Economic decisions are often influenced by the institutional settings in which they are made, and thus decision behavior can be understood as an individual process of adaptation to the environment. The central goal of our research is the development and testing of cognitive models that explain economic decisions.
People’s decisions are influenced by their experience. When buying a new car, for instance, people’s past experience will strongly influence their purchase. Someone satisfyingly driving a Mercedes for several years might not seriously consider other brands when buying a new car even if new attractive cars have been introduced to the market. Similarly, investment decisions are often influenced by an investor’s past investment failures. How experience changes people’s behavior has traditionally been described by learning models. The present project focuses on how models of bounded rationality improve explanations of people’s behavior when they take learning and memory effects into account.
Most economists define rationality in terms of consistency principles. Several decades of research on consumer behavior has demonstrated how and when people violate these principles. In this project we examine cognitive theories that can explain people's preferential choices and provide better theories of consumer behavior. These theories go beyond traditional economic discrete choice models, by explaining the cognitive process underlying choices and its contexual embedding.
Economic decisions are often characterized by risk and uncertainty. The perceptions of risk and returns are central factors affecting economic behavior and should influence how individuals make investments. When aiming for a deeper understanding of how people handle risk, it is beneficial to go beyond a purely behavioral approach and explore the cognitive and in particular neurocognitive mechanisms underlying decisions. This project explores how people's investment decisions are determined by the interplay of their attitude toward risk and the perception of risk and return.