nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2004‒12‒12
sixteen papers chosen by
Marco Novarese
Università del Piemonte Orientale

  1. Conventions - Some Conventional and Some Not So Conventional Wisdom By Siegfried Berninghaus; Werner Güth; Hartmut Kliemt
  2. Heterogeneity and the Voluntary Provision of Public Goods By Kenneth S. Chan; Stuart Mestelman; Rob Moir; R. Andrew Muller
  3. Charitable Giving by Married Couples: Who Decides and Why Does it Matter? By James Andreoni; Eleanor Brown; Isaac C. Rischall
  4. Transfers and Altruistic Punishments in Third Party Punishment Game Experiments. By Ottone, Stefania
  5. Emulation, Inequality, and Work Hours: Was Thorsten Veblen Right? By Samuel Bowles; Yongjin Park
  6. Judges' Cognition and Market Order By Benito Arruñada; Veneta Andonova
  7. Excess Entry, Ambiguity Seeking, and Competence: An Experimental Investigation By Daniela Grieco; Robin Hogarth
  8. Ethical Differentiation and Market Behavior: An Experimental Approach By Julian Rode; Robin Hogarth; Marc Le Menestrel
  9. The Impact of Newspapers on Consumer Confidence: Does Spin Bias Exist? By Karel-Jan Alsem; Steven Brakman; Lex Hoogduin; Gerard Kuper
  10. Agent-Based Models and Human Subject Experiments By John Duffy
  11. A Theory of Overconfidence, Self-Attribution, and Security Market Under- and Over-reactions By KENT D. DANIEL; David Hirshleifer; AVANIDHAR SUBRAHMANYAM
  12. Negative Reciprocity: The Coevolution of Memes and Genes By Daniel Friedman; Nirvikar Singh
  13. Effects of Portfolio Planning Methods on Decision Making: Experimental Results* By JS Armstrong; Roderick J. Brodie
  14. Do Cultures Clash? Evidence from Cross-National Ultimatum Game Experiments By Swee Hoon Chuah; Robert Hoffmann; Martin Jones; Geoffrey Williams
  15. On the theory of reference-dependent preferences (revised) By Alistair Munro; Robert Sugden
  16. The formation of social preferences : some lessons from psychology and biology By Louis Lévy-Garboua; Claude Meidinger; Benoît Rapoport

  1. By: Siegfried Berninghaus; Werner Güth; Hartmut Kliemt
    Abstract: In this paper we consider conventions as regularities in behavior which help to solve coordination problems in a society. These problems can be formalized as non-cooperative games with several equilibria. We know that in such situations serious problems of equilibrium selection arise which cannot be solved by traditional game theoretical reasoning. Conventions seem to be a powerful tool to solve equilibrium selection problems in real world societies. Essentially, two questions will be addressed in this paper: a) Which conventions will emerge in a society? b) How can a society break away from an inferior and reach a superior convention? It turns out that "risk dominance" of a convention plays a crucial role in dealing with both questions and generally in the evolution of conventions.
    Date: 2004–11
  2. By: Kenneth S. Chan; Stuart Mestelman; Rob Moir; R. Andrew Muller
    Abstract: We investigate the effects of heterogeneity, incomplete information and communication on aggregate contributions to a public good using the voluntary contribution mechanism in a nonlinear laboratory environment. One-dimensional heterogeneity (heterogeneity in income or preferences) and two-dimensional heterogeneity (heterogeneity in income and preferences) both increase voluntary contributions. The effect is greatest when information is incomplete in the sense that subjects do not know each other’s payoffs. Incomplete information also reduces contributions in the homogeneous case. Communication reverses the relative importance of oneand two-dimensional heterogeneity in promoting cooperation.
    Date: 1998–04
  3. By: James Andreoni; Eleanor Brown; Isaac C. Rischall
    Abstract: We examine how charitable giving is influenced by who in the household is primarily responsible for giving decisions. Looking first at single-person households, we find men and women to have significantly different tastes for giving, setting up a potential conflict for married couples. We find that, with respect to total giving, married households tend to resolve these conflicts largely in favor of the husband’s preferences. However, when the woman is the decision maker, she will still make a significantly different allocation of those charity dollars, preferring to give to more charities but to give less to each. We find our results give new insights into both issues of charitable giving and household decision making.
    Date: 1999–07
  4. By: Ottone, Stefania
    Abstract: Our research is a variant of the third party punishment game. In particular, we want to test whether players have heterogeneous preferences; the levels of the sanction and of the transfer are proportional to the unfairness of the Dictator; the change of the role influences the Observer’s reaction to unfair behavior; players’ decision to punish the Dictator and/or to help the Receiver depends on how costly their intervention is.
    JEL: A12 A13 C72 C91 D63 D64
    Date: 2004–12
  5. By: Samuel Bowles (University of Massachusetts Amherst); Yongjin Park (Connecticut College)
    Abstract: We investigate Veblen effects on work hours, namely the way that a desire to emulate the consumption standards of the rich induces longer work hours among the rest. Consistent with our model of these asymmetric social comparisons, greater inequality predicts longer work hours in ten OECD countries over the period 1963-1998. The country fixed effects estimates of the impact of inequality on hours are large, robust, and cannot be explained by conventional incentive effects. In the presence of Veblen effects, a social welfare optimum cannot be implemented by a flat tax on consumption but may be accomplished by progressive consumption taxes.
    Keywords: Interdependent utility, relative income, social comparisons, inequality, emulation, Veblen effects, work hours
    JEL: H23 D31 D62 J22
    Date: 2004–11
  6. By: Benito Arruñada; Veneta Andonova
    Abstract: We argue that during the crystallization of common and civil law in the 19th century, the optimal degree of discretion in judicial rulemaking, albeit influenced by the comparative advantages of both legislative and judicial rulemaking, was mainly determined by the anti-market biases of the judiciary. The different degrees of judicial discretion adopted in both legal traditions were thus optimally adapted to different circumstances, mainly rooted in the unique, market-friendly, evolutionary transition enjoyed by English common law as opposed to the revolutionary environment of the civil law. On the Continent, constraining judicial discretion was essential for enforcing freedom of contract and establishing a market economy. The ongoing debasement of pro-market fundamentals in both branches of the Western legal system is explained from this perspective as a consequence of increased perceptions of exogenous risks and changes in the political system, which favored the adoption of sharing solutions and removed the cognitive advantage of parliaments and political leaders.
    Keywords: Legal systems, institutional development, law enforcement
    JEL: K40 N40 O10
    Date: 2004–07
  7. By: Daniela Grieco; Robin Hogarth
    Abstract: Excess entry refers to the high failure rate of new entrepreneurial ventures. Economic explanations suggest 'hit and run' entrants and risk-seeking behavior. A psychological explanation is that people (entrepreneurs) are overconfident in their abilities (Camerer & Lovallo, 1999). Characterizing entry decisions as ambiguous gambles, we alternatively suggest–following Heath and Tversky (1991)–that people seek ambiguity when the source of uncertainty is related to their competence. Overconfidence, as such, plays no role. This hypothesis is confirmed in an experimental study that also documents the phenomenon of reference group neglect. Finally, we emphasize the utility that people gain from engaging in activities that contribute to a sense of competence. This is an important force in economic activity that deserves more explicit attention.
    Keywords: Competence, excess entry, entrepreneurship, overconfidence
    JEL: C91 L10
    Date: 2004–10
  8. By: Julian Rode; Robin Hogarth; Marc Le Menestrel
    Abstract: We constructed triopolistic experimental markets where producers set prices. One producer’s costs were higher than the others. In two experiments, costs were attributed to compliance with ethical guidelines. In the third, no justification was provided. Consumers paid premia for the ethically differentiated product and even larger premia if they did not know the producers’ 'ethical' costs. Individual differences were important (students of business/economics paid smaller premia than others). We also provide evidence consistent with a large attitude-behavior gap for ethical consumption. Finally, we speculate about the observed 'demand function' for ethics and emphasize the potential of experimental methodology for understanding contextual effects in market settings
    Keywords: Fair trade, ethical premia, price competition, contextual effects
    JEL: A13 B41 D43 D46
    Date: 2004–10
  9. By: Karel-Jan Alsem; Steven Brakman; Lex Hoogduin; Gerard Kuper
    Abstract: It is sometimes argued that news reports in the media suffer from biased reporting. Mullainathan and Shleifer (2002) argue that there are two types of media bias. One bias, called ideology, reflects a news outlet’s desire to affect reader opinions in a particular direction. The second bias, referred to as spin, reflects the outlet’s attempt to simply create a memorable story. Competition between outlets can eliminate the effect of ideological bias, but increases the incentive to spin stories. We examine whether we find some evidence of spin in Dutch newspaper reporting on the state of the economy. If newspapers are indeed able to create memorable stories this should, according to our hypothesis, affect the opinion of readers with respect to the state of the economy. Sentiments about the actual state of the economy could be magnified by spin. As a result, consumer confidence – a variable that routinely measures the opinion on the state of the economy – can be expected to be affected not only by economic fundamentals, but also by the way these fundamentals are reported. We construct a variable that reflects the way consumers perceive economic news reported in newspapers. We find that this variable indeed has a significant impact on consumer confidence, which is short-lived.
    JEL: E20 E21 E30
    Date: 2004
  10. By: John Duffy (University of Pittsburgh)
    Abstract: This paper considers the relationship between agent-based modeling and economic decision-making experiments with human subjects. Both approaches exploit controlled ``laboratory'' conditions as a means of isolating the sources of aggregate phenomena. Research findings from laboratory studies of human subject behavior have inspired studies using artificial agents in ``computational laboratories'' and vice versa. In certain cases, both methods have been used to examine the same phenomenon. The focus of this paper is on the empirical validity of agent-based modeling approaches in terms of explaining data from human subject experiments. We also point out synergies between the two methodologies that have been exploited as well as promising new possibilities.
    Keywords: agent-based models, human subject experiments, zero- intelligence agents, learning, evolutionary algorithms
    JEL: C8 C9
    Date: 2004–12–09
  11. By: KENT D. DANIEL (Northwestern University - Kellogg School of Management); David Hirshleifer (Fisher College of Business, Ohio State University, Department of Finance); AVANIDHAR SUBRAHMANYAM (University of California, Los Angeles)
    Abstract: We propose a theory based on investor overconfidence and biased self- attribution to explain several of the securities returns patterns that seem anomalous from the perspective of efficient markets with rational investors. The theory is based on two premises derived from evidence in psychological studies. The first is that individuals are overconfident about their ability to evaluate securities, in the sense that they overestimate the precision of their private information signals. The second is that investors' confidence changes in a biased fashion as a function of their decision outcomes. The first premise implies overreaction to private information arrival and underreaction to public information arrival. This is consistent with (1) post-corporate event and post-earnings announcement stock price 'drift', (2) negative long- lag autocorrelations (long-run 'overreaction'), and (3) excess volatility of asset prices. Adding the second premise leads to (4) positive short-lag autocorrelations ('momentum'), and (5) short-run post-earnings announcement 'drift,' and negative correlation between future stock returns and long-term measures of past accounting performance. The model also offers several untested empirical implications and implications for corporate financial policy.
    Keywords: Overconfidence, Market Efficiency, Investor Psychology, Asset Pricing
    JEL: G
    Date: 2004–12–04
  12. By: Daniel Friedman (University of California, Santa Cruz); Nirvikar Singh (University of California, Santa Cruz)
    Abstract: A preference for negative reciprocity is an important part of the human emotional repertoire. We model its role in sustaining cooperative behavior but highlight an intrinsic free-rider problem: the fitness benefits of negative reciprocity are dispersed throughout the entire group, but the fitness costs are borne personally. Evolutionary forces tend to unravel people’s willingness to bear the personal cost of punishing culprits. In our model, the countervailing force that sustains negative reciprocity is a meme consisting of a group norm together with low-powered (and low-cost) group enforcement of the norm. The main result is that such memes coevolve with personal tastes and capacities so as to produce the optimal level of negative reciprocity.
    Keywords: Altruism, reciprocity, negative reciprocity, coevolution
    JEL: C7 D8
    Date: 2004–12–06
  13. By: JS Armstrong (The Wharton School - University of Pennsylvania); Roderick J. Brodie (Department of Marketing, University of Auckland,)
    Abstract: Subjects (n = 1015) working individually in the role of managers were asked to choose between investment opportunities that would either double their investment or cause the loss of half of it. Six administrators ran experiments on 27 occasions in six countries over a five-year period. Information about the BCG matrix increased the subjects' likelihood of selecting the project that was clearly less profitable. Of subjects exposed to the BCG matrix, 64% selected the unprofitable investment. Of subjects who used the BCG matrix in their analysis, 87% selected the less profitable investment.
    Keywords: decision making, marketing, portfolio planning methods
    JEL: A
    Date: 2004–12–06
  14. By: Swee Hoon Chuah (Nottingham University Business School); Robert Hoffmann (Nottingham University Business School); Martin Jones (Department of Economic Studies, University of Dundee); Geoffrey Williams (Nottingham University Business School)
    Abstract: Economic, political and social globalisation entails increasing interaction between individuals of different cultures. While experimental economists have established differences between the behaviour within different cultures, the effect of cultural difference on cross-culture interactions has so far not been sufficiently explored. This paper reports on the results of experiments with ultimatum games designed for this purpose, in which Malaysian Chinese and UK subjects played opponents of their own as well as of the other culture. We find that cultural differences exist between the behaviour of Western and Asians interacting (a) within their own respective national groups, and (b) with members of the other group. This evidence is discussed in terms of the possibility of a 'clash of cultures'.
    Keywords: Note:
    JEL: C78 C91 D64 Z13
    Date: 2004–11–16
  15. By: Alistair Munro; Robert Sugden (School of Economics, University of East Anglia, Norwich, NR4 7TJ.)
    Abstract: A theory is proposed in which preferences are conditional on reference points. It is related to Tversky and Kahneman’s reference-dependent preference theory, but is simpler and deviates less from conventional consumer theory. Preferences conditional on any given reference point satisfy standard assumptions. Apart from a continuity condition, the only additional restriction is to rule out cycles of pairwise choice. The theory is consistent with observations of status quo bias and related effects. Reference points are treated as subject to change during the course of trade. The implications of endogeneity of reference points for behaviour in markets are investigated.
    Keywords: status quo bias; behavioral economics; loss aversion; reference-dependence; prospect theory; general equilibrium
    JEL: D11 D51
    Date: 2001–03–21
  16. By: Louis Lévy-Garboua (TEAM); Claude Meidinger (TEAM); Benoît Rapoport (TEAM)
    Abstract: The goal of this paper is to draw some lessons for economic theory from research in psychology, social psychology and, more briefly, in biology, which purports to explain the "formation" of social preferences. We elicit the basic mechanisms whereby a variety of social preferences are determined in a variety of social contexts. Biological mechanisms, cultural transmission, learning, and the formation of cognitive and emotional capacities shape social preferences in the long or very long run. In the short run, the built-in capacities are utilized by individuals to construct their own context-dependent social preferences. The full development of social preferences requires consciousness of the individual's similarities and differences with others, and therefore knowledge of self and others. A wide variety of context-dependent social preferences can be generated by just three cognitive processes : identification of self with known others, projection of known self onto partially unknown others, and categorization of others by similarity with self. The self can project onto similar others but is unable to do so onto dissimilar others. The more can the self identify with, or project onto, an other the more generous she will be. Thus the self will find it easier to internalize and predict the behavior of an in-group than an out-group and will generally like to interact more with the former than with the latter. The main social motivations can be simply organized by reference to social norms of justice of fairness that lead to reciprocal behavior, some kind of self-anchored altruism that provokes in-group favoritism, and social drives which determine an immediate emotional response to an experienced event like hurting a norm's violator or helping an other in need.
    Keywords: Formation of social preferences, psychology, social psychology sociale, biology
    JEL: B40 D63 D64 D70 D80 Z13
    Date: 2004–01

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