Financial Engineering Practitioners Seminar: Michael Woodford
Date: November 30, 2015 from 6:00 pm to 7:30 pm EST
Location: Davis Auditorium, CEPSR Building
Contact: For further information regarding this event, please contact IEOR Department by sending email to .
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Title: Risk Attitude as Perceptual Distortion

Abstract: A model of choice between risky monetary rewards (or losses) is proposed in which departures from optimal risk-neutral behavior (i.e., choices that would maximize expected wealth) in the case of gambles where only modest amounts are at stake are explained not as reflecting preferences for more or less certain outcomes, but instead as a consequence of decisions being based on an imperfect subjective representation of the decision situation, rather than a perfectly precise description of the available options. The approach taken is similar in form to an account of systematic errors in perceptual judgments that can be attributed to imprecision in the neural coding of sensory information. Unlike approaches like prospect theory, that posit decisions based on distorted transformations of the true data but where the distorted decision would seem clearly suboptimal for the organism, in the proposed theory the choice rules maximize expected wealth (under a particular prior over choice situations), subject to the constraint that choice must be based on the imprecise subjective representation of the situation, and that imprecision can be viewed as an efficient use of scarce cognitive resources.

Bio: Michael Woodford is the John Bates Clark Professor of Political Economy in the Department of Economics, Columbia University. He holds a PhD in Economics from MIT, and is a Fellow of the Econometric Society and of the American Academy of Arts and Sciences.