nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2006‒10‒21
fourteen papers chosen by
Marco Novarese
Universita del Piemonte Orientale

  1. The curved relationship between subjective well-being and age. By Andrew E. Clark; Andrew J. Oswald
  2. On ignoring scientific evidence: The bumpy road to enlightenment By Robin Hogarth
  3. On heuristic and linear models of judgment: Mapping the demand for knowledge By Robin Hogarth; Natalia Karelaia
  4. Interpersonal Comparisons of Utility in Bargaining: Evidence from a Transcontinental Ultimatum Game By Romina Boarini; Jean-Francois Laslier; Stéphane Robin
  5. Do Social Networks Inspire Employment? - An Experimental Analysis - By Berninghaus, Siegfried K.; Fischer, Sven; Gueth, Werner
  6. Individual Investor Sentiment and Stock Returns - What Do We Learn from Warrant Traders? By Schmitz, Philipp; Glaser, Markus; Weber, Martin
  7. The herd moves? Emergence and self-organization in collective actors? By Martin Beckenkamp
  8. Wage Differentials, Fairness, and Social Comparison: An experimental study of the Co-Employment of Permanent and Temporary Agency Workers† By Dorothea Alewell; Andreas Nicklisch
  9. Does Health Information Matter for Modifying Consumption? A Field Experiment Measuring the Impact of Risk Information on Fish Consumption By Jutta Roosen; Stephan Marette; Sandrine Blanchemanche; Philippe Verger
  10. Perceiving strategic environments: An experimental study of learning under minimal information By Andreas Nicklisch
  11. Noisy commitments: The impact of information accuracy on efficiency By Eyal Ert; Andreas Nicklisch
  12. The Impact of Institutions on the Decision How to Decide By Christoph Engel; Elke U. Weber
  13. Trade and Communication Under Subjective Information By Stecher, Jack D.
  14. Did F. A. Hayek Embrace Popperian Falsificationism? - A Critical Comment About Certain Theses of Popper, Duhem and Austrian Methodology By van den Hauwe, Ludwig

  1. By: Andrew E. Clark; Andrew J. Oswald
    Abstract: This article is concerned with a body of work on happiness and age represented by important papers such as Mroczek and Kolarz (1998) and Mroczek and Spiro (2005). Using a large British data set, the paper presents new longitudinal evidence. It also points out that, perhaps unknown to many psychologists, a parallel literature on this topic exists in economics journals. The paper shows that subjective well-being follows a U-shape through the life course. We argue that eventually the two literatures will have to be made consistent with one another, and suggest that, although it is not easy to live in both worlds, with their different styles and conventions, economists and psychologists still have much to learn from one another.
    Date: 2006
  2. By: Robin Hogarth
    Abstract: It is well accepted that people resist evidence that contradicts their beliefs. Moreover, despite their training, many scientists reject results that are inconsistent with their theories. This phenomenon is discussed in relation to the field of judgment and decision making by describing four case studies. These concern findings that “clinical” judgment is less predictive than actuarial models; simple methods have proven superior to more “theoretically correct” methods in times series forecasting; equal weighting of variables is often more accurate than using differential weights; and decisions can sometimes be improved by discarding relevant information. All findings relate to the apparently difficult-to-accept idea that simple models can predict complex phenomena better than complex ones. It is true that there is a scientific market place for ideas. However, like its economic counterpart, it is subject to inefficiencies (e.g., thinness, asymmetric information, and speculative bubbles). Unfortunately, the market is only “correct” in the long-run. The road to enlightenment is bumpy.
    Keywords: Decision making, judgment, forecasting , linear models, heuristics
    JEL: D81 M10
    Date: 2006–05
  3. By: Robin Hogarth; Natalia Karelaia
    Abstract: Research on judgment and decision making presents a confusing picture of human abilities. For example, much research has emphasized the dysfunctional aspects of judgmental heuristics, and yet, other findings suggest that these can be highly effective. A further line of research has modeled judgment as resulting from “as if” linear models. This paper illuminates the distinctions in these approaches by providing a common analytical framework based on the central theoretical premise that understanding human performance requires specifying how characteristics of the decision rules people use interact with the demands of the tasks they face. Our work synthesizes the analytical tools of “lens model” research with novel methodology developed to specify the effectiveness of heuristics in different environments and allows direct comparisons between the different approaches. We illustrate with both theoretical analyses and simulations. We further link our results to the empirical literature by a meta-analysis of lens model studies and estimate both human and heuristic performance in the same tasks. Our results highlight the trade-off between linear models and heuristics. Whereas the former are cognitively demanding, the latter are simple to use. However, they require knowledge – and thus “maps” – of when and which heuristic to employ.
    Keywords: Decision making; heuristics; linear models; lens model; judgmental biases
    JEL: D81 M10
    Date: 2006–06
  4. By: Romina Boarini (PREG - Pole de recherche en économie et gestion - [CNRS : UMR7176] - [Polytechnique - X]); Jean-Francois Laslier (PREG - Pole de recherche en économie et gestion - [CNRS : UMR7176] - [Polytechnique - X]); Stéphane Robin (GATE - Groupe d'analyse et de théorie économique - [CNRS : UMR5824] - [Université Lumière - Lyon II] - [Ecole Normale Supérieure Lettres et Sciences Humaines])
    Abstract: This paper presents the experimental results of a “Transcontinental Ultimatum Game” implemented between India and France. The bargaining took the form of standard ultimatum games, but in one treatment Indian subjects made offers to French subjects and, in another treatment, French subjects made offers to Indian subjects. We observed that French→Indian bargaining mostly ended up with unequal splits of money in favour of French, while nearly equal splits were the most frequent outcome in Indian→French interactions. The experimental results are organized through a standard social reference model, modified for taking into account the different marginal value of money for bargainers. In our model bargaining is driven by relative standings comparisons between players, occurring in terms of real earnings (that is monetary earnings corrected for a purchasing power factor) obtained in the game. The norm of equity behind the equalization of real earnings is called local equity norm, and contrasted to a global equity norm which would encompass the wealth of players beyond the game. According to what we observed, no beyond-game concern seems to be relevantly endorsed by subjects.
    Keywords: Interpersonal Comparisons of Utility; Fairness; Bargaining experiment; Ultimatum Game
    Date: 2006–10–09
  5. By: Berninghaus, Siegfried K. (Universität Karlsruhe); Fischer, Sven (Max Planck Institute for Research into Economic Systems. Strategic Interaction Group); Gueth, Werner (Max Planck Institute for Research into Economic Systems, Strategic Interaction Group)
    Abstract: There is robust field data showing that a frequent and successful way of looking for a job is via the intermediation of friends and relatives. Here we want to test this experimentally. Participants first play a simple public goods game with two interaction partners ('friends'), and share whatever they earn this way with two different sharing partners ('cousins') who have different friends. Thus one's social network contains two 'friends' and two 'cousins'. In the second phase of the experiment participants learn about a job opportunity for themselves and one additional vacancy and decide whom of their network they want to recommend and, if so, in which order. In case of coemployment, both employees compete for a bonus. Will one recommend others for the additional job in spite of this competition, will one prefer 'friends' or 'cousins' and how does this depend on contributions (of 'friends') or shared profits (with 'cousins')? Our findings are partly quite puzzling. Most participants, for instance, recommend quite actively but compete very fiercely for the bonus.
    Date: 2006–10–02
  6. By: Schmitz, Philipp (Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre); Glaser, Markus (Sonderforschungsbereich 504); Weber, Martin (Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre)
    Abstract: In this paper, we propose a measure of individual investor sentiment that is derived from the market for bank-issued warrants. Due to a unique warrant transaction data set from a large discount broker we are able to calculate a daily sentiment measure and test whether individual investor sentiment is related to daily stock returns by using vector autoregressive models and Granger causality tests. We find that there exists a mutual influence of sentiment and stock market returns, but only in the very short-run (one and two trading days). Returns have a negative influence on sentiment, while the influence of sentiment on returns is positive for the next trading day. The influence of stock market returns on sentiment is stronger than vice versa. Our sentiment measure simultaneously avoids problems that are associated with existing sentiment measures, which are based on the closed-end fund discount, stock market transactions, the put-call ratio or investor surveys.
    Date: 2006–10–05
  7. By: Martin Beckenkamp (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: The puzzle about collective actors is in the focus of this contribution. The first section enters into the question of the adequateness and inadequateness of reductionist explanations for the description of entities. The considerations in this part do not draw on systems and hence not on principles of self-organisation, because this concept necessitates a systemic view. In other words, the first section discusses reductionism and holism on a very general level. The scope of these arguments goes far beyond self-organising systems. Pragmatically, these arguments will be discussed within the domain of corporative actors. Emergence is a concept embedded in system theory. Therefore, in the second part the previous general considerations about holism are integrated with respect to the concept “emergence”. In order to close the argument by exactly characterising self-organising systems and giving the conceptual link between self-organisation and emergence – which is done in the section four – the third section generally conceptualises systems. This conceptualisation is independent of whether these systems are self-organising or not. Feedback loops are specified as an essential component of systems. They establish the essential precondition of system-theoretic models where causes may also be effects and vice versa. System-theory is essential for dynamic models like ecological models and network thinking. In the fourth part mathematical chaos-theory bridges the gap between the presentation of systems in general and the constricted consideration of self-organising systems. The capability to behave or react chaotically is a necessary precondition of self-organisation. Nevertheless, there are striking differences in the answers given from theories of self-organisation in biology, economics or sociology on the question “What makes the whole more than the sum of its parts?” The fracture seems particularly salient at the borderline between formal-mathematical sciences like natural sciences including economy and other social sciences like sociology, for instance in the understanding and conceptualisation of “chaos” or “complexity”. Sometimes it creates the impression that originally well defined concepts from mathematics and natural science are metaphorically used in social sciences. This is a further reason why this paper concentrates on conceptualisations of self-organisation from natural sciences. The fifth part integrates the arguments from a system-theoretic point of view given in the three previous sections with respect to collective and corporative actors. Due to his prominence all five sections sometimes deal with the sociological system theory by Niklas Luhmann, especially in those parts with rigorous and important differences between his conception and the view given in this text. Despite Luhmann’s undoubted prominence in sociology, the present text strives for a more analytical and formal understanding of social systems and tries to find a base for another methodological approach.
    Date: 2006–07
  8. By: Dorothea Alewell (Friedrich Schiller University Jena, Chair for Business Administration, Human Resource Management and Organization); Andreas Nicklisch (Max Planck Institute for Research on Collective Goods)
    Abstract: Recent experimental literature in labor economics shows that fairness concerns make a substantial difference for working decisions. Our study systematically explores how the existence of multiple fairness foci influences wage setting and acceptance thresholds. Particularly, we focus on the effect of horizontal fairness concerns, i.e., the wage comparison among employees. For our experiment, we use an institutional design of wage negotiations among employers, employees and temporary agency workers. Working agencies hire these workers and rent them out to firms. Thereby, we create a heterogeneous background of the labour force. Although temporary agency workers do the same work, typically, they receive lower wages due to the intermediate agency. The results of our laboratory experiments indicate that the availability of information concerning co-employee’s wage offers strongly influences the wage set and participants’ acceptance of contracts. Whereas the relation of average wages is not influenced by the order of the decisions, the absolute level of wages is dependent on the decisions. We find that temporary agency workers who decide on a wage offer after permanent employees receive a premium in addition to their wages, while permanent employees take a cut in wages if they get their wage offer after temporary workers have decided on their offers. These results are more influenced by self-regarding social comparison preferences than by other-regarding horizontal fairness concerns.
    Keywords: Experimental economics, horizontal fairness norms, labour economics, social preferences, vertical fairness norms
    JEL: C92 J33 M12 M52
    Date: 2006–03
  9. By: Jutta Roosen; Stephan Marette (Center for Agricultural and Rural Development (CARD); Food and Agricultural Policy Research Institute (FAPRI)); Sandrine Blanchemanche; Philippe Verger
    Abstract: A field experiment was conducted in France to evaluate the impact of health information on fish consumption. A warning given to the treatment group revealed the risks of methylmercury contamination in fish and also gave consumption recommendations. Using difference-in-differences estimation, we show that this warning led to a significant but relatively weak decrease in fish consumption. However, consumption of the most contaminated fish did not decrease despite advice to avoid consumption of these types of fish. Accompanying questionnaires show that consumers imperfectly memorize the fish species quoted in the warning. The results point to the relatively poor efficacy of a complex health message, despite its use by health agencies around the world.
    Keywords: econometrics, field experiment, fish consumption, health information, nutrition. JEL Classification: C9, D8, I1.
    Date: 2006–10
  10. By: Andreas Nicklisch (Max Planck Institute for Research on Collective Goods)
    Abstract: We present the results of an experiment on learning with minimal information. Particularly, subjects are only provided with feedback about their own payoff from the last period of the game being played, but not with information about the structure of the game. We compare the empirical structure of the decision algorithm for this setting with the empirical structure of algorithms for subjects who receive sufficient information to learn the game. The laboratory data show that, depending on the information setting, players adjust their strategy choice differently. The structure of the decision algorithm for subjects operating with minimal information indicates myopic responses to success, while the structure for sufficiently informed players is more complex. As a consequence, sufficiently informed players outperform players who have minimal information in a simple coordination game. Yet, if the structure of the game changes, readjustment is more successful for the players operating with minimal information.
    Keywords: Experimental economics, learning, minimal social situation, myopia
    JEL: D83 D84
    Date: 2006–06
  11. By: Eyal Ert (Max Wertheimer Minerva Center for Cognitive Research, Faculty of Industrial Engineering and Management, Israeli Institute of Technology, Haifa, Israel); Andreas Nicklisch (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: We report an experiment designed to test the influence of noisy commitments on efficiency in a simple bargaining game. We investigate two different levels of commitment reliability in a variant of the peasant-dictator game. Theoretical analysis suggests that the reliability of commitments in this game does not affect efficiency. We find that accurate commitments promote efficiency, as expected by game theory. However, noisy commitments are found to impair efficiency. We explain this effect by the differences between incentives off the equilibrium path under conditions of accurate commitments and noisy commitments. This difference changes the game structure and in the current game facilitates more random responses.
    Keywords: Commitments, efficiency, experimental economics, information, trust
    JEL: A12 D02 K00
    Date: 2006–02
  12. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn); Elke U. Weber (Columbia University, Professor of Psychology and Management)
    Abstract: The human mind is not a general problem solving machine. Instead of deliberately, consciously and serially processing the available information, men can rely on routines, rules, roles or affect for the purpose. They can bring in technology, experts or groups. For all of these reasons, men have a plurality of problem solving modes at their disposition. Often, the meta-choice of problem solving mode matters for behavioural output. Some performance standards are only to be met if a certain problem solving mode is used, like a well-established skill. Other requirements are easier to fulfil with some problem solving modes. This explains why institutions frequently impact on the choice of problem solving mode. To show how institutions are able to do that, a model of problem solving modes is developed. It allows to systematise the access points for institutional intervention.
    Keywords: Decision Making, Problem Solving, Institutions
    JEL: D10 D21 D83 K20 K40 L51 Z13
    Date: 2006–08
  13. By: Stecher, Jack D. (Dept. of Accounting, Auditing and Law, Norwegian School of Economics and Business Administration)
    Abstract: This paper models an economy where agents perceive the choices they face subjectively, and have subjective interpretations of the terminology they use in a shared business language. Preferences are defined on what an agent perceives, and not on what is objectively presented to an agent. A business language enables agents to trade, provided the terminology in the language is sufficiently vague: once agents can express more detail than their trading partners can perceive, the language ceases to be useful. Under some regularity conditions on the language, an appropriately defined notion of competitive equilibrium exists. However, much less can be said about welfare than in the neoclassical case, as there are counter-examples to both welfare theorems.
    Keywords: Language; Perceptual Limits; Unawareness
    JEL: C65 D01 D82 M41
    Date: 2006–03–03
  14. By: van den Hauwe, Ludwig
    Abstract: Criticizing and commenting upon a questionable thesis of Hayek biographer Hans Jörg Hennecke, the author of this article argues that Hayek´s methodological outlook at the time he engaged in business cycle research was actually closer to praxeological apriorism than to Popperian falsificationism. A consideration of the Duhem thesis highlights the fact that even from a mainstream methodological perspective falsificationism is more problematic than is often realized. Even if the praxeological and mainstream lines of argumentation reject the Popperian emphasis on falsification for different reasons and from a different background, the prospects for falsificationism in economic methodology seem rather bleak.
    Keywords: General Methodology; Austrian Methodology; Falsificationism; Popper; Hayek; Duhem; Duhemian Argument; Testing of Theories; Meaning and Interpretation of Econometric Results; Correlation and Causality;
    JEL: B53 A12 C10 B23 E32 B20 B40
    Date: 2006

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