nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2005‒12‒14
six papers chosen by
Marco Novarese
Universita del Piemonte Orientale

  1. Learning to be prepared By Kets,Willemien; Voorneveld,Mark
  2. Consumers Sentiment and Cognitive Macroeconometrics Paradoxes and Explanations By Maurizio Bovi
  3. The Hayek Hypothesis and the Production Decision: An Experimental Analysis By John Janmaat
  4. Ultimatums and Tantrums: A Resource Sharing Experiment By John Janmaat
  5. Causes, consequences, and cures of myopic loss aversion - An experimental investigation By Gerlinde Fellner; Matthias Sutter
  6. Cinema Is Good For You: the effects of cinema attendance on self reported anxiety or depression and “happiness” By S.C. Noah Uhrig

  1. By: Kets,Willemien; Voorneveld,Mark (Tilburg University, Center for Economic Research)
    Abstract: Behavioral economics provides several motivations for the common observation that agents appear somewhat unwilling to deviate from recent choices. More recent choices can be more salient than other choices, or more readily available in the agent's mind. Alternatively, agents may have formed habits, use rules of thumb, or lock in on certain modes of behavior as a result of 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 [Games Econ. Behav. 48 (2004) 403-414, and Games Econ. Behav. 51 (2005) 228-232].
    Keywords: adjustment;minimal prep sets;availability bias;salience;rules of thumb; learning
    JEL: C72 D83
    Date: 2005
  2. By: Maurizio Bovi (ISAE)
    Abstract: Using data from the Business Surveys Unit of the European Commission, this paper examines how, and how accurately, people assess economic systems. As expected, respondents demonstrate to know their own situation better than the system wide one, and the past better than the future. Also, correctly, perceptions accumulate towards the long run “stationarity” of the economic stance. In contrast, the presence of a long-run bias in the “forecast” error is detected. Evidence shows that it is due to people’s tendency to judge over-pessimistically and/or to forecast over-optimistically. Finally, individuals seem to believe that their own situation may consistently drift apart from the general one. I interpret commonsense behaviors as supporting the reliability of survey data. Puzzling results are assessed in the light of cognitive economics.
    Keywords: Beliefs, survey research, consumer sentiment, cognitive economics
    JEL: C42 C82 D12 D84
    Date: 2005–12–05
  3. By: John Janmaat (Acadia University)
    Abstract: The Hayek Hypothesis holds that prices contain enough information to direct the resources in the economy to their most efficient use. In a series of experiments, Vernon Smith (1992) found that, with the right trading institutions, a market with agents that know only their own valuations of a good will converge quite rapidly to the competitive equilibrium price and trading volume. In the series of experiments reported here, the extension of the Hayek Hypothesis to an economy with production is explored. When agents can choose between autarkic production and specialization, they have the opportunity to hedge against market risk. A coordination problem is also created, interfering with the ability of the system to converge on the theoretical Ricardian equilibrium.
    JEL: C9 D8 F1
    Date: 2005–12–08
  4. By: John Janmaat (Acadia University)
    Abstract: The ultimatum game experiment has a long history in experimental economics. In-vivo ultimatum like strategic settings often involve uncertain rejection and payoff reversals. This paper presents the results of an ultimatum like experiment extended to reflect characteristics of a shared international river, in particular where a downstream nation has the potentially payoff reversing strategy option of a military strike. Subjects implicitly split an endowment between water consuming and security enhancing investments, where relative security investments determine the probability of the payoff reversal, with one subject being able to purchase a gamble to reverse the payoffs. Maximin, folk, and Nash solutions are compared, with results suggesting that behavior is responding to folk theorem like incentives. Dynamic analyses support this by showing no significant relationship between the gamble choice and its single period rationality.
    Keywords: Resource Economics, Peace Economics, Experimental Economics, Applied Game Theory
    JEL: C7 C9 N4 Q2
    Date: 2005–12–07
  5. By: Gerlinde Fellner; Matthias Sutter
    Abstract: Myopic loss aversion (MLA) has been established as one prominent explanation for the equity premium puzzle. In this paper we address two issues related to the effects of MLA on risky investment decisions. First, we assess the relative impact of feedback frequency and investment flexibility (via the investment horizon) on risky investments. Second, given that we observe higher investments with a longer investment horizon, we examine conditions under which investors might endogenously opt for a longer investment horizon in order to avoid the negative effects of MLA on investments. We find in our experimental study that investment flexibility seems to be at least as relevant as feedback frequency for the effects of myopic loss aversion. When subjects are given the choice to opt for a long or short investment horizon, there is no clear preference for either. Yet, if subjects face a default horizon (either long or short), there is rather little switching from the one to the other horizon, showing that a default might work to attenuate the effects of MLA. However, if subjects switch, they are more often willing to switch from the long to the short horizon than vice versa, suggesting a preference for higher investment flexibility.
    Keywords: loss aversion, risk, investment, experiment
    JEL: C91 D80 G11
    Date: 2005–07
  6. By: S.C. Noah Uhrig (Institute for Social and Economic Research)
    Abstract: I analyse the effects of cinema attendance on psychological well-being and happiness. The type of visual stimulation unique to film provokes an emotive response holding therapeutic properties. The collective and controlled experience of this emotive response promotes well-being generally. This analysis differs from most research into the effect of leisure on happiness, anxiety or depression, and well-being because it focuses on the effects of sensory stimulation and its resulting emotion inducing properties as opposed to leisure pursuits involving physical conditioning. This work differs further by systematically comparing 10 different leisure activities against cinema attendance in their relative affects on happiness and self-reported anxiety and depression. Using data from wave 12 of the British Household Panel Study, I find that cinema attendance has strong positive effects on happiness and stable negative effects on self-reporting of anxiety or depression, even when controlling for various socio-demographic and economic factors. This research confirms, therefore, that cinema is a unique leisure activity with beneficial properties for well-being.
    Keywords: cinema, depression, leisure, well-being
    Date: 2005–08

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