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Godfrey Cadogan is a Research Scientist in Risk and Uncertainty at the Institute for Innovation and Technology Management, Ted Rogers School of Management, Ryerson University. His research focus is on application of diverse branches of mathematics such as algebraic topology, number theory, group... More
  • The Source of Uncertainty for Probabilistic Preferences Over Gambles or Why people change their minds when gambling 0 comments
    Dec 24, 2011 10:35 AM

    A recent paper posted here explains why people change their minds when faced with gambling situations. The behavioural finance and economics literature characterizes such behaviour under rubric of "ambiguity aversion". Where people make decisions when they do not know the underlying probability distribution. However, a new branch of decision theory called decision field theory introduced by Prof. Jerome Busemeyer at Indiana University provides explanations based on analogy with quantum mechanics. His work was recently featured in the New Scientist.  Also, the emerging field of quantum cognition provides answers to behavior where behavioural finance and economics fail. It turns out that the source of uncertainty is a "behavioural quantum wave" which people emit when they do not know the underlying proobability distribution. That woud help explain why we sometimes see cyclic patters in stock price behaviour, and empirical phenomenon such as business cycles. If enough people are uncertain about the future, and those beliefs coincide, then we have peaks and troughs. The next frontier is how to incorporate the mathematically proven fact of behavioural quantum waves into forecast models.

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