LML Fellow Mark Kirstein has received a PRIME fellowship from DAAD (the German Academic Exchange Service). This will support a 12-month research visit to the London Mathematical Laboratory, followed by a postdoctoral position at Leipzig University for 6 months. Mark will use his time at LML to study The time resolution of the probability weighting puzzle as a member of the Ergodicity Economics (EE) research group.
The classical economic model of decisions under uncertainty is the expected utility hypothesis, which asserts that humans maximise expected changes in the utility of their wealth. The utility function is viewed as reflecting the decision-maker’s idiosyncratic attitude to risk. Empirical studies over the last forty years show that observed behaviour deviates systematically from this classical prediction. Most researchers take these deviations as reflecting irrational biases, and the study of such biases gave rise to the field of behavioural economics.
Mark will focus on one bias: probability weighting. This claims that humans behave irrationally in systematically under-estimating the probabilities of common events and over-estimating the probabilities of rare events. Mark proposes a new explanation of this behaviour using a central tenet of EE: that humans maximise the time-average growth rate of their wealth. Under multiplicative dynamics and with perfect knowledge of gamble parameters, this is equivalent to the expected utility hypothesis with logarithmic utility. However, real decision-makers are frequently uncertain of the parameters of the gambles they face. By incorporating this additional uncertainty in a model of repeated gambles, Mark hopes to explain observed decisions as growth-optimal. Providing a clear rationale for decisions which mainstream economists see as irrational would open a new paradigm for the study of economic behaviour.
At LML, Mark will work closely with Ole Peters, Alexander Adamou, and Yonatan Berman. His German hosts will be Max-Konstantin von Renesse at Leipzig University and Jürgen Jost at the Max-Planck-Institute for Mathematics in the Sciences.
The TU Dresden issued a press release announcing the fellowship.