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Noisy neural coding and decisions under uncertainty

Author

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  • Ferdinand Vieider
Abstract
I derive a noisy neural coding model (NCM ) and pit its performance against prospect theory plus additive noise (PT) using some prominent recent datasets collected to measure PT parameters. The NCM is based on the premise that choice patterns observed under uncertainty may originate from noisy perceptions of choice stimuli, which are optimally combined with mental priors to obtain actionable decision parameters. This contrast with PT, which models preferences as deterministic, but adds a noise term for empirical implementations. I show how the parameters emerging from the NCM naturally map into PT parameters. The NCM can thus be seen as a generative model for PT. At the same time, the NCM departs from PT in that it is inherently stochastic. This results in novel predictions about systematic correlations between PT parameters, as well as pointing to instances under which PT will be violated. Using Bayesian hierarchical models to fit the data, I find substantial support for these predictions. The NCM further consistently outperforms PT in terms of predictive ability. These results contribute to the nascent literature documenting the role played by imprecise cognition in economic decisions.

Suggested Citation

  • Ferdinand Vieider, 2021. "Noisy neural coding and decisions under uncertainty," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 21/1022, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:21/1022
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    File URL: http://wps-feb.ugent.be/Papers/wp_21_1022.pdf
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    Cited by:

    1. Steiner, Jakub & Netzer, Nick & Robson, Arthur & Kocourek, Pavel, 2021. "Endogenous Risk Attitudes," CEPR Discussion Papers 16190, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    risk taking; prospect theory; noisy cognition; efficient coding;
    All these keywords.

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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