Proceedings of the Annual Meeting of the Cognitive Science Society

This research investigates expertise at decision making under risk and the allocation of cognitive effort as risky decisions are made^- We conceptualize risk within a space defined by decision variables that managers monitor in their environment. W e present a representation of the risk space that captures h o w foreign exchange traders understand risk in spot currency markets. Results from an experiment with professional traders as subjects show that the risk space explains whether and when traders make decisions to buy, sell, and hold spot positions in foreign currencies. An index of cognitive effort is presented that can be used to predict subjects' level of confidence in their assessments of market behavior. Effort is relatively high when conditions are likely to trigger uncertainty. Effort is relatively low when markets act as expected.