nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2007‒01‒13
eight papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. Experimental Evidence on the Benefits of Eliminating Exchange Rate Uncertainties and Why Expected Utility Theory causes Economists to Miss Them By Robin Pope; Reinhard Selten; Sebastian Kube; Jürgen von Hagen
  2. Testing the rationality assumption using a design difference in the TV game show 'Jeopardy' By Sjögren Lindquist, Gabriella; Säve-Söderbergh, Jenny
  3. The Role of Inter-Group Relationships in Institutional Analysis By Alberto Battistini
  4. Financial Engineering and Rationality: Experimental Evidence Based on the Monty Hall Problem By Brain Kluger; Daniel Friedman
  5. The power of words in financial markets: soft versus hard communication,a strategy method experiment By Corgnet Bruce; Angela Sutan; Arvin Aashta
  6. Cognitive Abilities and Labour Market Outcomes By Silke Anger; Guido Heineck
  7. Learning about Oneself: Technology Financing in a Tamil Fishing By Xavier Gine; Stefan Klonner
  8. Games in the Nervous System: The Game Motoneurons Play By Irit Nowik; Idan Segev; Shmuel Zamir

  1. By: Robin Pope; Reinhard Selten; Sebastian Kube; Jürgen von Hagen
    Abstract: Conclusions favourable to flexible exchange rates typically accord with expected utility theory in ignoring the costs that exchange rate uncertainty generates for governments, central banks, firms and unions in: (i) choosing among available acts; and (ii) existing until learning the outcome of the chosen act. Allowing for these costs involves the stages of knowledge ahead framework, Pope (1983, 1995, 2005). A laboratory experiment suggests that (i) and (ii) together outweigh the advantages of having a flexible exchange rate as an additional instrument for managing a country’s employment, interest rate, price level and international competitiveness goals
    Keywords: experiment
    JEL: C90
    Date: 2006–10
  2. By: Sjögren Lindquist, Gabriella (Swedish Institute for Social Research, Stockholm University); Säve-Söderbergh, Jenny (Swedish Institute for Social Research, Stockholm University)
    Abstract: This paper empirically investigates the rationality assumption commonly applied in economic modeling by exploiting a design difference in the game-show Jeopardy between the US and Sweden. In particular we address the assumption of individuals’ capabilities to process complex mathematical problems to find optimal strategies. The vital difference is that US contestants are given explicit information before they act, while Swedish contestants individually need to calculate the same information. Given a rationality assumption of individuals computing optimally, there should be no difference in the strategies used. However, in contrast to the rational and focal bidding behaviors found in the US, the Swedish players display no optimal behavior. Hence, when facing too complex decisions, individuals abandon optimal strategies.
    Keywords: Rationality; Bounded Rationality; Field Experiments
    JEL: C72 C93 D81
    Date: 2006–12–28
  3. By: Alberto Battistini
    Abstract: Taking value as the socio-economic analogue of biological or cultural fitness, in this paper I start a study of the interaction between individual-level and group-level explanatory mechanisms by looking for what kind of intra-group relationships obtains given the nature of inter-group relationships. Specifically, it is shown that when value comes from appropriating resources from other groups, inter-group relationships are conflictual or war-like and, as a consequence, intra-group-relationships are centralized and hierarchical; when the value creation process involves niche-competition between groups, inter-group relationships are fission-fusion with commitment and intra-group relationships are decentralized and egalitarian; finally, when value comes from appropriating occasional benefits from cooperation, inter-group relationships are indistinguishable from intra-group relationships, and the latter are decentralized and hierarchical. Interpreting intra-group relationships as different forms of social order and the division of labour, applications to political and economic institutions are also provided. Exploitation, a well-defined concept in the paper without recourse to the labour theory of value, is shown to be consistent with some of these institutions and, particularly, with the absence of explicit coercion
    Keywords: value, distribution, exploitation
    JEL: A12 D33 D74 L22
    Date: 2006–10
  4. By: Brain Kluger; Daniel Friedman
    Abstract: Financial engineering often involves redefining existing financial assets to create new financial products. This paper investigates whether financial engineering can alter the environment so that irrational agents can quickly learn to be rational. The specific environment we investigate is based on the Monty Hall problem, a well-studied choice anomaly. Our results show that, by the end of the experiment, the majority of subjects understand the Monty Hall anomaly. Average valuation of the experimental asset is very close to the expected value based on the true probabilities.
    Keywords: experiment, behavioral finance
    JEL: C90
    Date: 2006–07
  5. By: Corgnet Bruce; Angela Sutan; Arvin Aashta
    Abstract: The main objective of this paper is to analyze the impact of non-informative communications on asset prices. An experimental approach allows us to control for the release of non-relevant messages. We introduce the release of messages in standard experimental asset markets with bubbles (Smith, Suchanek and Williams 1988) through a strategy method experiment. We conjecture that a priori uninformative messages can significantly impact the level of asset prices. Uninformative communications may be used by boundedly rational subjects to compute the fundamental value of the asset. In addition, rational agents may anticipate such an effect and adapt their strategy to the messages received. We asked 182 subjects to construct strategies about their action in a standard experimental asset market environment. Our analysis sheds light on the possibility of manipulation and stabilization of financial markets by influential agents such as financial “gurus” or central bankers.
    Keywords: experiment
    JEL: C90
    Date: 2006–06
  6. By: Silke Anger; Guido Heineck
    Abstract: We contribute to the literature on the relationship between cognitive abilities and labour market outcomes providing first evidence for Germany. In particular, cross-sectional data from the German Socio-Economic Panel (SOEP) are used, which include two measures of cognitive ability, one test of fluid mechanics (speed test) and another test of crystallised pragmatics (word fluency test). We find a positive relationship between cognitive abilities and economic activity, as workers with high ability test scores are less likely to be unemployed. In addition, results from Mincer-type OLS and 2SLS regressions suggest that mechanics abilities are correlated with wages in a significantly positive way for West German workers, even when educational attainment is controlled for, whereas pragmatics of cognition do not affect earnings significantly. However, we also find that ability and education are inseparable determinants of earnings, which confirms findings of recent studies for other countries.
    Keywords: Cognitive ability, earnings regressions, returns to education, ability bias, unemployment probability
    JEL: J24 J31 I21
    Date: 2006
  7. By: Xavier Gine (DECRG The World Bank); Stefan Klonner
    Abstract: We study adoption of a costly new technology when the profitability of the new technique differs over individuals and there is uncertainty about these individual-specific differences. We establish that such individual-specific uncertainty results in a financing constraint when debt contracts are characterized by limited liability and limited commitment on the side of the borrower. In data from a Tamil coastal village, in which a new fishing boat became available in 2001, we find significant evidence for individual-specific uncertainty about the profitability of the new technology. Results suggest that this uncertainty reduces the amount of external finance available for the technology switch by 20 percent. The resulting need for complementary self-finance creates a wealth threshold, below which adoption, even if profitable, is not feasible. Kuznets-type inequality dynamics result on the middle run.
    Keywords: Learning, Competition, Credit Constraints
    JEL: O33 D83 D92
    Date: 2006–12–03
  8. By: Irit Nowik; Idan Segev; Shmuel Zamir
    Date: 2006–12–30

This nep-cbe issue is ©2007 by Marco Novarese. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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