Wednesday, June 06, 2012

Scottish Summer School Psychology and Economics

PhD students can still register for the session on psychology and economics at the DTC Summer school on June 20th by emailing

My component of the session will look at techniques such as anchoring vignettes, measurement of preferences in surveys, integration of psychometric measures into econometrics and related topics

I will also be giving a plenary talk on Stress and Financial Decision Making based on co-authored with Colm Harmon, Gunther Fink and David Canning: 

Wednesday 20 June
Liam Delaney (University of Stirling) | Stress and Financial Decision Making: Evidence from the laboratory and the field         
The assumption of stable time and risk preferences is crucial to several economic models. However, a large recent literature points to non-stationarity in time preferences in several empirical settings (e.g. McClure et al 2007). Understanding the extent and biological basis of such instability is important. In particular, understanding the role of biological stress processes in generating fluctuations in preferences, valuation and choices is a key task for this literature. Many important economic outcomes are generated by choices made often in stressful and unfamiliar environments and it is questionable whether the preferences held by individuals when construing tradeoffs in these environments are identical to preferences held when thinking about such tradeoffs in the abstract. Examples include making life-changing decisions about debt in the environment of a financial institution under perceived time pressure and making decisions about job-offers in the context of welfare centers and so on. Furthermore, many economic outcomes generate stress and it is possible that the stress generated by such outcomes yields decision-making patterns that are inconsistent with rational behaviour e.g. suboptimal debt resolution mechanisms and inefficient job search patterns (e.g. Krueger and Mueller 2010, Mullainathan 2011).  While a body of psychological literature exists examining the effect of stress on decision-making, this literature is still very incomplete in application to large economic questions. In particular, we have very little understanding of how stress influences the types of preferences core to economic decision making and economic models and almost no evidence at all of the economic significance of such effects, whether they are substantial enough to merit a change in core models of economic decision making and ultimately design of major policy institutions such as welfare mechanisms and regulatory structures for financial marketing and bankruptcy resolution. Our study investigates the effects of acute stress on financial decision-making, subjects were invited to participate in two independent laboratory sessions. During both sessions, subjects were asked to respond to two blocks of financial decision tasks. After the first block, which lasted approximately 25 minutes, respondents were randomly assigned into three groups: a control group, who did not receive any stressor, a cognitive stressor group, and a physical stressor group. Respondents assigned to the cognitive stressor protocol were subjected to a series of IQ questions, designed to increase in difficulty such that all participants would fail the tasks eventually. Under the physical stressor protocol, subjects were asked to place both of their feet into ice-cold (4°C, 40°F) water, a “cold pressor test†which is widely used in the medical literature, and generally induces a large jump in blood pressure and heart rates.  After the stressor, individuals were asked to respond to a second set of financial questions. We find that exposure to stress significantly increases the degree of discounting and risk aversion displayed by individuals, and leads to large reductions in the respondents’ willingness to learn about investment options before taking their final decision.

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