nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2005‒09‒29
fourteen papers chosen by
Marco Novarese
Universita del Piemonte Orientale

  1. Regions of rationality: Maps for bounded agents By Robin Hogarth; Natalia Karelaia
  2. Human nature and institutional analysis By Benito Arruñada
  3. Managing Potential and Realized Absorptive Capacity: How do Organizational Antecedents matter? By Jansen, J.J.P.; Bosch, F.A.J. van den; Volberda, H.W.
  4. Information Sharing, Cognitive Centrality, and Influence among Business Executives during Collective Choice By Abele, S.; Stasser, G.; Vaughan-Parsons, S.I.
  5. Of Rats and Brands: A Learning-and-Memory Perspective on Consumer Decisions By Van Osselaer, S.M.J.
  6. Irrationality in Consumers’ Switching Decisions: When More Firms May Mean Less Benefit By Chris M. Wilson; Catherine Waddams Price
  7. The impossibility of an effective theory of policy in a complex economy By K. Vela Velupillai
  8. A Modular Agent-Based Environment for Studying Stock Markets By Boer-Sorban, K.; Kaymak, U.; Bruin, A. de
  9. Individual Risk Attitudes : New Evidence from a Large, Representative, Experimentally-Validated Survey By Thomas Dohmen; Armin Falk; David Huffman; Uwe Sunde; Jürgen Schupp; Gert G. Wagner
  10. Ambiguity Seeking as a Result of the Status Quo Bias By Mercè Roca; Robin Hogarth; A. John Maule
  11. Continuous versus Step-Level Public Good Games By Abele, S.; Stasser, G.
  12. Measuring Strategic Uncertainty in Coordination Games By Frank Heinemann; Rosemarie Nagel; Peter Ockenfels
  13. Why humans care about sunk costs while animals don't. An evolutionary explanation By Felix Höffler
  14. Human Resource Management And The Search For The Happy Workplace By Peccei, R.

  1. By: Robin Hogarth; Natalia Karelaia
    Abstract: An important problem faced by boundedly rational agents is to identify “regions of rationality,” i.e., the areas for which simple, boundedly rational models are and are not effective. To map the contours of such regions, we derive probabilities that models identify the best of m alternatives (m > 2) characterized by k attributes (k > 1). The models include a single variable (lexicographic), variations of elimination-by-aspects, equal weighting, hybrids of the preceding, and models exploiting dominance. We compare all with multiple regression. We illustrate the theory with twenty simulated and four empirical datasets. Fits between predictions and realizations are excellent. However, the terrain mapped by our work is complex and no single model is “best.” We further provide an overview by regressing the performance of the different models on factors characterizing environments. We conclude with suggestions for further research as well as implications for the concept of rationality in economics.
    Keywords: Decision making, Bounded rationality, Lexicographic rules, Choice theory
    JEL: D81 M10
    Date: 2005–04
  2. By: Benito Arruñada
    Abstract: This essay reviews some findings in cognition sciences and examines their consequences for the analysis of institutions. It starts by exploring how humans’ specialization in producing knowledge ensures our success in dominating the environment but also changes fast our environment. So fast that it did not give time to natural selection to adapt our biology, causing it to be potentially maladapted in important dimensions. A main function of institutions is therefore to fill the gap between the demands of our relatively new environment and our biology, still adapted to our ancestral environment as hunter-gatherers. Moreover, institutions are built with the available elements, which include our instincts. A deeper understanding of both aspects, their adaptive function and this recruitment of ancestral instincts, will add greatly to our ability to manage institutions.
    Keywords: Evolution, biology, behavior, institutions
    Date: 2005–03
  3. By: Jansen, J.J.P.; Bosch, F.A.J. van den; Volberda, H.W. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: This study explores how organizational antecedents affect potential and realized absorptive capacity. Our study identifies differential effects for both components of absorptive capacity. Results indicate that organizational mechanisms associated with coordination capabilities (i.e. cross-functional interfaces, participation in decision-making, and job rotation) primarily enhance a unit’s potential absorptive capacity. Organizational mechanisms associated with socialization capabilities (i.e. connectedness and socialization tactics) primarily increase a unit’s realized absorptive capacity. Our findings reveal why units may have difficulties in managing levels of potential and realized absorptive capacity and vary in their ability to create value from their absorptive capacity.
    Keywords: combinative capabilities;absorptive capacity;organizational antecedents;external knowledge;
    Date: 2005–05–10
  4. By: Abele, S.; Stasser, G.; Vaughan-Parsons, S.I. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Laboratory studies have shown that decision-making groups tend to focus on common information at the expense of unique information. In the current study, high level business executives completed a personnel selection task. Access to information about the candidates was not controlled as in a typical study of information sharing, but common, partially shared, and unique information arose naturally from the individual members’ information searches. During subsequent discussions, groups mentioned more common than partially shared than unique information. However, the underlying processes seemed to be different from what has been observed in laboratory studies. The popularity of information in the population from which groups were composed predicted both the number of a group’s members who accessed an item in their information searches and whether the group discussed the item. However, the number of group members who accessed an item did predict whether information was repeated during discussion, and repetition predicted which items were included on a final written summary. Finally, cognitively central group members were more influential than cognitively peripheral members.
    Keywords: Information Sharing;Cognitive Centrality;Group Decision Making;Hidden Profiles;Collective Choice;
    Date: 2005–06–09
  5. By: Van Osselaer, S.M.J. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: When consumers evaluate or choose products, they rely on what they have learned and can remember about those products’ characteristics, such as brand names, ingredients, orfeatures. Severalexperimentssuggest that evenrathersophisticatedpatternsofproduct evaluation and choice can be explained by simple associative learning-and-memory processes,which show similarities to those found in rats,dogs,and other animals.Strategic implications for brand management and public policy, theoretical implications for the study of human learning and memory, and directions for future research are outlined.
    Keywords: Brand Management;Brand Equity;Co-branding;Ingredient Branding;Brand Extension;Consumer Decision Making;Learning;Memory;Consumer Behavior;Consumer Psychology;
    Date: 2004–10–29
  6. By: Chris M. Wilson (University of East Anglia); Catherine Waddams Price (University of East Anglia)
    Abstract: We report evidence of three types of consumer switching decision errors within the UK electricity market. We identify consumers who do not switch despite substantial available savings, consumers who switch from a cheaper to a more expensive supplier and consumers who switch to a cheaper, but not the cheapest available supplier. Moreover, we find that consumers make more efficient decisions in markets with fewer competitors. This finding is consistent with theories of consumer confusion and “information-overload” rather than other “rational” explanations of consumer mistakes such as perceived differences in firm quality or uncertainty over consumers’ own demand.
    Keywords: Consumer choice, Switching costs, Behavioural IO
    JEL: L00 D12
    Date: 2005–09–20
  7. By: K. Vela Velupillai
    Keywords: theory of policy,dynamical system,computation universality,recursive rule,complex economy
    JEL: C60 E60 E61 E69
    Date: 2005
  8. By: Boer-Sorban, K.; Kaymak, U.; Bruin, A. de (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Artificial stock markets are built with diffuse priors in mind regarding trading strategies and price formation mechanisms. Diffuse priors are a natural consequence of the unknown relation between the various elements that drive market dynamics and the large variety of market organizations, findings, however, might hold only within the specific market settings. In this paper we propose a framework for building agent-based artificial stock markets. We present the mechanism of the framework based on a previously identified list of organizational and behavioural aspects. Within the framework experiments with arbitrary many trading strategies, acting in various market organizations can be conducted in a flexible way, without changing its architecture. In this way experiments of other artificial stock markets, as well as theoretical models can be replicated and their findings compared. Comparisons of the different experimental results might indicate whether findings are due to traders’ behaviour or to the chosen market structure and could suggest how to improve market quality.
    Keywords: Computational economics;agent-based modelling;artificial stock markets;behavioural finance;
    Date: 2005–04–03
  9. By: Thomas Dohmen; Armin Falk; David Huffman; Uwe Sunde; Jürgen Schupp; Gert G. Wagner
  10. By: Mercè Roca; Robin Hogarth; A. John Maule
    Abstract: Several factors affect attitudes toward ambiguity. What happens, however, when people are asked to exchange an ambiguous alternative in their possession for an unambiguous one? We present three experiments in which individuals preferred to retain the former. This status quo bias emerged both within- and between-subjects, with and without incentives, with different outcome distributions, and with endowments determined by both the experimenter and the participants themselves. Findings emphasize the need to account for the frames of reference under which evaluations of probabilistic information take place as well as modifications that should be incorporated into descriptive models of decision making.
    Keywords: Ambiguity, risk, status quo bias, decision making, uncertainty
    JEL: C91 D81
    Date: 2005–09
  11. By: Abele, S.; Stasser, G. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: We will firstly outline the rationale of a public good game and explain the distinction between a continuous public good game and a threshold public good game. As a vast majority of experimental research in social psychology on public good games has used threshold public good games, we will then outline the structure of a dilemma game with a provision point. Our point is that dilemma games with a provision point violate two important assumptions commonly held for public good games: a) there is always a conflict between the group’s interest and the individual’s interest; and b) an individual is always better off defecting. A threshold dilemma game is a dilemma with a coordination game embedded in it. Hence it provides focal point solutions and may as a consequence leave less room for other factors to affect behavior. Moreover, games with a provision point might yield different results than games without a provision point. We will argue that above that threshold dilemma games do not provide good models of many the public goods problems that are encountered in real life. We will propose that a public good game with a tilted S function provides a more appropriate model of real life dilemmas while fulfilling the defining properties of public good games.
    Keywords: Step-level Public Good Game;Continuous Public Good Game;
    Date: 2005–04–03
  12. By: Frank Heinemann; Rosemarie Nagel; Peter Ockenfels
    Abstract: This paper explores three aspects of strategic uncertainty: its relation to risk, predictability of behavior and subjective beliefs of players. In a laboratory experiment we measure subjects’ certainty equivalents for three coordination games and one lottery. Behavior in coordination games is related to risk aversion, experience seeking, and age. From the distribution of certainty equivalents we estimate probabilities for successful coordination in a wide range of games. For many games, success of coordination is predictable with a reasonable error rate. The best response to observed behavior is close to the global-game solution. Comparing choices in coordination games with revealed risk aversion, we estimate subjective probabilities for successful coordination. In games with a low coordination requirement, most subjects underestimate the probability of success. In games with a high coordination requirement, most subjects overestimate this probability. Estimating probabilistic decision models, we show that the quality of predictions can be improved when individual characteristics are taken into account. Subjects’ behavior is consistent with probabilistic beliefs about the aggregate outcome, but inconsistent with probabilistic beliefs about individual behavior.
    Keywords: Belief Formation, Coordination Games, Global Game, Lotteries, Risk Aversion, Strategic Uncertainty
    JEL: C72 C91 D81 D84
    Date: 2004–12
  13. By: Felix Höffler (Max-Planck-Institute for Research on Collective Goods)
    Abstract: While humans often care about sunk investment, animals are not subject to this sort of sunk cost behavior or “Concorde fallacy”. This paper investigates a simple two stage decision problem under uncertainty. At the second stage, subjects can commit the Concorde fallacy by sticking to the first stage decision, independent of the state of nature revealed in-between. We investigate whether this can be beneficial in a standard payoff monotonic adaptation process. Committing the Concorde fallacy reduces the payoffs but accelerates the adaptation since it acts like “self-punishment”. It will, however, not only reduce the population growth rate in the long run but also the population size at any point in time in a biological evolutionary process. In this sense, animals can never benefit from the Concorde fallacy. Risk aversion gives an extra benefit to a behavior that more rapidly learns to avoid bad outcomes. If the wrong initial decision leads occasionally, albeit very infrequently, to a very low payoff, then risk averse humans will be better off by committing the Concorde fallacy.
    Keywords: Concorde fallacy, Sunk costs, Evolutionary game theory, Replicator Dynamics, Risk aversion
    JEL: C73 D81 D83
    Date: 2005–09
  14. By: Peccei, R. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: The analysis of the impact of human resource (HR) practices on employee well-being at work is an important yet relatively neglected area of inquiry within the field of human resource management (HRM). In this inaugural address, the main findings from ongoing research based on data from the 1998 British Workplace Employee Relations Survey (WERS98) are presented. These suggest that the HR practices that are adopted by organisations have a significant impact on the well-being of their workforces and that this impact tends, on the whole, to be more positive than negative. The effects, however, are more complex than is normally assumed in the literature. In particular, preliminary results indicate that the constellation of HR practices that help to maximise employee well-being (i.e. that make for happy workplaces), are not necessarily the same as those that make up the type of ‘High Performance Work Systems’ commonly identified in the literature. This has important theoretical, policy and ethical implications for the field of HRM. These are discussed along with important directions for future research.
    Keywords: Human Resource Management;HRM;Human Resource Practices;employee well-being;job satisfaction;job stress;happy workplaces;HR;
    Date: 2004–01–15

This nep-cbe issue is ©2005 by Marco Novarese. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.