nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2005‒03‒13
nine papers chosen by
Marco Novarese
Universita del Piemonte Orientale

  1. Individual action, institutions and social change : an approach in terms of convention By Bernard Enjolras
  2. On Representative Social Capital By Charles Bellemare; Sabine Kroger
  3. Framing under risk : Endogenizing the Reference Point and Separating Cognition and Decision By Raphaël Giraud
  4. Optimal Redistributive Taxation when Government’s and Agents’ Preferences Differ By Blomquist, Sören; Micheletto, Luca
  5. Learning to be prepared By Kets, Willemien; Voorneveld, Mark
  6. The effect of precommitment and past-experience on insurance choices : an experimental study By Thomas Papon
  7. Central bank power is a matter of faith By Bengtsson, Ingemar
  8. The Rhetoric of Inequity Aversion By Avner Shaked
  9. The Rhetoric of Inequity Aversion – Reply By Ernst Fehr; Klaus M. Schmidt

  1. By: Bernard Enjolras (Institute for social research et MATISSE)
    Abstract: This anthology consists of a collection of articles that address two common questions : how institutions emerge from individual actions and how individual actions are shaped by institutions ? What unifies these contributions is the search of a theoretical explanation that overcomes the shortcomings of the rational choice explanations of social institutions. The approach developed here deals with two methodological problems that are pervasive in social sciences : that of the relationship between agency and structures and that of role of rationality and norms in explaining individual social behavior. Individuals are seen to be acting according to "conventions" that structure their interaction and that are cognitive and interpretative schemes that allow them to understand social reality and to give meaning to their actions. In addition individuals do not act either rationally or normatively but are conceived as acting within a "conventional" context that gives meaning to their action but also constrains them. They are supposed to be moved both by normative considerations and by self-interest that can conflict.
    Keywords: Convention, norm; rationality; collective action; agency; structure; social action; institution; governance; social change; community; nonprofit organizations; institutions
    JEL: C72 D70 H42 L3 L31 L32 L50
    Date: 2004–06
  2. By: Charles Bellemare; Sabine Kroger
    Abstract: This paper analyzes data for a random sample drawn from the Dutch population who reveal their capacity to provide and sustain social capital by their propensity to invest and reward investments by means of an economic experiment. We have three main results. First, we find that heterogeneity in behavior is characterized by several asymmetries -- men, the young and elderly, and low educated individuals invest relatively less, but reward significantly more investments. Second, higher expected levels of investments have a positive and significant effect on the level of investments themselves, corroborating the presence of social norms. Third, we compare our results with a laboratory experiment conducted with a student sample. We find that the student sample provides a lower bound of the population level of social capital.
    Keywords: Social Capital Investments, Social Norms, Experiment, Representative Sample
    JEL: Z13 C90 C10 D39
    Date: 2005
  3. By: Raphaël Giraud (EUREQua/TEAM)
    Abstract: We aim at improving the classical explanation of the framing effect phenomenon, based on Prospect Theory by, first, making the reference point shifting that generates the phenomenon endogenous, and second, providing a theory of risky choice framing that accounts for the fundamental intuition that framing effects do not come from cognitive limitations of the subjects. We introduce a normative equivalence relation on the set of lottery prizes that models different descriptions and axiomatizing a preference functional of the Expected Lottery-Dependent Utilit type. We first show that the framing effect relates to the indeterminacy of preferences over the space of prizes, modeled by a set of von Neumann-Morgenstern utility functions interpreted as states of mind or reference points. Second, we show that it is possible to identify the precise effect of the reference point shifting by disentangling the perception of the prizes of a lottery from the reaction to its description. The framing phenomenon is thus explained by an endogenous reference point shifting that stems from the feelings that arise in the spirit of the decision maker as a consequence of a variation in the description, in line with psychological explanations of other kinds of framing.
    Keywords: Framing effects; descriptions; states of mind; reference point shifting; lottery-dependent expected utility; partial orders
    JEL: D81 D00 A12
    Date: 2004–09
  4. By: Blomquist, Sören (Department of Economics); Micheletto, Luca (Department of Economics)
    Abstract: Paternalism, merit goods and specific egalitarianism are concepts we sometimes meet in the literature. The thing in common is that the policy maker does not fully respect the consumer sovereignty principle and design policies according to some other criterion than individuals’ preferences. Using the self-selection approach to tax problems developed by Stiglitz (1982) and Stern (1982), the paper provides a characterization of the properties of an optimal redistributive mixed tax scheme in the general case when the government evaluates individuals’ well-being using a different utility function than the one maximized by private agents.
    Keywords: optimal taxation; behavioral economics; paternalism; merit goods; non-welfarism
    JEL: H21 H23
    Date: 2005–02–21
  5. By: Kets, Willemien (Department of Econometrics and Operations Research); Voorneveld, Mark (Dept. of Economics, Stockholm School of Economics)
    Abstract: Behavioral economics provides several motivations for the common observation that agents appear somewhat unwilling to deviate from recent choices: salience, inertia, the formation of habits, the use of rules of thumb, or the locking in on certain modes of behavior due to learning by doing. This paper provides discrete-time adjustment processes for strategic games in which players display precisely such a bias towards recent choices. In addition, players choose best replies to beliefs supported by observed play in the recent past, in line with much of the literature on learning. These processes eventually settle down in the minimal prep sets of Voorneveld (2004, 2005).
    Keywords: adjustment; learning; minimal prep sets; behavioral bias; salience
    JEL: C72 D83
    Date: 2005–03–07
  6. By: Thomas Papon (EUREQua)
    Abstract: This paper reports results from an experimental study that investigates insurance behaviors in low-probability high-loss risk situations. This study reveals that insurance behaviors may depend on the individual prior experience towards risk. It may also depend on the duration of the commitment period, namely the period during which individuals commit themselves to maintain the same insurance decision. Non-additive decision models such as Dual Theory and Cumulative Prospect Theory seem to have a higher descriptive power than Expected Utility Theory when explaining subjects' behaviors. This paper presents a direct experimental test of the prediction of Myopic Prospect Theory relative to insurance demand. This study is also designed to test the significance of gambler's fallacy and availability bias in the insurance decision process. These theoretical concepts help to understand many behaviors commonly observed in reality but which remain unexplained within the E.U framework. In particular, this paper provides new explanations about the puzzling fact that people usually fail to obtain insurance against disaster-type risks such as natural disasters, even when premiums are close to actuarially fair levels. According to our experimental results, the deficiency of insurance demand for natural disasters may be due to the lack of individual prior experience towards such risks ; as well as the relatively short commitment period of insurance policies (usually one fiscal year) compared with the empirical frequency of major natural hazards (centennial and even more).
    Keywords: Insurance demand; Low-probability high-consequence risks; heuristics and bias in risk perception; experimental methodology; Cumulative Prospect Theory; Dual Theory
    JEL: C90 C91 D1 D81 D84 G22 M31
    Date: 2004–09
  7. By: Bengtsson, Ingemar (Department of Economics, Lund University)
    Abstract: This paper reconsiders how central banks get involved in the process of determining nominal variables such as market interest rates and inflation rates. It is argued that the traditional story deriving central bank power from its monopoly of issuing base money is flawed. That story - in its various guises - is based on the quantity equation. This equation, however, is only applicable in the hypothetical only-cash-world, i.e. in a world where all transactions has to be paid for with central bank issued notes and coins. Nevertheless, the vast majority of economists would agree that, in practice, central banks seem to influence interest and inflation rates. Here, we suggest that the explanation is that central banks have acquired a role as focal point for those variables. It is possible because interest setting is a coordination game, in which agents have to predict each others expectations.
    Keywords: entral Banking; Focal Points; Inflation; Monetary Policy; Money; Quantity Theory
    JEL: C70 E31 E42 E43 E44 E51 E52 E58
    Date: 2005–03–04
  8. By: Avner Shaked
    Date: 2005–03–04
  9. By: Ernst Fehr; Klaus M. Schmidt
    Date: 2005–03–04

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