Further Perceptions of Probability

Hyman Minsky’s Financial Instability Hypothesis (Minsky, 1977) proposes that cyclicality in the financial market is caused by a rational process of learning and inference of probabilities. Although a substantial literature is available on the perception of stationary probability distributions, the learning of non-stationary distributions has received less interest. The purpose of this thesis is to investigate people’s cognitive ability to learn cyclical changes in an underlying probability from feedback. Key aspects of the design of Gallistel et al. (2014) are replicated, but under continuously, rather than stepwise, changing Bernoulli distributions to establish: (i) if the learning process is continuous or discrete, (ii) if there is only local learning or if people induce the underlying functional form, and (iii) if there are any differences in performance between perceptual and cognitive formulations of the task. The step-hold updating model introduced by Gallistel et al. (2014) is compared to two simple trial by trial updating models. The results suggest that (i) the learning process is continuous, (ii) people perceive the functional form explicitly but do not extrapolate, and (iii) there are some differences depending on framing. One of the trial by trial models outperforms the stephold model for the majority of subjects in this sample and version of the task.