Why do Agents Make Suboptimal Economic Decision? An MRI Experimental Analysis of Loss Aversion

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Title: Why do Agents Make Suboptimal Economic Decision? An MRI Experimental Analysis of Loss Aversion
Authors: Kljajic, Miroslav
Date: 2014-08
Abstract: Economists have long observed an asymmetry in the behaviour of individuals facing gains and losses. Loss aversion has an impact on many economic decisions, including those to do with the educational system (Fryer et al, 2012), social security benefits (Shu & Payne (2013), the stock market (Barberis & Huang, 2001) and the real estate market (Genesove & Mayer, 2001). This paper examines why people are loss averse and why it is that agents make choices that do not appear to be optimal in the utility maximization sphere. This paper hypothesizes that loss aversion is related to activity or the absence of activity in decision making regions of the brain. The paper also examines how market distractions play a role in decision making. In this study participants were placed in an MRI scanner and performed an fMRI task. This paper provides conclusive evidence to support our hypotheses that loss aversion is related to activity or absence of activity in decision making regions of the brain. Additionally we found evidence that market distractions lead to suboptimal decision making that is related to activity in brain regions other than those responsible for decision making. Visual regions of the brain are not associated with decision making and those regions of interest were the only regions that were activated during the visual presentation of a distracting stimulus. In this part of the experiment, the decision making part of the brain was not active. In the analysis of market distraction, it is evident that everyday distractions, in addition to loss aversion, deters optimal economics decision making and thus further bounds agent rationality.
URL: http://hdl.handle.net/10393/31619
CollectionScience économique - Mémoires // Economics - Research Papers
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