nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2007‒01‒28
sixteen papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. On the Convergence of Evolutionary and Behavioral Theories of Organizations: A Tentative Roadmap By Giovanni Dosi; Luigi Marengo
  2. What Simon says By Floris Heukelom
  3. Kahneman and Tversky and the Origin of Behavioral Economics By Floris Heukelom
  4. Income and Happiness: Evidence, Explanations and Economic Implications. Working paper #5 By Andrew E. Clark; Paul Frijters; Michael A. Shields
  5. Behavioral Economics and Climate Change Policy By John M. Gowdy
  6. Best Responding to What? A Behavioral Approach to One Shot Play in 2x2 Games By Gallice, Andrea
  7. Understanding individuals’ decisions about vaccination: a comparison between Expected Utility and Regret Theory models By M Zia Sadique; John Edmunds; Nancy Devlin; David Parkin
  8. Distribution-Free Learning By Karl H. Schlag
  9. Observational Learning in the Motion Picture Market By Santugini, Marc
  10. Enjoy the Silence: An Experiment on Truth-Telling By Santiago Sanchez-Pages; Marc Vorsatz
  11. Is Beauty only Skin-deep? Disentangling the Beauty Premium on a Game Show By Michele Belot,; V. Bhaskar; Jeroen van de Ven
  12. Acquisition of information and share prices: An empirical investigation of cognitive dissonance By Elena Argentese; Helmut Luetkepohl; Massimo Motta
  13. Equilibrium Play and Best Response to (Stated) Beliefs in Constant Sum Games By Pedro Rey-Biel
  14. The Compromise Game: Two-sided Adverse Selection in the Laboratory By Juan D. Carrillo; Thomas R. Palfrey
  15. Production Structure and Economic Fluctuations By Tommaso Ciarli; Marco Valente
  16. Endogenous Network Formation in the Laboratory By Celen, Bogachan; Hyndman, Kyle

  1. By: Giovanni Dosi; Luigi Marengo
    Abstract: The behavioral theory of the firm has been acknowledged as one of the most fundamental pillars on which evolutionary theorizing in economics has been built. Nelson and Winter’s 1982 book is pervaded by the philosophy and concepts previously developed by Cyert, March and Simon. On the other hand, some behavioral notions, such as bounded rationality, though isolated from the context, are also at the heart of some economic theories of institutions such as transaction costs economics. In this paper, after briefly reviewing the basic concepts of evolutionary economics, we discuss its implications for the theory of organizations (and business firms in particular), and we suggest that evolutionary theory should coherently embrace an “embeddedness” view of organizations, whereby the latter are not simply efficient solutions to informational problems arising from contract incompleteness and uncertainty, but also shape the “visions of the world”, interaction networks, behavioral patterns and, ultimately, the very identity of the agents. After outlining the basic features of this perspective we analyze its consequences and empirical relevance.
    Date: 2007–01–22
  2. By: Floris Heukelom (Universiteit van Amsterdam)
    Abstract: This paper provides an overview of the work of Herbert Simon and his ideas about rational decision making. By his own standards, Simon is an economist who works in the tradition of Adam Smith and Alfred Marshall. The central theme in Simon’s research is how human beings organize themselves in different structures of distributed decision making in order to achieve a degree of rationality that is higher than which can be attained by the individual. In this realm his main preoccupation are hierarchic organizations such as the business firm and the computer. Simon sharply contrasts his views with the EUT, the dominant view on rational decision making in economics and other social sciences.
    Keywords: Herbert Simon; decision making; Expected Utility Theory; hierarchic organizations
    JEL: A12 D01 D21
    Date: 2007–01–12
  3. By: Floris Heukelom (ASE, Universiteit van Amsterdam)
    Abstract: Kahneman and Tversky and their behavioral economics stand in a long tradition of applying mathematics to human behavior. In the seventeenth century, attempts to describe rational behavior in mathematical terms run into problems with the formulation of the St. Petersburg paradox. Bernoulli’s celebrated solution to use utility instead of money marks the beginning of expected utility theory (EUT). Bernoulli’s work is taken up by psychophysics which in turn plays an important role in the making of modern economics. In the 1940s von Neumann and Morgenstern throw away Bernoulli and psychophysics, and redefine utility in monetary terms. Relying on this utility definition and on von Neumann and Morgenstern’s axiomatic constraints of the individual’s preferences, Friedman and Savage attempt to continue Bernoulli’s research. After this fails economics and psychology go separate ways. Economics employs Friedman’s positive-normative distinction; psychology uses Savag! e’s normative-descriptive distinction. Using psychophysics Kahneman and Tversky broaden the normative-descriptive distinction and argue with increasing strength for a descriptive theory of rational behavior. A prominent part of contemporary behavioral economics is founded upon the export of Tversky and Kahneman’s program to economics. Within this research, two different branches of research can be observed. One branch continues Kahneman and Tversky’s search for a descriptive theory of rational behavior and extends the normative-descriptive distinction with a prescriptive part. A second branch takes Tversky and Kahneman’s work as a falsification of positive economics. It argues that economics should take account of the psychological critique but stick to rigorous mathematical model building and Friedman’s positive-normative distinction.
    Keywords: Kahneman and Tversky; behavioral economics; expected utility theory; normative economics
    JEL: A12 B21 D01
    Date: 2007–01–11
  4. By: Andrew E. Clark; Paul Frijters; Michael A. Shields (National Centre for Econometric Research)
    Date: 2006–09
  5. By: John M. Gowdy (Department of Economics, Rensselaer Polytechnic Institute, Troy NY 12180-3590, USA)
    Abstract: The policy recommendations of most economists are based on the rational actor model of human behavior. Behavior is assumed to be self-regarding, preferences are assumed to be stable, and decisions are assumed to be unaffected by social context or frame of reference. The related fields of behavioral economics, game theory, and neuroscience have confirmed that human behavior is other regarding, and that people exhibit systematic patterns of decision-making that are "irrational" according to the standard behavioral model. This paper takes the position that it is these "irrational" patterns of behavior that uniquely define human decision making and that effective economic policies must take these behaviors as the starting point. This argument is supported by game theory experiments involving humans, closely related primates, and other animals with more limited cognitive ability. The policy focus of the paper is global climate change. The research surveyed in this paper suggests that the standard economic approach to climate change policy, with its almost exclusive emphasis on rational responses to monetary incentives, is seriously flawed. In fact, monetary incentives may actually be counter-productive. Humans are unique among animal species in their ability to cooperate across cultures, geographical space and generations. Tapping into this uniquely human attribute, and understanding how cooperation is enforced, holds the key to limiting the potentially calamitous effects of global climate change.
    Date: 2007–01
  6. By: Gallice, Andrea
    Abstract: We introduce a simple procedure to be used for selecting the strategies most likely to be played by inexperienced agents who interact in one shot 2x2 games. We start with an axiomatic description of a function that may capture players' beliefs. Various proposals connected with the concept of mixed strategy Nash equilibrium do not match this description. On the other hand minimax regret obeys all the axioms. Therefore we use minimax regret to approximate players' beliefs and we let players best respond to these conjectured beliefs. When compared with existing experimental evidences about one shot matching pennies games, this procedure correctly indicates the choices of the vast majority of the players. Applications to other classes of games are also explored.
    Keywords: prediction; beliefs; mixed strategy Nash equilibrium; minimax regret; matching pennies; experiments.
    JEL: C72 C91
    Date: 2007–01
  7. By: M Zia Sadique (Department of Economics, City University, London); John Edmunds (Health Protection Agency, Centre for Infections, London); Nancy Devlin (Department of Economics, City University, London); David Parkin (Department of Economics, City University, London)
    Abstract: This paper proposes two new theoretical models for examining individual decision-making regarding vaccination. In each case, individuals’ decisions are modelled as a binary choice (i.e. to accept or to reject an invitation to receive vaccination) which are a product both of the perceived risk of the preventable disease in question and of the perceived risk of adverse side effects of the vaccine itself. Individuals decisions are modelled in two ways – first, as expected utility maximising and second, as regret minimising – and the results compared. In both cases, the decision to vaccinate is explained by a threshold condition with respect to the risk of remaining exposed to the disease by rejecting vaccination, and the risk of experiencing adverse events from vaccination itself. Regret-averse individuals have a higher threshold – suggesting a lower propensity to vaccinate than that suggested by the expected utility models. Although the results are intuitively plausible, they rest on assumptions about the perceived severity of side effects as opposed to preventable disease. We conclude by identifying a number of theoretical issues that remain to be explored, and outlining the empirical research required.
    Date: 2005–07
  8. By: Karl H. Schlag
    Abstract: We select among rules for learning which of two actions in a stationary decision problem achieves a higher expected payo¤when payo¤s realized by both actions are known in previous instances. Only a bounded set containing all possible payo¤s is known. Rules are evaluated using maximum risk with maximin utility, minimax regret, competitive ratio and selection procedures being special cases. A randomized variant of fictitious play attains minimax risk for all risk functions with ex-ante expected payoffs increasing in the number of observations. Fictitious play itself has neither of these two properties. Tight bounds on maximal regret and probability of selecting the best action are included.
    Keywords: fictitious play, nonparametric, finite sample, matched pairs, foregone payoffs, minimax risk, ex-ante improving, selection procedure
    JEL: D83 D81 C44
    Date: 2006
  9. By: Santugini, Marc
    Abstract: I focus on the market for movies released in the theater to measure the extent to which consumers learn about the quality of a movie from observing its market share in the release week. I derive the demand for movies using a dynamic discrete choice model in which consumers are endowed with private information about a movie and engage in as well as anticipate learning. I also assume that consumers watch a movie at most once to account for demand saturation. I depart from previous applied work on estimating the demand for movies by incorporating forward-looking behavior and observational learning. I also propose a new approach to account for demand saturation. The approach allows the decay rate for a market share to depend on consumers' past decisions, past movie competition, as well as past observational learning. The decay rate also depends on consumers' anticipation of observational learning and future schedule of movies in the theater. Given the distributional assumptions, the corresponding market shares for movies are mixing multinomial logit probabilities, taking into account consumers' forward-looking behavior and heterogeneity due, in part, to their private information. Using US market-level data, I estimate the structural parameters of demand via the maximum simulated likelihood procedure. I recover reasonable estimates for the covariates such as MPAA ratings and studio indicators. I also find evidence of observational learning. I plan to measure the effect of observational learning on demand saturation as well as the effect of anticipation of observational learning on delaying consumers from watching movies in their release weeks.
    Keywords: Motion pictures; Information; Learning; Market saturation
    JEL: L15 L82 D83 D12 C13
    Date: 2006–11–08
  10. By: Santiago Sanchez-Pages; Marc Vorsatz
    Abstract: We analyze experimentally two sender-receiver games with conflictive preferences. In the first game, the sender can choose to tell the truth, to lie, or to remain silent. The latter strategy is costly and similar to an outside option. If sent, the receiver can either trust or distrust the sender’s message. In the second game, the receiver must decide additionally whether or not to costly punish the sender after having observed the history of the game. We investigate the existence of two kinds of social preferences: Lie-aversion and preference for truth-telling. In the first game, senders tell the truth more often than predicted by the sequential equilibrium concept, they remain silent frequently, and there exists a positive correlation between the probability of being truthful and the probability of remaining silent. Our main experimental result for the extended game shows that those subjects who punish the sender with a high probability after being deceived are precisely those who send fewer but more truthful messages. We then explore two formal models of the baseline game that can account for our experimental results. First, we fit the data to the logit agent quantal response equilibrium; secondly, we solve for the Perfect Bayesian Nash equilibria of a stylized version of the baseline game with two types of senders. The equilibrium predictions obtained in both cases are consistent with both preferences for truth-telling and lie-aversion although the latter seems to be more pronounced.
    Keywords: Experiment, Lie-Aversion, Social Preferences, Strategic Information Transmission, Truth-Telling.
    JEL: C72 C73 D83
  11. By: Michele Belot,; V. Bhaskar; Jeroen van de Ven
    Abstract: This paper analyzes behavior on a TV game show where players' monetary payoffs depend upon an array of factors, including ability in answering questions, perceived cooperativeness and the willingness of other players to choose them. We find a substantial beauty premium and are able to disentangle contributing factors. Attractive players perform no differently than less attractive ones, on every dimension. They also exhibit and engender the same degree of cooperativeness. Nevertheless, attractive players are substantially less likely to be eliminated by their peers. Our results suggest a consumption value basis for the beauty premium.
    Date: 2007–01–11
  12. By: Elena Argentese; Helmut Luetkepohl; Massimo Motta
    Abstract: This paper deals with the determinants of agents’ acquisition of information. Our econometric evidence shows that the general index of Italian share-prices and the series of Italy’s financial newspaper sales are cointegrated, and the former series Granger-causes the latter, thereby giving support to the cognitive dissonance hypothesis: (non-professional) agents tend to buy the newspaper when share prices are high and not to buy it when share prices are low. Instead, we do not find support for the hypothesis that the agents acquire information in order to trade in the stock-market: we find no relationship between quantities exchanged in the market and newspaper sales, nor between stock market volatility and newspaper sales.
    Date: 2006
  13. By: Pedro Rey-Biel
    Abstract: We report experimental results on one-shot two person 3x3 constant sum games played by non-economists without previous experience in the laboratory. Although strategically our games are very similar to previous experiments in which game theory predictions fail dramatically, 80% of actions taken in our ex- periment coincided with the prediction of the unique Nash equilibrium in pure strategies and 73% of actions were best responses to elicited beliefs. We argue how social preferences, presentation effects and belief elicitation procedures may influence how subjects play in simple but non trivial games and explain the diferences we observe with respect to previous work.
    Keywords: Experiments, Constant Sum Games, Stated Beliefs
    JEL: C72 C91 D81
    Date: 2007–01–15
  14. By: Juan D. Carrillo; Thomas R. Palfrey
    Date: 2007–01–12
  15. By: Tommaso Ciarli; Marco Valente
    Abstract: We aim at contributing to the debate on the mechanisms and properties of economic fluctuations. We consider a crucial aspect among many thought to influence this ubiquitous and extremely relevant phenomenon: the interaction structure that characterises the organisation of production, that is, the production relation among sectors of a system. We build — and simulate — a very simple model representing an input–output system where sectors/firms adapt production and desired levels of stocks. Their output serves both an exogenous final demand and the intermediate demand solicited by the other sectors of the system. Series of simulation runs allow to derive relevant and non–obvious conclusions concerning the levels and, more importantly, the volatility of economic activity, as an outcome of the same, inherent, economic structure. We claim that the results that we obtain through the highly abstract representation we use, provide useful intuitions on the working of economic cycles, to be later integrated by further studies. As a by–product of our analysis, we also suggest that the methodology we adopt can provide valuable insights by allowing a detailed analysis of the time path generated in the artificial systems, and therefore assessing with precisions the same mechanisms that affect real– world systems. The natural following step, left for further research, is to investigate how those mechanisms are empirically generated.
    Keywords: Production structure, micro- and macro-volatility, simulation models
    Date: 2007–01–22
  16. By: Celen, Bogachan (Columbia GSB); Hyndman, Kyle (SMU)
    Abstract: This paper provides an experimental test of a theory of endogenous network forma- tion. A group of subjects face a decision problem under uncertainty. The subjects are endowed with a private information about the fundamentals of the problem, and they are supposed to make a decision one after the other. The key feature of the experiment is that a subject can observe the decisions of the preceding subjects by forming links. A link is costly, yet it enables a subject to observe previous decisions of those to whom he is linked. We show that subjects respond to changes in the information structure and the cost of link formation in the expected manner. However, we also show that behavior systematically deviates from the Bayesian benchmark as subjects form more links than theory predicts. Subjects also exhibit a tendency to conform rather than follow their own information. In order to explain this pattern, we provide an econo- metric model that posits that subjects care about their relative standing in the group. We show that the modified model provides a better fit than a standard QRE.
    Keywords: Social learning, social interaction, networks, network formation.
    JEL: A14 C73 C91 C92 D8
    Date: 2007–01

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