nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2006‒08‒26
ten papers chosen by
Marco Novarese
Universita del Piemonte Orientale

  1. The Science Game: An Experiment on Reducing errors in Forensic Science and Other Areas By R.Koppl
  2. Behavioral Foundations of Democracy and Development By Ethan Kapstein
  4. Social Interactions and Schooling Decisions By Rafael Lalive; Alejandra Cattaneo
  5. Expectations, Animal Spirits, and Evolutionary Dynamics By Angelo Antoci; Massimiliano Landi; Pier Luigi Sacco
  6. The dynamics of overconfidence: Evidence from stock market forecasters By Richard Deaves; Erik Lüders; Michael Schröder
  7. Rational and boundedly rational behavior in sender-receiver games By Massimiliano Landi; Domenico Colucci
  8. Are preferences complete? An experimental measurement of indecisiveness under risk By Eric Danan; Anthony Ziegelmeyer
  9. Homeostasis and Well Being By John Malcolm Dowling; Yap Chin Fang
  10. Competing Against Simulated EquilibriumPrice Dispersions: An Experiment OnInternet-Assisted Search Markets By Aurora García-Gallego; Nikolaos Georgantzís; Pedro Pereira; José C. Pernías-Cerrillo

  1. By: R.Koppl
    Abstract: In “monopoly epistemics,” one privileged actor is asked to identify the truth. In “democratic epistemics,” several independent parties are asked. In an experiment contrasting them, democratic epistemics reduced the systemic error rate by two-thirds, supporting the claim that replacing monopoly epistemics with democratic epistemics would reduce error rates in forensic science and other areas. It also suggests first, the potential of “epistemic systems design,” which employs the techniques of economic systems design to address issues of veracity, rather than efficiency, and second, the value of “experimental epistemology,” which employs experimental techniques in the study of science. Research of the sort described here puts evolutionary epistemology into practice by seeking to find the proper design principles for error-correcting social institutions. Length 52 pages
    Date: 2006–07
  2. By: Ethan Kapstein
    Abstract: Since 1974 the world has experienced a “third wave” of democratization. Ensuring that these new democracies consolidate is critical to both global prosperity and peace. Unfortunately, the academic literature that might help policy-makers shape appropriate foreign assistance programs remains underdeveloped, in that it lacks strong behavioral foundations, or explanations of why people act the way they do. This paper argues that the process of democratic consolidation requires a transition from clientelistic to contractual exchange relationships. Without that transition, efforts to promote democratic consolidation are unlikely to succeed.
    Keywords: democracy, foreign assistance, economic development
    JEL: O17 F35 D73
    Date: 2004–12
  3. By: YANNIS M. IOANNIDES (tufts university); Adriaan R. Soetevent (University of Amsterdam and Tinbergen Institute)
    Abstract: This paper examines social interactions when social networking is endogenous. It employs a linear-quadratic model that accommodates contextual e®ects, and endogenous local inter- actions, that is where individuals react to the decisions of their neighbors, and endogenous global ones, where individuals react to the mean decision in the economy, both with a lag. Unlike the simple V AR(1) structural model of individual interactions, the planner's problem here involves intertemporal optimization and leads to a system of linear di®erence equations with expectations. It highlights an asset-like property of socially optimal outcomes in every period which helps characterize the shadow values of connections among agents. Endogenous networking is easiest to characterize when individuals choose weights of social attachment to other agents. It highlights a simultaneity between decisions and patterns of social at- tachment. The paper also poses the inverse social interactions problem, asking whether it is possible to design a social network whose agents' decisions will obey an arbitrarily speci¯ed variance covariance matrix.
    JEL: D85 A14 J0
    Date: 2005–10
  4. By: Rafael Lalive (University of Zurich, IEW, CEPR, CESifo, IFAU and IZA Bonn); Alejandra Cattaneo (University of Zurich)
    Abstract: The aim of this paper is to study whether schooling choices are affected by social interactions. Such social interactions may be important because children enjoy spending time with other children or parents learn from other parents about the ability of their children. Identification is based on a randomized intervention that grants a cash subsidy encouraging school attendance among a sub-group of eligible children within small rural villages in Mexico. Results indicate that (i) the eligible children tend to attend school more frequently, (ii) but also the ineligible children acquire more schooling when the subsidy is introduced in their local village, (iii) social interactions are economically important, and (iv) they may arise due to changes in parents’ perception of their children’s ability.
    Keywords: peer effects, schooling, field experiment, PROGRESA
    JEL: C93 I21 I28
    Date: 2006–08
  5. By: Angelo Antoci (University of Sassari); Massimiliano Landi (School of Economics and Social Sciences, Singapore Management University); Pier Luigi Sacco (IUAV, Venice)
    Abstract: We consider a (deterministic) evolutionary model where players have dynamic expectations about the strategy distribution. We provide a global analysis of the co-evolution of play and expectations for a generic two{by{two game. Besides the the typical indeterminacy of the evolutionary dynamics, we find some other ones: for any initial strategy configuration the dynamics can converge to any asymptotically stable fixed point, for different initial values of the expectations. Moreover, starting from the same initial pair of strategy configuration and values of expectations, the dynamics may lead to different asymptotically stable fixed points for different parameters of the expectations.
    Keywords: evolutionary games, dynamic systems, animal spirits
    JEL: C73
    Date: 2006–03
  6. By: Richard Deaves (McMaster University); Erik Lüders (Pinehill Capital and Laval University); Michael Schröder (Center for European Economic Research (ZEW))
    Abstract: As a group, market forecasters are egregiously overconfident. In conformity to the dynamic model of overconfidence of Gervais and Odean (2001), successful forecasters become more overconfident. What’s more, more experienced forecasters have “learned to be overconfident,” and hence are more susceptible to this behavioral flaw than their less experienced peers. It is not just individuals who are affected. Markets also become more overconfident when market returns have been high.
    Date: 2005–10–07
  7. By: Massimiliano Landi (School of Economics and Social Sciences, Singapore Management University); Domenico Colucci (University of Florence)
    Abstract: We consider a signalling game in which a population of receivers decide on the outcome by majority rule, sender and receivers have conflicting interests, and there is uncertainty about both players’ types. We model players rationality along the lines of recent findings in behavioral game theory. We characterize the structure of the equilibria in the reduced game so obtained. We find that all pure strategy equilibria are consistent with successful attempts to mislead the receivers, and relate them to the message bin Laden sent on the eve of the 2004 US Presidential elections. The same result holds if we allow for some uncertainty about the sign of the correlation between the sender’s and the receivers’ payoffs.
    Date: 2005–10
  8. By: Eric Danan; Anthony Ziegelmeyer
    Abstract: We propose an experimental design allowing a behavioral test of the axiom of completeness of individual preferences. The central feature of our design consists in enabling subjects to postpone commitment at a small cost. Our main result is that preferences are significantly incomplete. We use lotteries as choice alternatives and we find that risk aversion is globally robust to preference incompleteness.
    Keywords: Incomplete preferences, preference for flexibility, risk aversion, indecisiveness, indifference
    JEL: C91 D11
    Date: 2006–08
  9. By: John Malcolm Dowling (School of Economics and Social Sciences, Singapore Management University); Yap Chin Fang (Tampines Junior College, Singapore)
    Abstract: The paper suggests that maintenance of a homeostatic equilibrium provides a rationale for many actions of economic agents. Homeostatic equilibrium has physical, economic, emotional, psychological and environmental dimensions. The characteristics of this equilibrium include feelings of safety, trust, connectedness with friends, family and community, and a predictable and welcoming social and work environment. Individuals generally make decisions that help them move toward and achieve this state of equilibrium. Departure from homeostasis reduces well being and stimulates agents to take actions that will return them to a state of homeostasis. This hypothesis is tested with probit analysis using sample responses from the four waves of the World Values Surveys conducted between 1980 and 2002. Results generally support the homeostasis hypothesis. Variables that reflect departure from homeostasis such as divorce and poor health are highly significant, pointing to a reduction in well being. Variables that reflect the importance of friends, family, a trusting social and work environment have significant impacts to raise well being.
    JEL: I3
    Date: 2006–02
  10. By: Aurora García-Gallego (Universitat Jaume I); Nikolaos Georgantzís (Universitat Jaume I); Pedro Pereira (Autoridade da Concorrência); José C. Pernías-Cerrillo (LINEEX, Universitat de Valencia)
    Abstract: In a four-treatment experiment, we test some of the hypotheses in García-Gallego et al. (2004) concerning competition among a number of firms of which some (or all) are indexed by a price-comparison engine facilitating buyers’ search process. In this paper, we isolate individual behavior from noise due to other players’ actions and learning, facing each subject with simulated rivals whose prices are extracted from mixed strategy equilibrium distributions. We find systematic deviations from both theoretical distributions and previous data obtained in sessions where all players were human. Specifically, departures of experimental data from the corresponding theoretical predictions are enhanced in this setting as compared to our previous research in which all agents were represented by human players. This suggests that the divergence between theoretical and observed price reported there should not be attributed to noisy learning and strategic uncertainty due to subjects’ interaction with other players. Furthermore, economic tests on players’ risk attitudes oganize pricing behavior in meaningful, although not always compatible, ways.
    JEL: C91 D43 D83 L13
    Date: 2005–10

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