Abstract
AbstractThe dominant paradigm in neuroscience considers the brain to be a prediction engine. The brain generates predictions first, which are then contrasted with information to generate error signals. Finite brain resources are subsequently spent in selectively processing the error signals based on their relative value with higher value signals getting a priority. In this way, the brain can be thought of as optimizing on its own internal resources before seeking to optimize on the resources available in the external world. We show that such considerations change the cost–benefit calculations of certain vs uncertain outcomes in the brain, giving rise to, what can be termed as, a strict certainty preference. A new perspective on prominent financial innovations (such as securitization, interest rate swaps, and credit default swaps) emerges, with a dark side that potentially leads to a misallocation of resources towards low NPV projects.
Funder
University of the Sunshine Coast
Publisher
Springer Science and Business Media LLC
Reference32 articles.
1. Andreoni, J., Sprenger, C.: Certain and uncertain utility: the allais paradox and five decision theory phenomena, UC San Diego Working Paper .
2. Andreoni, J., Sprenger, C.: Risk preferences are not time preferences. Am Econ Rev 102(7), 3357–3376 (2012)
3. Bank for International Settlements (2017), Semi-annual OTC derivatives statistics at end-2016.
4. Borio, H.:Is monetary policy less effective when interest rates are persistently low?, BIS Paper No. 628 (2017).
5. Caballero, R.: The ‘Other’ imbalance and the financial crisis, NBER Working Paper No. 15636 (2010)