nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2007‒02‒10
fourteen papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. Intentions, Trust and Frames: A note on Sociality and the Theory of Games By Vittorio Pelligra
  2. Social Memory and Evidence from the Past By Luca Anderlini; Dino Gerardi; Roger Lagunoff
  3. Social identity and trust - An experimental investigation By Werner Güth; M. Vittoria Levati; Matteo Ploner
  4. Social Identity and Social Exchange: Identification, Support, and Withdrawal from the Job By Knippenberg, D.L. van; Dick, R. van; Tavares, S.
  5. Should Political Scientists Use the Self-Confirming Equilibrium Concept? Explaining the Choices of Cognitively Limited Actors By Lupia, Arthur; Zharinova, Natasha; Levine, Adam Seth
  6. Social Preferences and Public Economics: Are good laws a substitute for good citizens? By Samuel Bowles
  7. A micro-meso-macro perspective on the methodology of evolutionary economics: integrating history, simulation and econometrics By Prof John Foster
  8. Affective Match: Leader Emotional Displays, Follower Positive Affect, and Follower Performance By Damen, F.J.A.; Knippenberg, B. van; Knippenberg, D.L. van
  9. Interacting Dimensions of Diversity: Cross-Categorization and the Functioning of Diverse Work Groups By Homan, A.C.; Knippenberg, D.L. van; Kleef, G.A. van; Dreu, C.K.W. de
  10. Consistency, Heterogeneity, and Granularity of Individual Behavior under Uncertainty By Syngjoo Choi; Raymond Fisman; Douglas Gale; Shachar Kariv
  11. Overconfidence in financial markets and consumption over the life cycle By Frank Caliendo; Kevin X. D. Huang
  12. Managing a 401(k) Account: An Experiment on Asset Allocation By James Sundali; Federico Guerrero
  13. Hunting the Heffalump: Can Trait and Cognitive Characteristics Predict Entrepreneurial Orientation? By E. COOLS; H. VAN DEN BROECK
  14. Guessing Games and People Behaviours: What Can we Learn? By Andrea Morone; Piergiuseppe Morone

  1. By: Vittorio Pelligra
    Abstract: Psychological Game Theory (PGT) extends classical game theory allowing for the formal analysis of belief-dependent sentiments and emotions such as resentment, pride, shame, gratefulness, and the like. PGT incorporates these factors by relating agents' subjective expected utility to players' strategies, to their beliefs about others' strategies, but also to their beliefs about others' beliefs about their strategies, and so on. This paper argues that, thanks to the epistemic consequences of this hierarchy of beliefs, PGT is well-endowed to address, and to some extent solve three of the most challenging problems recently emerged in classical game theory, namely, the problem of intentions, that of trust and that of decision frames.
    Keywords: Psychological games, intentions, trust, decision frames.
    JEL: C72 C79 C9
    Date: 2007
  2. By: Luca Anderlini (Georgetown University); Dino Gerardi (Cowles Foundation, Yale University); Roger Lagunoff (Georgetown University)
    Abstract: Examples of repeated destructive behavior abound throughout the history of human societies. This paper examines the role of social memory -- a society's vicarious beliefs about the past -- in creating and perpetuating destructive conflicts. We examine whether such behavior is consistent with the theory of rational strategic behavior. We analyze an infinite-horizon model in which two countries face off each period in an extended Prisoner's Dilemma game in which an additional possibility of mutually destructive "all out war" yields catastrophic consequence for both sides. Each country is inhabited by a dynastic sequence of individuals who care about future individuals in the same country, and can communicate with the next generation of their countrymen using private messages. The two countries' actions in each period also produce physical evidence; a sequence of informative but imperfect public signals that can be observed by all current and future individuals. We find that, provided the future is sufficiently important for all individuals, regardless of the precision of physical evidence from the past there is an equilibrium of the model in which the two countries' social memory is systematically wrong, and in which the two countries engage in all out war with arbitrarily high frequency. Surprisingly, we find that degrading the quality of information that individuals have about current decisions may "improve" social memory so that it can no longer be systematically wrong. This in turn ensures that arbitrarily frequent all out wars cannot take place.
    Keywords: Social memory, Private communication, Dynastic games, Physical evidence
    JEL: C72 C79 D80 D83 D89
    Date: 2007–01
  3. By: Werner Güth; M. Vittoria Levati; Matteo Ploner
    Abstract: We experimentally examine how group identity affects trust behavior in an investment game. In one treatment, group identity is induced purely by minimal groups. In other treatments, group members are additionally related by outcome interdependence established in a prior public goods game. Moving from the standard investment game (where no group identity is prompted) to minimal group identity to two-dimensional group identity, we find no significant differences in trust decisions. However, trust is significantly and positively correlated with contribution decisions, suggesting that "social" trust is behaviorally important.
    Keywords: Experiment; Investment game; Trust; Group identity
    JEL: C72 C92
    Date: 2007–01
  4. By: Knippenberg, D.L. van; Dick, R. van; Tavares, S. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Integrating insights from the social exchange perspective and the social identity perspective on the psychological relationship between the individual and the organization, we propose that evaluations of the support received from the organization and its representatives, and organizational identification interact in predicting withdrawal from the job. Specifically, the relationship of support with withdrawal is proposed to be weaker the stronger employees identify with the organization. This prediction was confirmed in two samples focusing on different operationalizations of support and withdrawal. Sample 1 concerned the interaction of organizational support and organizational identification in predicting turnover intentions, Sample 2 concerned the prediction of absenteeism from supervisor support and organizational identification. We conclude that the present study yields promising first evidence that may lay the basis for further integration of social exchange and social identity analyses of organizational behavior.
    Keywords: Organizational identification;Organizational support;Social identity;Organizational behavior;
    Date: 2005–06–15
  5. By: Lupia, Arthur; Zharinova, Natasha; Levine, Adam Seth
    Abstract: Many claims about political behavior are based on implicit assumptions about human reasoning. One such assumption, that political actors think in complex and similar ways when assessing strategies, is nested within widely used game theoretic equilibrium concepts. Empirical research casts doubt on the validity of these assumptions in important cases. For example, the finding that some citizens expend limited cognitive energy to social concerns runs counter to the assumption that citizens (e.g., jurors) base all decisions on complex thoughts. Similarly, evidence that some political actors (e.g., Democrats and Republicans) think about political cause-and-effect quite differently runs against the assumption that all players reason about politics in similar ways. The self-confirming equilibrium (SCE) concept provides a means for evaluating the robustness of theoretical conclusions to the introduction of a broad range of psychological assumptions. Through arguments and examples, we explain opportunities and challenges inherent in using the SCE concept. We find that the concept provides an improved foundation for more serious and constructive interactions between formal theoretic and psychology-oriented literatures.
    Keywords: political science; equilibrium concepts; cognition; jury decision making; self-confirming equilibrium; Nash equilibrium; need for cognition; conjecture; belief
    JEL: C72 H00 D83
    Date: 2007–01–28
  6. By: Samuel Bowles (Santa Fe Institute, University of Siena and University of Massachusetts)
    Abstract: Laws and policies designed to harness self-regarding preferences to public ends may fail when they compromise the beneficial effects of pro-social preferences. Experimental evidence indicates that incentives that appeal to self interest may reduce the salience of intrinsic motivation, reciprocity, and other civic motives. Motivational crowding in also occurs. The evidence for these processes is reviewed and a model of optimal explicit incentives is presented. JEL Categories: D64, D52, H41, H21, Z13, C92
    Keywords: Social preferences, implementation theory, incentive contracts, incomplete contracts, framing, behavioral experiments, motivational crowding out, ethical norms, constitutions
    Date: 2007–01
  7. By: Prof John Foster (School of Economics, The University of Queensland)
    Abstract: Applied economics has long been dominated by multiple regression techniques. In this regard, econometrics has tended to have a narrower focus than, for example, psychometrics in psychology. Over the last two decades, the simulation and calibration approach to modeling has become more popular as an alternative to traditional econometric strategies. However, in contrast to the well-developed methodologies that now exist in econometrics, simulation/calibration remains exploratory and provisional, both as an explanatory and as a predictive modelling technique although clear progress has recently been made in this regard (see Brenner and Werker (2006)). In this paper, we suggest an approach that can usefully integrate both of these modelling strategies into a coherent evolutionary economic methodology.
    Date: 2007
  8. By: Damen, F.J.A.; Knippenberg, B. van; Knippenberg, D.L. van (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Leader emotions may play an important role in leadership effectiveness. Extending this earlier research on leader emotional displays and leadership effectiveness, we propose that the ?affective match? between follower positive affect (PA) and leaders? emotional displays moderates the effectiveness of leader emotional displays. Leader display of emotions has more positive effects on follower behavior if the match between the valence of leader emotion and follower PA is strong rather than weak. Support for this hypothesis was found in two experiments. The congruency between leader emotional displays and follower PA determined follower task performance and extra-role compliance. Results from the second experiment indicated that this effect is due to the affective aspects of leader behavior and not to the valence of the content of the message.
    Keywords: Leadership Effectiveness;Emotions;Positive Affect;
    Date: 2006–07–18
  9. By: Homan, A.C.; Knippenberg, D.L. van; Kleef, G.A. van; Dreu, C.K.W. de (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: We conducted an experiment to show how the interplay between informational diversity and other dimensions of diversity can account for some of the inconsistent effects of informational diversity in previous research. 70 four-person groups involved in a decision-making task received homogeneous or heterogeneous information. By manipulating gender composition and bogus personality feedback we created groups that either had a potential faultline (a basis for subgroup categorization) or were homogeneous on these dimensions. In potential faultline groups, heterogeneity of information either converged with or cross-cut the other dimensions of diversity. Results showed that informational diversity enhanced group functioning when it was crossed rather than converged with the potential faultline.
    Keywords: Diversity;Group Processes;Information Elaboration;Cross-Categorization;
    Date: 2006–01–01
  10. By: Syngjoo Choi; Raymond Fisman; Douglas Gale; Shachar Kariv
    Date: 2007–01–26
  11. By: Frank Caliendo; Kevin X. D. Huang
    Abstract: Overconfidence is a widely documented phenomenon. Empirical evidence reveal two types of overconfidence in financial markets: investors both overestimate the average rate of return to their assets and underestimate uncertainty associated with the return. This paper explores implications of overconfidence in financial markets for consumption over the life cycle. The authors obtain a closed-form solution to the time-inconsistent problem facing an overconfident investor/consumer who has a CRRA utility function. They use this solution to show that overestimation of the mean return gives rise to a hump in consumption during the work life if and only if the elasticity of intertemporal substitution in consumption is less than unit. They find that underestimation of uncertainty has little effect on the long-run average behavior of consumption over the work life. Their calibrated model produces a hump-shaped work-life consumption profile with both the age and the amplitude of peak consumption consistent with empirical observations.
    Date: 2007
  12. By: James Sundali (Managerial Sciences Department, University of Nevada, Reno); Federico Guerrero (Department of Economics, University of Nevada, Reno)
    Abstract: The study reports the results of an asset allocation experiment in which subjects managed an endowment of money over a 20 "year" time period. While grounded in theory, the study takes an applied look at the ability of subjects to efficiently and effectively make asset allocation decisions similar to those found in 401(k) accounts. The main conclusions are as follows. First, efficient portfolios are more easily created when the set of assets to choose from is carefully constructed. Thus, financial engineers should be given the responsibility for choosing the assets available to plan participants and ensuring that combinations of these assets will fall on the efficient frontier. If followed, this advice would likely significantly reduce the amount of individual company stock offered in Defined Contribution (DC) plans in place of well-constructed low cost index funds from multiple asset classes. Second, if the assets selected for inclusion in DC plans allow the investor to easily create portfolios on the efficient frontier, then the challenge for the investor is not how to get onto the frontier but where to locate on it. The simplistic surveys that are commonly used by DC plan providers to determine risk tolerance and to recommend asset allocations are woefully inadequate for this task. More sophisticated and theoretically driven instruments must be created to educate investors on the risks and the benefits available at different points along the efficient frontier.
    Keywords: 401(k) accounts, asset allocation
    JEL: G11 G23
    Date: 2006–12
    Abstract: The aim of this study was to get more insight into what typifies Flemish entrepreneurs. We compared entrepreneurs with non-entrepreneurs for five traits (tolerance for ambiguity, selfefficacy, proactive personality, locus of control, need for achievement) and for cognitive styles. Additionally, we used these trait and cognitive characteristics to predict variances in entrepreneurial orientation (EO). Whereas the link between EO and organizational performance has been studied intensively, the examination of possible antecedents of EO remains a white space. We found that entrepreneurs (N = 177) score significantly higher on all traits than nonentrepreneurs (N = 60). For the cognitive styles (measured with the Cognitive Style Indicator), we found that non-entrepreneurs score higher on the knowing and planning style. No differences were found for the creating style. With regard to the link between the entrepreneur’s profile and EO, we found a significant contribution of tolerance for ambiguity and proactive personality to EO.
    Keywords: traits; cognitive styles; entrepreneurial orientation; entrepreneurs versus nonentrepreneurs
    Date: 2006–12
  14. By: Andrea Morone (University of Bari.); Piergiuseppe Morone (University of Foggia.)
    Abstract: In this paper we address the topic of guessing games. By developing a generalised theory of naïveté, we show how Güth et al..s result (i.e. convergence toward interior equilibria is faster than convergence toward boundary equilibria) is compatible with Nagel.s theory of boundedly rational behaviour. However, we also show how, under new model parameterisation, neither Güth et al..s story of convergence towards interior equilibria, nor Nagel.s theory of boundedly rational behaviour are verified. We conclude that the results of Nagel (1995) and Güth et al. (2002), however interesting, are severely affected by the ad hoc parameterisation chosen for the game.
    Keywords: Guessing game, p-beauty contest, individual behaviour.
    JEL: C72 C91
    Date: 2007–02

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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