Accepted Manuscript

Introduction to quantum probability theory and its economic applications

Emmanuel Haven, Andrei Khrennikov, Chenghu Ma, Sandro Sozzo

PII: S0304-4068(18)30090-9
DOI: https://doi.org/10.1016/j.jmateco.2018.08.004
Reference: MATECO 2265

To appear in: Journal of Mathematical Economics

Received date : 25 July 2018

Revised date : 17 August 2018
Accepted date : 20 August 2018

Please cite this article as: Haven E., Khrennikov A., Ma C., Sozzo S., Introduction to quantum
probability theory and its economic applications. Journal of Mathematical Economics (2018),
https://doi.org/10.1016/j.jmateco.2018.08.004

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Editorial
Introduction to quantum probability theory and its economic
applications

Emmanuel Haven, Memorial University, Canada

Andrei Khrennikov, Linnaeus University, Sweden

Chenghu Ma, Fudan University, China

Sandro Sozzo, University of Leicester, UK

Because of its mathematical elegance and simplicity, manageability and predictive success,
expected utility theory (EUT) provides both the normative and descriptive foundations of
decision-making under uncertainty.

Following Knight’s (1921) distinction between ‘objective uncertainty’ (or ‘risk’) and ‘subjective
uncertainty’ (or ‘ambiguity’), von Neumann and Morgenstern (1944) provided for an axiomatic
framework which defined EUT using objective probability. Savage (1954) and then Anscombe
and Aumann (1963) further generalized EUT also in an axiomatic way.

Boolean logic , and Bayesian probability theory, axiomatized by Kolmogorov (1950), provide
for mathematical structures which have been, and currently still are, at the heart of modelling
human rational behavior in the presence of uncertainty.

Although the economics and finance literature supplies numerous examples where EUT can be
seen to work well, the economics profession is well aware of paradoxes such as the Allais (1953)
paradox and Ellsberg's (1961) ‘ambiguity aversion’, and the profession is equally aware of the
usefulness of non-expected utility theory in resolving some well documented empirical puzzles
in finance. Camerer and Weber (1992) and Machina and Siniscalchi (2014) provide extensive
reviews of non-expected utility theory, while Epstein (1992) and Ma (2011) cover non-expected
utility theory for its applications in asset pricing theory.
In the 1980’s Kahneman and Tversky began to identify empirical deviations of rational behavior
in human judgments. Since then, we can account (in non-exhaustive fashion), for a variety of
effects and paradoxes such as sorites paradoxes; unpacking effects, disjunction effects etc. We
can in effect claim that the collection of all those experimentally determined deviations laid the
seeds for the creation of behavioral economics and finance.

As we remarked in Aerts, Haven and Sozzo (2018) (p. 1080), amongst the more advanced
axiomatic approaches which have been developed we can mention ‘EU with multiple priors’
(Gilboa and Schmeidler (1989)); ‘Choquet EU’ (Schmeidler (1989); Choquet (1954)); ‘smooth
ambiguity preferences model’ (Klibanoff et al. (2005)); ‘variational preference model’
(Maccheroni et al. (2006)) and ‘cumulative prospect theory’ (Tversky and Kahneman (1992)).
See also the review by Gilboa and Marinacci (2013).

We also mentioned in Aerts, Haven and Sozzo (2018) (p. 1081), that within the extensions of
EUT, there are still open challenges: the ‘50:51 example’ and the ‘reflection example’ (Machina
(2009); L’Haridon and Placido (2010); Baillon et al. (2011)).

What is the main purpose of this special section? Why is quantum probability of use within the
decision-making context described so far?

In its basic mathematical set-up, quantum mechanics differs from the Newtonian (classical
mechanics) framework. If economics were to have connections with physics, it would be most
likely with classical mechanics where the so-called ‘phase space’ (whose elements are pairs of
momentum and position for instance), is an Euclidean space. Those pairs are states in such space.
In quantum mechanics, a state is formalized with a wave function, which is complex valued.
That state will now form part of a Hilbert space. Position and momentum in quantum physics are
real-valued, and one needs to find so called operators in the Hilbert space which can represent
those real quantities. Let us be a little bit more precise.
As we mentioned already, quantum theory employs a mathematical formalism built around the
notion of Hilbert space and more precisely we can now think of such space as a linear vector
space over the field of complex numbers, endowed with a scalar product. We may say that the
Hilbert space is a generalization of Euclidean space. States are represented by vectors of the
Hilbert space, while state transformations are obtained through the action of suitable operators
over the Hilbert space, called orthogonal projection operators.

The statistics of events, within the quantum setting, over a number of repeated trials is
formalized by the notion of ‘quantum probability’. Quantum probability is technically different
from Kolmogorovian probability. More precisely, while Kolmogorovian probability is a
normalized measure over a sigma-algebra of sets which we denote as events; quantum
probability is not a measure on a sigma-algebra of sets but, rather, a normalized measure over the
non-commutative and non-distributive set of orthogonal projection operators of the Hilbert
space, whose elements are now called ‘events’ in the quantum sense. We need to emphasize the
words ‘non-commutative’, as quantum probability differs from Kolmogorovian probability in at
least this respect. The non-commutativity of observables is intrinsically related to the definition
of uncertainty in quantum mechanics. The Heisenberg Uncertainty Principle, also well know
from the popular science press, says that one cannot jointly measure with certainty, position and
momentum.

The mathematical properties of the quantum formalism account for a number of non-classical
phenomena such as ‘entanglement’; ‘incompatibility’; ‘interference’ and ‘superposition’. All of
those phenomena have very precise definitions in quantum mechanics and hence translating
those concepts outside of quantum mechanics is fraught with delicate obstacles.

However, the richness and flexibility of quantum probability, which does not have to obey the
mathematical restrictions of Boolean logic and Kolmogorovian probability, makes it to be a
natural candidate for the representation of heterogeneity and individual differences of human
decision-makers. We need to note though that quantum probability is by no means the only
generalization of Kolmogorovian probability.
The advantages of the quantum mathematical formalism over the Kolmogorovian formalism can
be clarified by the ways in which a decision-making process is formalized. A key feature of any
quantum system is the uncontrollable and ever-present interface activity between the object to be
measured (for instance the spin) and the measurement apparatus itself. There are, to date, no
definite interpretations on what the precise content may be of the interface between measured
object and the measurement device. In agreement with traditional research in quantum
mechanics, we can claim, as mentioned in Aerts, Haven and Sozzo (2018) (p. 1081), that the
measurement device creates a so-called ‘measurement context’ for the measured object. The
contextual interaction triggers a probabilistic change of the state of the measured object and an
actualization of a particular outcome amidst a set of available outcomes is realized. As stated
also in Aerts, Haven and Sozzo (2018) (p. 1081), this type of contextuality as described above,
requires the use of quantum probability (see also Aerts (2009); Khrennikov and Haven (2009)).

Let us give an example. In Shafir and Tversky (1992) a two-stage gamble experiment is
conducted where players must play a first gamble and they are then asked to enter a second
gamble, depending on whether i) they are informed they lost in the first gamble; ii) they are
informed they won in the first gamble or iii) they are not informed of the outcome. The results
from this experiment show that quite some players (in comparable numbers) are fine to play a
second gamble whether they won or lost. But they are much more reticent to play a second
gamble if they have no information. Jerome Busemeyer and Zheng Wang (2007) showed that
with this gamble experiment, a Markov model will require that the probability of gambling,
when no information is provided from the first gamble, should be the average of the probability
of gambling when information is provided (when either having lost or won). However, the
experimental results from this well-known experiment by Shafir and Tversky (1992) show this
not to be the case. It is here that the quantum probability model shows important promise. In the
quantum model in Hilbert space, the situations in the presence of information (lost, won) are
represented by vectors of the Hilbert space, while the situation when no information is present is
represented by the linear combination (superposition) of the latter vectors. This superposition is
responsible for the standard quantum interference term that appears in the probability of
gambling: if the interference term is zero, the quantum model reduces to the Markov model.
However, the interference term is generally non-zero which, in particular, enables modelling the
experimental pattern of Shafir and Tversky (1992).

Increasingly, the community of decision theorists agree that “… the process of choice - and in
particular the act of choice - can make substantial difference to what is chosen” (p. 193, Sen
(2002)), and “…valuations are initially malleable but become ‘imprinted’ (i.e. precisely defined
and largely invariant), after the individual is called upon to make an initial decision” (p. 74,
Ariely et al. (2003)). Moreover, as discussed in Slovic (1995, p. 365) “…beliefs and preferences
are often constructed – not merely revealed - in the elicitation process”. We want to argue that
human judgments and decisions can be seen as constructive processes, where the interface
between the object of decision (the analogue of, for instance, the physics based spin) and the
decision-maker (the analogue of the physics based apparatus) is now cognitive based (as opposed
to being physics based). As we already remarked above, when we discussed the actualization
procedure: the contextual interaction ultimately leads to the actualization. In the cognition
setting, this actualization is the decision. It needs stressing that this quantum formalism opens up
a rich environment, in which we can formalize uncertainty via the notion of cognitive state
transformation. We discuss this in more detail in Aerts, Haven and Sozzo (2018) (p. 1082).

It is reasonable to claim that this mathematical formalism of quantum mechanics has been
successfully applied in identifying new deviations of classicality in cognition (Aerts (2009);
Busemeyer and Bruza (2012); Busemeyer et al. (2011); Yukalov and Sornette (2014); Haven and
Khrennikov (2013); Pothos and Busemeyer and Trueblood (2013); Wang et al. (2014);
Khrennikov (2010); Yearsley and Pothos (2016)).

This special section of the Journal is explicitly dedicated to show that the quantum cognition
lesson can be successfully applied to problems of decision-making under uncertainty and, more
generally, to economics and finance problems which involve decision-making. Actually, such
applications already exist in the economics literature. For example, Brandenburger and La Mura
(2016) consider team decision problems with quantum signals. In Khrennikov (2015), Aumann’s
theorem is discussed within the context of quantum-like agents. Extensions of EU are provided
in Asano et al. (2017) and Aerts et al. (2018). Applications to finance exist as well (Segal and
Segal (1998); Baaquie (2004); Björk and Hult (2005); Choustova (2007); Frieden, Hawkins and
d’Anna (2007); Bagarello and Haven (2015); Shen and Haven (2017); Hawkins and Frieden
(2017)). See also Samuelson (1977) for much earlier work. However, to the best of our
knowledge, a systematic and unified exposition of how the quantum formalism effectively
accommodates a variety of EU paradoxes and human decision-making problems does not yet
exist.

This special section of the Journal contains six papers.

In the paper by Jürgen Eichberger and Hans Jürgen Pirner the authors show how Savage’s
subjective expected utility (SEU) (or Bayesian decision theory) approach (Savage (1954)) can be
embedded in a complex Hilbert space framework. General states are characterized by
superpositions of basis states with complex amplitudes. It is the absolute square of such an
amplitude which defines the probability to find this basis state in the general state.
Complex amplitudes (two numbers) allow for more freedom than probability (one number) to
model decision processes. For the case of the well-known two-urn Ellsberg paradox (Ellsberg
1961), their paper shows that a straightforward re-interpretation of the Savage framework leaves
the well-documented inconsistency between theoretically predicted behavior and actually
observed behavior unresolved. They model the subjective prior information of the decision-
maker by an element of the Hilbert space which they call subjective ‘state of mind’. Objective
information, also represented by an element of the Hilbert space, has an impact on the decision
maker's ‘state of mind’ and they model this by projecting it onto the ‘state of mind’. The
modified ‘state of mind’ determines the decision maker's expected payoff. This parameter-wise
parsimonious modification of the embedded Savage framework can resolve the Ellsberg paradox.
The authors are keen to emphasize that quantum physics and ‘quantum decision theory’ are
clearly separate. There is no quantum mechanical underlying mechanism based on Planck's
constant in our brains which would justify viewing decision making as a result of quantum
mechanical effects. It is the mathematical framework used for quantum mechanical analysis
which may prove to be useful for modeling human decision making.
The paper by V.I. Danilov and Ariane Lambert-Mogiliansky proposes that the subjectively
perceived world can be modelled as a quantum object. Such approach captures well-known
cognitive distortions from the way by which people process information. Recent results in
decision-theory show that a dynamically consistent decision-maker in such a context exhibits
violations of the dynamic version of the sure thing principle. Such violations can explain the
difference between Kolmogorovian and quantum probabilities when applied to updating and it is
the starting point for their interest in so called ‘quantum persuasion’.
The paper investigates the implications of this fact for a decision-maker’s sensitivity to
persuasion (that is the attempt by another agent to influence his/her decision by selecting a
measurement that generates information). In their paper they find that because the problem is not
constrained by Bayesian plausibility, quantum-like decision-makers are significantly easier to
manipulate. They characterize the path of measurements and find that in contrast with the
classical Kolmogorovian setting, distraction rather than relevant information has strong
persuasion power. A maximal information state can be transformed into a fully uncertain state
with a single blind measurement. This application of quantum decision-theory opens-up
important avenues of research in the functioning of markets.

Irina Basieva, Polina Khrennikova, Emmanuel Pothos, Masanari Asano and Andrei Khrennikov,
provide in their work for a model which aids in the selection of lotteries (as generator of events)
under uncertainty. von Neumann Morgenstern EU and Kahneman’s and Tversky’s prospect
theory can be reproduced with the proposed model. Belief states are quantum states and such
states formalize the mental representation of an uncertain event. A central idea in the paper is the
concept of complementary lotteries. If there is a lottery ‘A’ with outcome x (probability of
outcome, p); and a lottery ‘B’ with outcome y (probability of outcome q), then a decision maker,
when complementary lotteries are considered, is assumed not to be able to define the joint
probability of outcomes x and y. Rather, the decision maker wonders if he/she selected lottery A
with a realized outcome x, what his/her loss is if lottery B had been chosen with a realized
outcome y? The authors make the argument that the mathematical description for such approach
requires a Hilbert space. A so-called comparison operator is needed which is a compound
operator of two transition operators. For instance, one transition operator captures the utility of
opting for lottery B relative to the utility of selecting lottery A. The essential idea here is to
capture the notion of fluctuating preferences for lottery A as opposed to B (and vice versa). The
fluctuating preferences are formally picked up by constructive and destructive interference. Out
of the comparison operator’s value a decision rule is constructed.

G. Charles-Cadogan’s paper introduces a weak harmonic transitivity axiom (WHTA) that is a

dual to the stochastic transitivity axiom. The WHTA facilitates construction of an abstract
outcome dependent harmonic probability weighting function (HPWF). The latter is a quasilinear
(i.e., nonlinear) probability measure on sets of events with attached cyclic sets with probability
(P) measure zero. Intuitively, the P-measure on sets of events is consistent with Kolmogorov’s
probability axioms. The attached P-measure zero sets support random fields that mimic mental
states of decision makers. The cyclic order of such a set is interrupted or cut at a point when the
set is measured. That is, mental states are disturbed by measurement. When the cycle is
completed the nonlinear probability collapses to a Kolmogorov type linear probability. A
probability cycle concept (Kemeny, Snell & Knapp, 1976) characterizes that phenomenon. It is
based on a phase function (of outcomes) responsible for probability distortion and bounded
subadditivity. Readers should pay attention to the HPWF because of its potential to establish a
link between probability cycles and brainwave patterns in neuroeconomics. For example,
response times, neural signals and eye tracking exhibit brainwave patterns that reflect
probabilistic risk attitudes that may be captured by the HWPF during decision making
experiments. The nexus between the HPWF and Quantum Probability Theory (QPT) Born’s rule
is established by and through orthogonalization of the moments of the underlying objective
probability distribution function in a maximum entropy problem. The solution supports a
probability amplitude in Hilbert space. It is shown that the latter has the same fixed point as
Prelec’s (1998) axiomatized probability weighting function. In Charles-Cadogan’s paper, an
estimation of HPWF is performed with harmonic regression and he recovers linear probability
with a debiasing heteroscedasticity correction. Preliminary analysis shows that the HPWF phase
function controls coherence and preference reversal in binary choice (Buehler, 1976) in the
frequency domain (Brillinger, 2001).

In the paper by Diederik Aerts, Suzette Geriente, Catarina Moreira and Sandro Sozzo, a
theoretical and experimental study is proposed to deal with human choices under Knightian
uncertainty. They test the ‘Ellsberg three-color example’, confirming the ambiguity aversion
pattern suggested by Ellsberg, and the ‘Machina 50/51’ and ‘reflection examples’, partially
confirming the preferences hypothesized by Machina. Machina preferences cannot generally be
represented by either subjective EUT or major non-EU models, e.g. rank-dependent models.
The authors instead show that a quantum model elaborated by themselves allows for a faithful
reproduction of the collected data. Their model represents subjective probabilities by quantum,
rather than Kolmogorovian, probabilities, while quantum states, which have a cognitive nature
and should be distinguished from physical states of nature, incorporate the uncertainty inherent
in the decision-making process.

In the last paper, Polina Khrennikova and Emmanuel Haven consider a geometric representation
of statistical data in the quantum probabilistic framework, with a newly developed mathematics
of generalized projectors, to describe probabilistically belief and preference formation. The
quantum probability framework combined with the Born rule (which allows to obtain classical
probabilities from the complex probability amplitudes) overcomes the detected non-additivity of
Kolmogorovian probability in the formula of total probability as supported by experimentally
collected data. The paper deals with investment preferences under risk in a setting, where
consequential reasoning in a classical subjective EUT, violates the ‘Savage Sure Thing
Principle’. The violation of the above principle is coined in earlier contributions as the
‘disjunction effect’ and it expresses itself via a violation of the law of total probability. The
experimental findings as reported in the paper, support the hypothesis that previous gains and
losses in investments can change the subsequent preference state of the decision maker. The aim
of this paper is twofold: i) it gathers additional empirical evidence on the emergence of the
disjunction effect in an investment setting, and ii) it proposes a probabilistic depiction of belief
and preference formation by applying the formalism of quantum projective measurements.

In conclusion, this special section may have shown that some of the decision-making paradoxes
can be accommodated with the help of mathematical tools which use the idea of quantum
probability.
The literature is growing in that regard. Although quantum formalisms can alleviate some of the
paradoxes, they certainly do not show (yet) that decision-making processes are the result of a
brain in which quantum mechanical processes occur. It also needs stressing that there are other
generalizations of probability besides quantum probability.
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