nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2006‒10‒28
seventeen papers chosen by
Marco Novarese
Universita del Piemonte Orientale

  1. Seemingly Irrelevant Events Affect Perceptions and Expectations - The FIFA World Cup 2006 as a Natural Experiment By Dohmen, Thomas J; Falk, Armin; Huffman, David; Sunde, Uwe
  2. Homo Reciprocans: Survey Evidence on Prevalence, Behaviour and Success By Dohmen, Thomas J; Falk, Armin; Huffman, David; Sunde, Uwe
  3. The Build-up of Cooperative Behavior among Non-cooperative Agents By Hassan Benchekroun; Ngo Van Long
  4. Voluntary Contributions to a Public Good: Non-neutrality Results / contributions volontaires, biens publics By Ngo Van Long; Koji Shimomura
  5. A psychological game with interdependent preference types By J. Atsu Amegashie
  6. Strategy and Organization Improving Organizational Learning By Tarondeau, Jean-Claude
  7. How Context Matters: A Survey Based Experiment on Distributive Justice By Marco Faravelli
  8. Ex Interim Voting in Public Good Provision By Sven Fischer; Andreas Nicklisch
  9. Are all crowds equally wise? A comparison of political election forecasts by experts and the public By Sjöberg, Lennart
  10. Myths of the Psychometric Paradigm and how they can misinform risk communication By Sjöberg, Lennart
  11. Prospect Theory and Higher Moments By Ågren, Martin
  12. Does Prospect Theory Explain the Disposition Effect? By Hens, Thorsten; Vlcek, Martin
  13. Making Prospect Theory Fit for Finance By De Giorgi, Enrico; Hens, Thorsten
  14. Impact of Early Childhood Care and Education on Children's Preschool Cognitive Development: Canadian Results from a Large Quasi-experiment By Pierre Lefebvre; Philip Merrigan; Matthieu Verstraete
  15. The Impact of Uncertainty on Incentive Framing Effectiveness in a Multidimensional Task Environment By P. VAN DE WEGHE; W. BRUGGEMAN
  16. The effect of norms, attitudes and habits on speeding behavior: Scale development and model building and estimation By P. DE PELSMACKER; W. JANSSENS
  17. Choice and Normative Preference By Jawwad Noor

  1. By: Dohmen, Thomas J; Falk, Armin; Huffman, David; Sunde, Uwe
    Abstract: Prominent economic theories have emphasized the role of commonly held perceptions and expectations for determining macroeconomic outcomes. A key empirical question is how such collectively held beliefs are formed. We use the FIFA World Cup 2006 as a natural experiment. We provide direct evidence that seemingly irrelevant events (the outcomes of soccer matches) can systematically affect individual perceptions about economic prospects, both on a personal and economy-wide level.
    Keywords: expectation formation; macroeconomic outcomes; psychology; soccer World Cup; sunspots
    JEL: D0 D8 E0
    Date: 2006–09
  2. By: Dohmen, Thomas J; Falk, Armin; Huffman, David; Sunde, Uwe
    Abstract: Experimental evidence has convincingly shown the existence of reciprocal inclinations, i.e., a tendency for people to respond in-kind to hostile or kind actions. Little is known, however, about: (i) the prevalence of reciprocity in the population, (ii) individual determinants of reciprocity, (iii) the correlation between positive and negative inclinations within person, and (iv) consequences of reciprocal inclinations for wages, subjective well-being, friendships and other economic and social outcomes. Answering these questions requires moving out of the lab and using a large and representative subject pool, which combines information about subjects' reciprocal inclinations with extensive socioeconomic background information. In this paper we measure the reciprocal inclinations of 21,000 individuals. We show that most people state reciprocal inclinations, in particular in terms of positive reciprocity. However, there is substantial heterogeneity in the degree of reciprocity, and quite surprisingly, only a weak correlation between positive and negative reciprocity for an individual. In terms of determinants, being female, and increasing age, lead to greater positive and less negatively reciprocal tendencies. Taller people are more positively reciprocal, but height has no impact on negative reciprocity. The asymmetric impact of these determinants provides further indication that positive and negative reciprocity are fundamentally different traits, rather than the outcome of a single underlying tendency. In terms of economic implications, we provide the first evidence using a large representative survey that corroborates an important hypothesis arising from laboratory experiments: Positively reciprocal workers are in fact paid more, and exert greater effort, on the job. Moreover, positively reciprocal people are more likely to be employed, report having more close friends, and have a higher overall level of life satisfaction. In this sense, Homo Reciprocans - in the positive domain - is in fact more successful than his or her non-reciprocal fellows.
    Keywords: happiness; reciprocity; SOEP; trust; unemployment; wage regression
    JEL: D63 J3 J6
    Date: 2006–08
  3. By: Hassan Benchekroun; Ngo Van Long
    Abstract: We develop a theoretical model in which each individual is, in some ultimate sense, motivated by purely egoistic satisfaction derived from the goods accruing to him, but there is an implicit social contract such that each performs duties for the others in a way that enhances the satisfaction of all. We introduce a state variable that acts as a proxy for social capital of trustworthiness and that we call the stock of cooperation. We show that noncooperative agents might condition their action on this state variable. Agents build-up the society's stock of cooperation and gradually overcome the free riding problem in a game of private contribution to a public good. We assume that there are neither penalties in the sense of trigger strategies, nor guilt and that each individual is rational. <P>Nous développons un modèle théorique dans lequel les individus sont motivés par la satisfaction égoïste que leur procure l’accumulation de biens, mais où le contrat social incite chaque individu à travailler pour les autres afin d’accroître le bien-être collectif. Nous introduisons une variable d’état représentant le stock de capital social, ou « stock de coopération ». Nous démontrons que cette variable peut influencer les actions des agents non-coopératifs. Les agents accumulent le stock de coopération de la société et réussisent à règler de manière progressive le problème du passager clandestin pour un jeu de contributions privées dans un bien public. Nous supposons qu’il n’existe pas de stratégies de pénalité, de sentiment de culpabilité chez les individus et que chaque agent est rationnel.
    Keywords: behavior rule, public goods, stock of cooperation, trust, biens public, confiance, règle de conduite, stock de coopération
    JEL: C73 H41 D60
    Date: 2006–10–01
  4. By: Ngo Van Long; Koji Shimomura
    Abstract: We show that the famous neutrality result in the theory of public good contributions (Warr, Kemp, Bergstrom, Blume and Varian) depends crucially on the assumption that agents do not take into account the effect of their public good contribution decisions on the relative price of the private goods. Thus, the scope of applicability of their result is not as large as one might at first think. Our non-neutrality results hold even if all countries are identical in technology, preferences, and endowments. <P>Nous démontrons que le théorème sur l’invariance du stock total d’un bien public par rapport à la distribution de revenus n’est valable que si les contributeurs ignorent l’impact de leurs contributions sur le prix relatif des biens privés. Par conséquent, le résultat de Warr, Kemp, Bergstrom, Blume et Varian n’a qu’une sphère d’application limitée. Nos résultats sur le manque de neutralité sont valables même si les préférences, les technologies, et les dotations de ressources de tous les pays sont identiques.
    Keywords: public goods, voluntary contributions,
    JEL: C73 H41 D60
    Date: 2006–10–01
  5. By: J. Atsu Amegashie
    Date: 2006–10–20
  6. By: Tarondeau, Jean-Claude (ESSEC Business School)
    Abstract: Living art organizations present a special interest in a research stressing cognitive processes and development of intangible resources like knowledge and capabilities. In living art organizations, production processes like rehearsals and tunings whose goals are to develop both tacit and tangible capabilities are readily observable and have undeniable effects on performance quality, revenues and costs. The observations of four opera houses support the conjecture that strategy and organizations could be preconditions for learning.
    Keywords: Cognitive Process; Learning; Living Art Organization; Organization; Strategy
    JEL: Z11
    Date: 2006–10
  7. By: Marco Faravelli
    Abstract: We explore distributive justice and perception of fairness using survey data from freshmen and senior students of economics and sociology. We analyse the impact of context and education on their preferences over a hypothetical distribution of resources between individuals which presents a trade off between efficiency and equality. With context giving minimal information, economics students are less likely to favour equality; studying economics influences the preferences of the subjects, increasing this difference. However, when the same problem is inserted into a meaningful context, the difference disappears. Four distribution mechanisms are analysed: egalitarianism, maximin, utilitarianism and utilitarianism with a floor constraint.
  8. By: Sven Fischer; Andreas Nicklisch
    Abstract: We report the results of an experimental study that compares voting mechanisms in the provision of public goods. Subjects can freely decide how much they want to contribute. Whether the public good is finally provided is decided by a referendum under full information about all contributions. If provision is rejected, contributions are reduced by a fee and reimbursed. We compare unanimity with majority voting and both to the baseline of cheap talk. Contributions are highest under unanimity. Yet, results concerning overall efficiency are mixed. When provision occurs, only unanimity enhances efficiency. Overall, however, unanimity leads to too many rejections.
    Keywords: competition, collusion, auction, bidding, public procurement
    JEL: C72 C91 H41
    Date: 2006–10
  9. By: Sjöberg, Lennart (Center for Risk Research)
    Abstract: In this study, 4 groups of people made prognostic judgments of the outcome of the Swedish Parliamentary election in the fall of 2006, about one week before the election. The groups consisted of members of the public (N=123), political scientists (N=53), journalists writing about domestic politics in Swedish daily newspapers (N=32), and journalists who were editing sections of readers’ letters in daily newspapers (N=10). They rated, for each of seven political parties, which percentage of the votes that they believed they would get in the election. They also marked which party they themselves preferred, and answered to a few questions about interest and competence. Data were then obtained on the outcome of the election, and on the two opinions polls closest in time to it. It was found that all four groups did reasonably well, when average prognostic judgments were compared to the outcome of the election, and better than the opinion polls. The two last polls overestimated the span between the incumbent government and the victorious opposition by a factor of 2. Wishful thinking was assessed by comparing prognostic judgments for each respondent’s preferred party with his or her judgments of other parties. All groups showed some wishful thinking; the political scientists least and the public most. There were large and consistent individual differences in prognostic ability. Men performed better than women, as did those who expressed more interest and knowledge in politics, but neither level of education nor confidence in making the judgments correlated significantly with performance.
    Keywords: prognostic judgments; experts; poltical elections
    Date: 2006–10–03
  10. By: Sjöberg, Lennart (Center for Risk Research)
    Abstract: Extensive research on risk perception has led to a received view (the psychometric model or paradigm), which stresses that members of the public react negatively to technology whenever it (a) is new, (b) causes “dread”, and (c) there is low trust in experts and organizations concerned with managing the risk. Experts, on the other hand, are said to be “objective” and unaffected by “subjective” factors. However, this research has used the same - misleading - methodology in almost all cases and the fact that some of the results have been “many times replicated” is therefore irrelevant to its validity. Analyses of the psychometric model have repeatedly shown that it leaves most of the variance of perceived risk and policy attitudes unexplained. A closer look at several decades' work shows that (a) novelty carries little weight in risk perception, (b) “dread” has not been measured in an appropriate manner and is little powerful, and (c) social trust has a marginal influence as compared to trust in science, epistemological trust. Furthermore, antagonistic attitudes are common and important. Experts exhibit the same structure and level of risk perception as the public; unless they assess risks, they are responsible for managing. In that case, they judge the risk to be drastically smaller than the public does. The importance of epistemic as opposed to social trust stresses the need to take peoples’ concern seriously, not only establish good social relations. The finding that antagonistic attitudes are common and important suggests that being “respectful of people’s feelings” will not be sufficient to establish trust. Failures of risk communication can probably be explained to some extent by the fact that practitioners rely on the misleading notions of the psychometric paradigm.
    Keywords: risk perception; risk communication; psychometric paradigm
    Date: 2006–10–15
  11. By: Ågren, Martin (Department of Economics)
    Abstract: The paper relates cumulative prospect theory to the moments of returns distributions, e.g. skewness and kurtosis, assuming returns are normal inverse Gaussian distributed. The normal inverse Gaussian distribution parametrizes the first- to forth-order moments, making the investigation straightforward. Cumulative prospect theory utility is found to be positively related to the skewness. However, the relation is negative when probability weighing is set aside. This shows that cumulative prospect theory investors display a preference for skewness through the probability weighting function. Furthermore, the investor’s utility is inverse hump-shape related to the kurtosis. Consequences for portfolio choice issues are studied. The findings, among others, suggest that optimal cumulative prospect theory portfolios are not meanvariance efficient under the normal inverse Gaussian distribution.
    Keywords: cumulative prospect theory; skewness; kurtosis; normal inverse Gaussian distribution; portfolio choice
    JEL: C16 D81 G11
    Date: 2006–10–17
  12. By: Hens, Thorsten (Institute for Empirical Research in Economics, University of Zurich); Vlcek, Martin (Institute for Empirical Research in Economics, University of Zurich)
    Abstract: The disposition effect is the observation that investors hold winning stocks too long and sell losing stocks too early. A standard explanation of the disposition effect refers to prospect theory and in particular to the asymmetric risk aversion according to which investors are risk averse when faced with gains and risk-seeking when faced with losses. We show that for reasonable parameter values the disposition effect can however not be explained by prospect theory as proposed by Kahneman and Tversky. The reason is that those investors who sell winning stocks and hold loosing assets would in the first place not have invested in stocks. That is to say the standard prospect theory argument is sound ex-post, assuming that the investment has taken place, but not ex-ante, requiring that the investment is made in the first place.
    Keywords: Disposition effect; prospect theory; portfolio choice
    JEL: G11
    Date: 2005–12–22
  13. By: De Giorgi, Enrico (Institute of Finance, University of Lugano); Hens, Thorsten (Institute for Empirical Research in Economics, University of Zurich)
    Abstract: This paper gives a survey over a common aspect of prospect theory that occurred to be of importance in a series of recent papers developed by Enrico De Giorgi, Thorsten Hens, Janos Mayer, Haim Levy, Thierry Post, Marc Oliver Rieger and Mei Wang. The common aspect of these papers is that the value function of the prospect theory of Kahneman and Tversky (1979) and similarly that of Tversky and Kahneman (1992) has to be re-modelled if one wants to apply it to portfolio selection. Instead of the piecewise power value function, a piecewise negative exponential function should be used. This functional form is still compatible with laboratory experiments but it has the following advantages over and above Kahneman and Tversky`s piecewise power function: <p> 1. The Bernoulli Paradox does not arise for lotteries with finite expected value. <p> 2. No infinite leverage/robustness problem arises. <p> 3. CAPM-equilibria with heterogeneous investors and prospect utility do exist. <p> 4. It is able to simultaneously resolve the following asset pricing puzzles: the equity premium, the value and the size puzzle.
    Keywords: Prospect theory; portfolio selection
    JEL: G00
    Date: 2005–12–22
  14. By: Pierre Lefebvre; Philip Merrigan; Matthieu Verstraete
    Abstract: On September 1st 1997, a new early childhood care and education policy was initiated by the provincial government of Québec, the second most populous province in Canada. Providers of childcare services licensed by the Department of the Family began offering daycare spaces at the reduced parental contribution of $5 per day per child for children aged 4. In successive years, the government reduced the age requirement and engaged in a plan to create new childcare facilities and pay for the cost of additional $5 per day childcare spaces. By September 2000, the low-fee policy applied to all children aged 0 to 59 months and the number of partly subsidized spaces increased from 77,000 in 1998 to 170,000 spaces, totally subsidized, by midyear 2003. In addition, on September 1st 1997, all public schools offered full-day rather than part-day kindergarten for 5-year-old children. No such important policy changes for preschool (including kindergarten) children were enacted in the other Canadian provinces over the years 1994 to 2003. Using biennial data drawn from Statistics Canada’s National Longitudinal Survey of Children and Youth (NLSCY), conducted since 1994-1995, this study attempts to estimate the effect of the policy on Québec’s preschool children cognitive test scores. A non-experimental evaluation framework based on multiple pre- and post-treatment periods is used to estimate the effect of the early childhood care and education regime on school readiness. The econometric results support the hypothesis that the policy had no effects on the cognitive development of 4-year-olds (the PPVT-R raw scores and the PPVT-R standardized scores). However, we provide evidence that the policy had a substantial negative impact on the scores of 5-year-olds.
    Keywords: preschool children, school readiness, childcare, kindergarten, treatment effects, natural experiment
    JEL: H42 J21 J22
    Date: 2006
    Abstract: In this paper, an experiment was conducted in a multidimensional environment to examine the incentive framing effectiveness under conditions of uncertainty, as opposed to certainty. Whereas previous research generally has treated uncertainty as an indivisible concept, this paper proposes a framework from which it is clear that several sources of uncertainty exist, each influencing a different part of the proposed effort-outcome relationship. A comparison was made between certainty and uncertainty, stemming from uncontrollable factors respectively imperfect monitoring. The results indicate that it is valuable to use penalty-framed incentives under certainty conditions, and that performance is higher under certainty than under conditions with either source of uncertainty. The reason lies in a higher level of effort intensity and more efficient effort allocation. Furthermore, it seems that penalty schemes induce higher performance than bonuses under imperfect monitoring, while incentive framing has no effect under uncertainty stemming from uncontrollable factors. The latter results, under uncertainty conditions, can be explained by differences in risk attitude and perceived risk.
    Date: 2006–07
    Abstract: In a quota sample of 334 Belgian individuals, reliable and valid scales are developed, that measure subjective, personal, normative and descriptive norms, personal identity, attitude components, perceived behavioral control, habit formation, behavioral intention and behavior with respect to speeding. A speeding behavior model is built in which the relevance of personal, descriptive and normative norms, the cognitive and affective attitude towards speeding, the affective attitude towards speed limits, and habit formation is assessed. Habit formation and the attitude towards speeding influence the intention towards speeding and selfreported speeding. Personal and to a lesser extent subjective and descriptive norms have a significant effect on attitudes towards speeding and on self-reported speeding. Recommendations for more effective and efficient anti-speeding campaigns are formulated.
    Keywords: speeding scale development, speeding behavior modeling, norms
    Date: 2006–07
  17. By: Jawwad Noor (Department of Economics, Boston University)
    Abstract: Due to factors such as temptation, choices may not respect normative prefer- ence (the agent.s own, subjective view of what constitutes his welfare). Neverthe- less, the evidence on preference reversals suggests a means of recovering normative preference from choice. A de.nition of normative preference in terms of choices between su¢ ciently delayed alternatives is formulated and studied. Mild condi- tions on behavior are shown to ensure the existence of a normative preference. Two characterizations are provided. It is demonstrated that a notion of welfare may exist inspite of dynamic inconsistency of preferences. An application shows that the evidence on hyperbolic discounting implies that agents.normative discount functions must be exponential.
    Keywords: Preference Reversals, Welfare, Temptation, Hyperbolic Discount- ing, Ethics.
    JEL: D11
    Date: 2005–10

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