nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2006‒09‒11
fifteen papers chosen by
Marco Novarese
Universita del Piemonte Orientale

  1. Welfare Implications of Peer Punishment in Unequal Societies By Visser, Martine
  2. Bridging the Great Divide in South Africa: Inequality and Punishment in the Provision of Public Goods By Visser, Martine; Burns, Justine
  3. Who Are the Trustworthy, We Think? By Johansson-Stenman, Olof
  4. Deception and Misreporting in a Social Program By Cesar Martinelli; Susan W. Parker
  5. Social Life of Values By Magala, S.J.
  6. On the Evolution of Trust, Distrust, and Formal Coordination and Control in Interorganizational Relationships: Towards an Integrative Framework By Vlaar, P.W.L.; Bosch, F.A.J. van den; Volberda, H.W.
  7. Moving in Social Circles – Social Circle Membership and Performance Implications By Verbeke, W.; Wuyts, S.
  8. Do Sophisticated Investors Believe in the Law of Small Numbers? By Baquero, G.; Verbeek, M.
  9. Information Processing and Learning: Testing the Analogy-based Expectation Approach By Steffen Huck; Philippe Jehiel; Tom Rutter
  10. Coping with Problems of Understanding in Interorganizational Relationships: Using Formalization as a Means to make Sense By Vlaar, P.W.L.; Bosch, F.A.J. van den
  11. How Feedback Can Improve Managerial Evaluations of Model-based Marketing Decision Support Systems By Kayande, U.; Bruyn, A. de; Lilien, G.L.; Rangaswamy, A.; Bruggen, G.H. van
  12. Categorization by Groups By Hamilton, R.W.; Puntoni, S.; Tavassoli, N.T.
  13. Modeling Heterogeneity By Arthur Lewbel
  14. Is Concern for Relative Consumption a Function of Relative Consumption? By Andersson, Fredrik W.
  15. Of Rats and Brands: A Learning-and-Memory Perspective on Consumer Decisions By Osselaer, S.M.J. van

  1. By: Visser, Martine (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: We show that peer sanctioning increases cooperation in public goods experiments more in unequally endowed groups than in equally endowed groups. Punishment results in a redistribution of wealth from high to low endowment players within groups. <p>
    Keywords: Inequality; cooperation; punishment; public goods; welfare and poverty; social norms
    JEL: C90 D63 H41 I30 Q20 Z13
    Date: 2006–01–31
  2. By: Visser, Martine (Department of Economics, School of Business, Economics and Law, Göteborg University); Burns, Justine (University of Cape Town, Private Bag,)
    Abstract: We explore the effect of income inequality and peer punishment on voluntary provision of public goods in an experimental context. Our sample draws from nine fishing communities in South-Africa where high levels of inequality prevail. We find that aggregate cooperation is higher in both the voluntary contribution mechanism (VCM) and punishment treatments for unequal groups. Once peer sanctioning is introduced over-contribution by low relative to high endowment players observed in the VCM treatment is significantly enhanced. Demand for punishment by low and high endowment players are similar, irrespective of differences in relative costs, and in unequal groups free-riding is punished more, specifically by low endowment players. We observe inequality aversion both in endowments and with respect to the interaction of endowments and contributions: high endowment players receive more punishment, but also receive more punishment for negative deviation from the group mean share. <p>
    Keywords: Inequality; cooperation; punishment; public goods experiments
    JEL: C90 D63 H41 Q20
    Date: 2006–08–31
  3. By: Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: In a representative Swedish sample people were asked to judge the relative extent that different groups of people are considered trustworthy in several dimensions, including their political views and reading habits. A statistically significant effect of similarity on perceived trustworthiness was found in each of the seven dimensions analyzed. For example, right-wing voters consider Social Democratic voters to be much less trustworthy than right-wing voters, and vice versa. Thus, it seems that perceived trustworthiness decreases quite generally with the social distance. It is argued that social identity theory offers a plausible explanation. Moreover, older people are generally considered more trustworthy than younger, and people living in small cities are considered more trustworthy than people living in big cities. <p>
    Keywords: social capital; trustworthiness; social distance; identity; social identity; self-signalling
    JEL: C42 Z13
    Date: 2006–07–22
  4. By: Cesar Martinelli (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)); Susan W. Parker (División de Economia, Centro de Investigacion y Docencia Economicas (CIDE))
    Abstract: We investigate empirically the extent of misreporting in a poverty-alleviation program in which self-reported information, followed by a household visit, is used to determine eligibility. Underreporting may be due to a deception motive, and overreporting to an embarrassment motive. We find that underreporting of goods and desirable home characteristics is widespread, and that overreporting is common with respect to goods linked to social status. Larger program benefits encourage underreporting and discourage overreporting. The effect of benefits on underreporting is significant under a variety of specifications. We also investigate the effects of education and gender on misreporting.
    Date: 2006–06
  5. By: Magala, S.J. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: The case of the Danish “cartoon war†was a premonition of things to come: accelerated social construction of inequalities and their accelerated symbolic communication, translation and negotiation. New uses of values in organizing and managing inequalities emerge. Values lead active social life as bourgeois virtues (McCloskey, 2006), their subversive alternatives or translated “memes†of cultural history. Since social life of values went global and online, tracing their hybrid manifestations requires cross-culturally competent domestication (Magala, 2005) as if they were “memes†manipulated for further reengineering. Hopes are linked to emergent concepts of “microstorias†(Boje,2002), bottom-up, participative, open citizenship (Balibar,2004), disruption of stereotypical branding in mass-media (Sennett, 2006). However, Kuhn’s opportunistic deviation from Popperian evolutionary epistemology should fade away with other hidden injuries of Cold War, to free our agenda for the future of social sciences in general and organizational sciences in particular (Fuller, 2000, 2003).
    Keywords: Complex Identities;Political Paradigms;Cross-Cultural Competence;Professional Evolution;Managing Inequalities;Intersubjective Falsificationism;
    Date: 2006–03–30
  6. By: Vlaar, P.W.L.; Bosch, F.A.J. van den; Volberda, H.W. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: In this article, we discuss the evolution of trust, distrust, and formal coordination and control in interorganizational relationships. We suggest that the degrees to which managers trust and distrust their partners during initial stages of cooperation leave strong imprints on the development of these relationships in later stages of collaboration. This derives from the impact of trust and distrust on: (1) formal coordination and control; (2) interorganizational performance; and (3) the interpretations that managers attribute to the behavior of their partners. Collectively, our arguments give rise to a conceptual framework, which indicates that there is a high propensity for interorganizational relationships to develop along vicious or virtuous cycles. By integrating and reconciling previous work on the trust-control nexus, and by emphasizing the dynamics associated with it, the article contributes to a more comprehensive and refined understanding of the evolution of interorganizational cooperation.
    Keywords: trust;distrust;formal coordination;formal control;evolution;interorganizational relationship;
    Date: 2006–07–24
  7. By: Verbeke, W.; Wuyts, S. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: We investigate social circles in intra-firm settings. First, we argue that social circles are inhabited by individuals whose attitudes display fit with the objectives of the social circle rather than more self-centered instrumentalism or calculation. For a test of this hypothesis, we distinguish between friendship circles and strategy-influence circles. We find that friendship circle membership is positively associated with attitudes that display empathic concern but negatively with more instrumental attitudes, whereas strategy-influence circle membership is positively associated with attitudes that display long-term ambition but negatively with attitudes that display short-term calculation. Second, we argue and find that membership of social circles affects individual performance (social circles foster the exchange of information, for which we find clear evidence), albeit not necessarily in a linear fashion. Our new insights into social circle membership and performance implications can guide individuals in seeking access to such social circles and can aid management in understanding and perhaps influencing intra-firm knowledge flows.
    Keywords: Knowledge Management;Social Networks;Reciprocity;
    Date: 2006–08–22
  8. By: Baquero, G.; Verbeek, M. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Believers in the law of small numbers tend to overinfer the outcome of a random process after a small series of observations. They believe that small samples replicate the probability distribution properties of the population. We provide empirical evidence indicating that investors are mistakenly driven by this psychological bias when hiring or firing a fund manager after a successful (or losing) performance streak. Using quarterly data between 1994 and 2000 of 752 hedge funds, we analyze actual money flows into and out of hedge funds and their relationship with the length of the streak. We first show that persistence patterns have a predictive ability of future relative performance of a manager: the longer the winner streak, the larger the probability for a fund to remain a winner. Investors, in turn, appear to be aware of quality dispersion across managers and respond by following a momentum strategy: the longer the winning (losing) streak, the more likely they will invest in (divest from) that fund. Yet, we find that investors place excessive weight in the managers’ track record as a criterion for decision. Our model shows that the length of the streak has an economically and statistically significant impact on money flows beyond rationally expected performance, which confirms a “hot-hand†bias driving to a large extent momentum investing. Apparently, even sophisticated investors exhibit psychological biases that may have adverse effects on their wealth.
    Keywords: Law of Small Numbers;Performance Persistence;Overreaction;Hedge Fund Investors;Hot-Hand Bias;
    Date: 2006–07–14
  9. By: Steffen Huck; Philippe Jehiel; Tom Rutter
    Date: 2006–09–05
  10. By: Vlaar, P.W.L.; Bosch, F.A.J. van den (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Research into the management of interorganizational relationships has hitherto primarily focused on problems of coordination, control and to a lesser extent, legitimacy. In this article, we assert that partners cooperating in such relationships are also confronted with ‘problems of understanding’. Such problems arise from differences between partners in terms of culture, experience, structure and industry, and from the uncertainty and ambiguity that participants in interorganizational relationships experience in early stages of collaboration. Building on Karl Weick’s theory of sensemaking, we advance that participants in interorganizational relationships use formalization as a means to make sense of their partners, the interorganizational relationships in which they are engaged and the contexts in which these are embedded so as to diminish problems of understanding. We offer a systematic overview of the mechanisms through which formalization facilitates sensemaking, including: (1) focusing participants’ attention; (2) provoking articulation, deliberation and reflection; (3) instigating and maintaining interaction; and (4) reducing judgment errors and individual biases, and diminishing incompleteness and inconsistency of cognitive representations. In this way, the article contributes to a better understanding of the relationships between formalization and sensemaking in collaborative relationships, and it carries Karl Weick’s thinking on the relationship between sensemaking and organizing forward in the context of interorganizational management.
    Keywords: Formalization;Sensemaking;Understanding;Interorganizational Cooperation;
    Date: 2006–07–24
  11. By: Kayande, U.; Bruyn, A. de; Lilien, G.L.; Rangaswamy, A.; Bruggen, G.H. van (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Marketing managers often provide much poorer evaluations of model-based marketing decision support systems (MDSSs) than are warranted by the objective performance of those systems. We show that a reason for this discrepant evaluation may be that MDSSs are often not designed to help users understand and internalize the underlying factors driving the MDSS results and related recommendations. Thus, there is likely to be a gap between a marketing manager’s mental model and the decision model embedded in the MDSS. We suggest that this gap is an important reason for the poor subjective evaluations of MDSSs, even when the MDSSs are of high objective quality, ultimately resulting in unreasonably low levels of MDSS adoption and use. We propose that to have impact, an MDSS should not only be of high objective quality, but should also help reduce any mental model-MDSS model gap. We evaluate two design characteristics that together lead model-users to update their mental models and reduce the mental model-MDSS gap, resulting in better MDSS evaluations: providing feedback on the upside potential for performance improvement and providing specific suggestions for corrective actions to better align the user's mental model with the MDSS. We hypothesize that, in tandem, these two types of MDSS feedback induce marketing managers to update their mental models, a process we call deep learning, whereas individually, these two types of feedback will have much smaller effects on deep learning. We validate our framework in an experimental setting, using a realistic MDSS in the context of a direct marketing decision problem. We then discuss how our findings can lead to design improvements and better returns on investments in MDSSs such as CRM systems, Revenue Management systems, pricing decision support systems, and the like.
    Keywords: Marketing Decision Support Systems;Marketing Decision Models;Marketing Information Systems;Feedback;Learning;
    Date: 2006–08–14
  12. By: Hamilton, R.W.; Puntoni, S.; Tavassoli, N.T. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Categorization is a core psychological process central to consumer and managerial decision-making. While a substantial amount of research has been conducted to examine individual categorization behaviors, relatively little is known about the group categorization process. In two experiments, we demonstrate that group categorization differs systematically from that of individuals: groups created a larger number of categories with fewer items in each category. This effect is mediated by groups’ larger knowledge base and moderated by groups’ ease in achieving consensus. While neither broader nor narrower categories are normatively superior, more integration or distinction among concepts may be desirable for a given objective. Thus, it is important for those relying on the outputs of categorization tasks, such as web site designers, store managers, product development teams, and product marketing managers, to understand and consider the systematic differences between group and individual categorization.
    Keywords: Categorization;Decision-making;Group and Individual Categorization;
    Date: 2006–08–22
  13. By: Arthur Lewbel (Boston College)
    Abstract: My goal here is to provide some synthesis of recent results regarding unobserved heterogeneity in nonlinear and semiparametric models, using as a context Matzkin (2005a) and Browning and Carro (2005), which were the papers presented in the Modeling Heterogeneity session of the 2005 Econometric Society World Meetings in London. These papers themselves consist of enormously heterogeneous content, ranging from high theory to Danish milk, which I will attempt to homogenize. The overall theme of this literature is that, in models of individual economic agents, errors at least partly reflect unexplained heterogeneity in behavior, and hence in tastes, technologies, etc.,. Economic theory can imply restrictions on the structure of these errors, and in particular can generate nonadditive or nonseparable errors, which has profound implications for model specification, identification, estimation, and policy analysis.
    Keywords: unobserved heterogeneity, nonlinear models, semiparametric models
    Date: 2006–09–04
  14. By: Andersson, Fredrik W. (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: By using hypothetical choice experiments, this paper presents evidence that individuals' concern for relative consumption depends on their relative consumption. Individuals with consumption levels above society's average consumption level tend to have, in general, lower concern for relative consumption. This supports Duesenberry's (1949) notion that people are more concerned with upward social comparison than with downward social comparison. <p>
    Keywords: Relative consumption; marginal degree of positionality; choice experiments; questionnaire-experimental methods
    JEL: C91
    Date: 2006–06–30
  15. By: Osselaer, S.M.J. van (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

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