This study experimentally tests our proposed extended present bias hypothesis—discount factor increases over the proximate future and eventually approaches constancy, but remains distinct from unity in the remote future. Using front-end delay and a post-dated check for payment, discount factors are elicited for three seven-day durations: between 2 and 9 days later, between 31 and 38 days later, and between 301 versus 308 days later. We find support for diminishing discounting between the proximate and intermediate comparisons, but not between the (...) intermediate and the remote comparisons. The findings validate our extended present bias hypothesis. (shrink)

Source preference in which equally distributed risks may be valued differently has been receiving increasing attention. Using subjects recruited in Berkeley, Fox and Tversky demonstrate a familiarity bias in source preference—betting on a less than even-chance event based on San Francisco temperature is valued more than betting on a better than even-chance event based on Istanbul temperature. Neophobia is associated with the amygdala which is GABA-rich and is known to be modulated by benzodiazepines as anxiolytic agents that enhance the activity (...) of the GABAA receptor in processing anxiety and fear. This leads to our hypothesis that familiarity bias in decision making may be explained by polymorphic variations in this receptor mediated by anxiety regulation in the amygdala. In two companion studies involving Beijing-based subjects, we examine 10 single nucleotide polymorphisms of GABRB2 and find 7 SNPs each showing negative association between familiarity bias—preference for betting on parity of Beijing temperature over Tokyo temperature—and having at least one minor allele. In an imaging genetics study of a subsample of subjects based on the SNP with the most balanced allelic distribution, we find that subjects’ familiarity bias in terms of risk aversion towards bets on the parity of the temperature of 20 Chinese cities is negatively associated with their post-scanning familiarity ratings of the cities only for those with no minor allele in this SNP. Moreover, familiarity bias is positively associated with activation in the right amygdala along with the brain’s attention networks. Overall, our findings help discriminate between ambiguity aversion and familiarity bias in source preference and supports our gene–brain–behavior hypothesis of GABAergic modulation of amygdala activation in response to familiarity towards the source of uncertainty. (shrink)

Often in insurance decision making, there are risk factors on which the insurer has an informational advantage over the consumer. But when the insurer sets and posts a premium for the consumer to consider, the consumer can potentially use the premium as an informational cue for the loss probability, and thereby to reduce the insurer’s informational advantage. We study, by means of a behavioral model, how consumers would use the premium as an informational cue in such contexts. The belief formation (...) process in our model assumes that both prior knowledge and the premium might have an impact on the consumer’s estimate of the loss probability. Moreover, the premium impacts the estimate through an anchoring-and-adjustment process. The model potentially leads to violations of rational expectations, with which the consumer overestimates the loss probability beyond what could be inferred from the premium, given the premise that the insurer must seek to break even or earn an expected profit. Our model analysis moreover implies that the frequency of such violations is non-increasing as the premium increases. Last, the model implies a generally inverted-U relationship between insurance demand and the premium so that the demand is upward sloping at low premium levels and downward sloping at high premium levels. A pilot field study and a laboratory experiment provide robust evidence for our model implications and calibrations for its parameters. (shrink)