction to uncertainty does not depend on the outcome domain and that it persists in the face of an incentive compatible mechanism to elicit preferences

financial services global perspectives the purpose of this paper is to discuss the issues related to the deregulation of the financial services sector and the role of multilateral negotiations which has opened up opportunities for the expansion of international financial services the paper analyses various categories of international financial services and highlights those factors that contribute to an increase in the competitiveness of financial institutions in their attempt to increase the supply of international financial services the paper also analyses the complementary role of fdi and trade in international financial services and discusses some of the benefits of fdi in financial services that have led to a more efficient and more competitive financial services industry in the host countries

the travels of a bank deposit in turbulent times the importance of deposit insurance design for cross border deposits we examine the impact of the existence on an explicit deposit insurance di scheme and its design features on bilateral cross border deposits cbd in a gravity model setting we find that both the absolute quality of a country s di and its relative quality vis a vis other countries di generally affect depositor behavior however during systemic banking crises cross border depositors primarily seek countries with the best di schemes similarly during the 2008 2009 great financial crisis the emergency actions taken by the governments which supply and maintain these safe havens have led to substantial relocations of cbd jel f34 g18

imprecision as an account of the preference reversal phenomenon many individuals choices and valuations involve a degree of uncertainty imprecision this paper reports an experiment designed to obtain some measure of imprecision and to examine the extent to which it can explain preference reversals of two opposite forms one of which appears not to have been reported previously the model of imprecision we examine not only predicts both patterns but also provides an account of earlier results that are otherwise not well explained the results suggest that any successful descriptive theory of choice and valuation will need to allow in some way for the imprecision surrounding people s decisions

the determinants of cross border equity flows abstract we explore a new panel data set on bilateral gross cross border equity flows between 14 countries 1989 1996 we show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions gross transaction flows depend on market size in source and destination country as well as trading costs in which both information and the transaction technology play a role distance proxies some information costs and other variables explicitly represent information transmission an information asymmetry between domestic and foreign investors and the efficiency of transactions the geography of information is the main determinant of the pattern of international transactions while there is weak support in our data for the diversification motive once we control for the informational friction we broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings

testing different stochastic specificationsof risky choice the harless camerer hc hey orme ho and random preference rp models of stochastic variation in choice under uncertainty are compared implications of these models including some that are independent of the deterministic theory with which they are combined are tested in an experiment in which participants respond to decision problems twice the hc model generally performs poorly the ho model predicts more violations of dominance than are observed while the rp model fails to account for those few violations which do occur additional regularities are observed which are inconsistent with all three models when combined with expected utility theory

a near rational model of the business cycle with wage and price inertia this paper presents a model in which insignificantly suboptimal behavior causes aggregate demand shocks to have significant real effects the individual loss to agents with inertial price wage behavior is second order in terms of the parameter describing the shock while the effect on real economic variables is first order thus significant changes in business activity can be generated by anticipated money supply changes provided that some agents are willing to engage in nonmaximizing behavior which results in small losses

preference reversal real world lotteries and lottery interested subjects prefer lce reversal or choice reservation price inconsistency has been documented experimentally for zrtain types of lotteries we argue that the relevance of these findings for realworld markets is uncertain because the type of objects used cannot exist on a market and because the extent to which the subjects had any real interest in the objects is unknown using reai world lotteries we have tested choice price consistency on subjects who prefer lotteries ta cash preference reversal was observed but the frequency was much lower than in earlier experiments there were no differences between subjects who qualified as lottery interested and those who did not 1 intmduction

banking across borders abstract the international linkages between banks play a crucial role in today s global economy existing models explain these links largely on the basis of portfolio theory in which banks diversify lending these models have found limited empirical support and do not speak to several relevant dimensions of the data they do not explain heterogeneity in the degree to which banks operate through foreign affiliates fund their activities abroad or matter for local lending in foreign countries this paper proposes a complementary theory of banking across borders that is based on elements of international trade theory in the model banking across borders arises because countries differ in their relative factor endowments and in the efficiency of their banking sectors based on these differences the pattern of foreign bank asset and liability holdings emerges endogenously this parsimonious model provides a rationale for the observed heterogeneity in foreign bank activities and is consistent with key patterns in the data

the rich domain of uncertainty source functions and their experimental implementation we often deal with uncertain events for which no probabilities are known several normative models have been proposed descriptive studies have usually been qualitative or they estimated ambiguity aversion through one single number this paper introduces the source method a tractable method for quantitatively analyzing uncertainty empirically the theoretical key is the distinction between different sources of uncertainty within which subjective choice based probabilities can still be defined source functions convert those subjective probabilities into willingness to bet we apply our method in an experiment where we do not commit to particular ambiguity attitudes but let the data speak

a note on the location choice of multinational banks the case of japanese financial institutions abstract there are many studies investigating the location choice of foreign direct investment fdi of us banks nigh et al journal of international business studies 17 1986 59 72 find that the choice does not depend on local banking opportunity this paper examines what factors affect the location choice of japanese multinational financial institutions our results are consistent with previous studies analyzing us banks in that the fdi of the manufacturing industry is an important determinant of the location choice of japanese financial institutions however our results differ from nigh et al in that japanese financial institutions choose their locations at least partially based on the local banking opportunity in the host countries

experimental evidence on varying uncertainty and skewness in laboratory double auction markets abstract we investigate the influence of skewness in asset fundamentals on asset prices under different states of uncertainty in double auction markets three different types of assets are considered risky assets ambiguous assets and assets where the fundamental value distribution can be learned by repeated sampling of realizations we show that market prices for skewed assets initially differ from those of non skewed assets for risky as well as for ambiguous assets because of learning the difference in market prices mostly disappears towards the end of trading when fundamentals are learned by experience sampling prices of all assets irrespective of skewness are very efficient from the beginning thus when probabilities are not described but experienced subjects are better able to estimate the fundamental value of an asset

the theory of evolution and the evolution of theory veblen s methodology in contemporary perspective this paper traces recent developments in economic theory from the perspective of thorstein veblen s methodological distinction between teleological and evolution modes of scientific thought it is argued that the imposition of rational behavior at the individual level prevents neoclassical theory from exhibiting genuine evolutionary processes since decision rules are prevented from emerging out of a process of adaptation to a changing environment the standard rationality postulate can nevertheless give rise to quasi evolutionary sequences at the aggregate level this possibility is blocked in macroeconomic literature by the use of the representative agent construct and the imposition of the hypothesis of self fulfilling expectations c 1996 academic press limited copyright 1996 by oxford university press

ambiguity attitudes in a large representative sample using a theorem showing that matching probabilities of ambiguous events can capture ambiguity attitudes we introduce a tractable method for measuring ambiguity attitudes and apply it in a large representative sample in addition to ambiguity aversion we confirm an ambiguity component recently found in laboratory studies a insensitivity the tendency to treat subjective likelihoods as 50 50 thus overweighting extreme events our ambiguity measurements are associated with real economic decisions specifically a insensitivity is negatively related to stock market participation ambiguity aversion is also negatively related to stock market participation but only for subjects who perceive stock returns as highly ambiguous this paper was accepted by james smith decision analysis

the location of financial sector fdi tax and regulation policy abstract this paper analyzes how corporate taxation and regulatory requirements affect the location of financial sector fdi we use novel information on new financial services entities established by multinational firms in 83 host countries we find a negative effect of host country taxes on the probability of choosing a particular host location we can also confirm a significant influence of the regulatory environment for example stricter equity capital requirements negatively affect location probabilities our empirical approach allows us to provide new insight in how a policy measure of a given country affects other countries by estimating cross country tax and regulation elasticities

preference reversals for ambiguity aversion this paper finds preference reversals in measurements of ambiguity aversion even if psychological and informational circumstances are kept constant the reversals are of a fundamentally different nature than the reversals found before because they cannot be explained by context dependent weightings of attributes we offer an explanation based on sugden s random reference theory with different elicitation methods generating different random reference points then measurements of ambiguity aversion that use willingness to pay are confounded by loss aversion and hence overestimate ambiguity aversion this paper was accepted by teck ho decision analysis

the determinants of us banking activity abroad abstract the banking industry provides an excellent example of the internationalization of world business and economic interdependencies across countries analysis of the past growth of international banking operations can also prove useful to banks interested in augmenting their current business or expanding their international coverage and to banks who anticipated future competition in their markets from new or strengthened foreign competitors this study provides the most comprehensive examination of the development of us bank branches in other countries is presented and tested in order to facilitate the understanding of the expansion of international banking

on the evolution of thorstein veblen s evolutionary economics this article addresses the origins of thorstein veblen s evolutionary economics as announced in his 1898 essay why is economics not an evolutionary science before 1897 and partly under the influence of c lloyd morgan veblen rejected biological reductionism veblen s 1897 endorsement of a critique of marxism by max lorenz shows that he found karl marx s account of human action too limiting by this time veblen had also rejected the idea of either the individual or society as exclusive foundations for social science instead he embraced an evolutionary framework of explanation along darwinian lines involving multiple levels of explanation and emergent properties copyright 1998 by oxford university press

venture theory a model of decision weights several theories suggest that people replace probabilities by decision weights when evaluating risky outcomes this paper proposes a model called venture theory of how people assess decision weights it is assumed that people first anchor on a stated probability and then adjust this by mentally simulating other possible values the amount of mental simulation is affected by the absolute size of payoffs the extent to which the anchor deviates from the extremes of 0 and 1 and the level of perceived ambiguity concerning the relevant probability the net effect of the adjustment i e up or down vis i vis the anchor reflects the relative weight given in imagination to values above as opposed to below the anchor this in turn is taken to be a function of both individual and situational variables and in particular the sign and size of payoffs cognitive and motivational factors therefore both play important roles in determining decision weights assuming that people evaluate outcomes by a prospect theory value function kahneman and tversky 1979 and are cautious in the face of risk fourteen predictions are derived concerning attitudes toward risk and ambiguity as functions of different levels of payoffs and probabilities the results of three experiments are reported whereas only a subset of the model s predictions can be tested in experiment 1 all fourteen are tested in experiments 2 and 3 using hypothetical and real payoffs respectively several of the model s predictions are not supported in experiment 2 but almost all are validated in experiments 1 and 3 the failures relate to the exact nature of probability payoff interactions in attitudes toward risk and ambiguity for losses the theory and results are discussed in relation to other experimental evidence future tests of the theory alternative models of risky choice and implications of venture theory for explaining further phenomena

fdi versus exports evidence from german banks abstract we use a new bank level dataset to study the fdi versus exports decision for german banks we extend the literature on multinational firms in two directions first we simultaneously study fdi and the export of cross border financial services second we test recent theories on multinational firms which show the importance of firm heterogeneity helpman e melitz m j yeaple s r 2004 export versus fdi american economic review 94 1 300 316 our results show that fdi and cross border services are complements rather than substitutes heterogeneity of banks has a significant impact on the internationalization decision more profitable and larger banks are more likely to expand internationally than smaller banks they have more extensive foreign activities and they are more likely to engage in fdi in addition to cross border financial services

exporting financial institutions management via foreign direct investment mergers and acquisitions we test the relevance of the new trade theory and the traditional theory of comparative advantage for explaining the geographic patterns of international m as of financial institutions between 1985 and 2000 the data provide statistically significant support for both theories we also find evidence that the u s has idiosyncratic comparative advantages at both exporting and importing financial institutions management