nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2007‒02‒17
eighteen papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. Cooperation, Competition, and Risk Attitudes: An Intergenerational Field and Laboratory Experiment By Gary Charness; Marie-Claire Villeval
  2. Asymmetric Enforcement of Cooperation in a Social Dilemma By Nikos Nikiforakis; Hans-Theo Normann; Brian Wallace
  3. Minimal group identity and gender in ultimatum games By Camille Chaserant
  4. Identity, Cooperation, and Punishment By Kendra N. McLeish; Robert J. Oxoby
  5. Identity, Dignity and Taboos: Beliefs as Assets By Roland Bénabou; Jean Tirole
  6. Personal Autonomy in Trust-Based Interactions. An Experimental Analysis By Matteo Ploner
  7. Conformism and Social Connections: An Empirical Analysis of Self-Commitment to Food Purchase By Matteo Ploner
  8. Perspectives from the Happiness Literature and the Role of New Instruments for Policy Analysis By Bernard M.S. van Praag
  9. Simulation experiments in practice : statistical design and regression analysis By Kleijnen,Jack P.C.
  10. Italian Asset Managers’ Behavior: Evidence on Overconfidence, Risk Taking and Gender By Beckmann, Daniela; Lütje, Torben; Rebeggiani, Luca
  11. Gurus, Opinion Polls and Social Learning By Nicolas Melissas
  12. Leadership Behaviour and Upward Feedback: Findings from a Longitudinal Intervention By Dierendonck, D. van; Haynes, C.; Borrill, C.; Stride, C.
  13. Beyond economic criteria: A humanistic approach to organizational survival By Rosanas, Josep M.
  14. Skill Uncertainty and Social Inference By Robert J. Oxoby
  15. Organization, evolution, cognition and dynamic capabilities By Nooteboom,Bart
  16. Cognitive distance in and between COP's and firms: where do exploitation and exploration take place, and how are they connected? By Nooteboom,Bart
  17. Methodological interactionism: theory and application to the firm and to the building of trust By Nooteboom,Bart
  18. Cognitive Ability and Scale Bias in the Contingent Valuation Method By Andersson, Henrik; Svensson, Mikael

  1. By: Gary Charness (University of California, Santa Barbara); Marie-Claire Villeval (CNRS-GATE and IZA)
    Abstract: The population of most developed societies is ‘graying’. As life expectancy increases and the large baby-boom generation approaches retirement age, this has critical consequences for maintaining a high standard of living and the sustainability of pension systems. In the light of these labor-force and social concerns, we consider experimentally the comparative behavior of juniors (under 30) and seniors (over 50) in both experiments conducted onsite with the employees of two large firms and in a conventional laboratory environment with students and retirees. Our results are compelling. First, seniors are not more risk-averse, as opposed to the conventional stereotype. Second, both juniors and seniors react to the competitiveness of the environment and there is no significant difference in performance in the real-effort task across the generations when they are competing. Third, seniors are typically more cooperative than juniors in a team-production game. Cooperation is highest in groups in which there is a mix of juniors and seniors, suggesting that there are indeed benefits in maintaining a work force with diversity in age. Overall, the implication is that it is beneficial to define additional short-term incentives near the end of the workers’ career to motivate and to retain older workers. A secondary, but important, issue is the external validity of conventional laboratory experiments. In general we do not find strong differences in behavior between workers and non-workers, indicating that laboratory experiments may not be such a bad approximation for the field environment.
    Keywords: age, performance, labor market, discrimination, diversity, stereotypes, experiments
    JEL: A13 B49 C91 C93 J14 J18 J38 J70
    Date: 2007–01
  2. By: Nikos Nikiforakis; Hans-Theo Normann; Brian Wallace
    Abstract: The imposition of sanctions is one of the most common means of enforcing cooperation in decentralized interactions. Typically, agents are asymmetric in the sense that each has a different sanctioning power. Using a public-good experiment we analyze such a decentralized punishment institution in which agents are asymmetric. The asymmetric punishment institution prevents the decay of cooperation towards the non-cooperative equilibrium level. Strong agents contribute less to the public good, but punish more than weak agents. At the aggregate level, we observe remarkable similarities between outcomes in asymmetric and symmetric punishment institutions.
    Keywords: asymmetry, decentralized punishment, public good, punishment effectiveness
    JEL: C92 D70 H41
    Date: 2007
  3. By: Camille Chaserant
    Abstract: Social identity, or group membership, affects economic outcomes. However, this influence may differ according to the nature of the groups involved. Investigating the weakest group cohesion necessary to influence individual behaviors, we undertook three linked ultimatum game experiments involving a minimal categorization process. Three main results are presented here: (i) Belonging to a minimal group affects behaviors; (ii) Men and women differ systematically in the nature of this influence and (iii) The ‘label’ given to a minimal group is in itself not neutral.
    Keywords: Minimal group, ultimatum game, social identity, gender
    JEL: C91 A12 C99
    Date: 2006
  4. By: Kendra N. McLeish (University of Calgary); Robert J. Oxoby (University of Calgary and IZA)
    Abstract: Among economists, there is increased recognition of the role individuals’ identities play in decision-making. In this paper, we conduct laboratory experiments in which we explore the motivations for and the effects of group identity. We find that negative out-group opinion (acting as an inter-group identity threat) can motivate in-group/out-group effects in a simple bargaining context. Further, our results suggest that disparagement of group norms by members of the in-group (acting as an intra-group identity threat) increases the use of costly punishment within the in-group.
    Keywords: identity, fairness, reciprocity, experiments
    JEL: C9 D1 M5
    Date: 2007–01
  5. By: Roland Bénabou (Princeton University, NBER, CEPR and IZA); Jean Tirole (Université de Toulouse and MIT)
    Abstract: We analyze social and economic phenomena involving beliefs which people value and invest in, for affective or functional reasons. Individuals are at times uncertain about their own "deep values" and infer them from their past choices, which then come to define "who they are". Identity investments increase when information is scarce or when a greater endowment of some asset (wealth, career, family, culture) raises the stakes on viewing it as valuable (escalating commitments). Taboos against transactions or the mere contemplation of tradeoffs arise to protect fragile beliefs about the "priceless" value of certain assets (life, freedom, love, faith) or things one "would never do". Whether such behaviors are welfareenhancing or reducing depends on whether beliefs are sought for a functional value (sense of direction, self-discipline) or for "mental consumption" motives (self-esteem, anticipatory feelings). Escalating commitments can thus lead to a "hedonic treadmill", and competing identities cause dysfunctional failures to invest in high-return activities (education, adapting to globalization, assimilation), or even the destruction of productive assets. In social interactions, norm violations elicit a forceful response (exclusion, harassment) when they threaten a strongly held identity, but further erode morale when it was initially weak. Concerns for pride, dignity or wishful thinking lead to the inefficient breakdown of Coasian bargaining even under symmetric information, as partners seek to self-enhance and shift blame by turning down "insultingly low" offers.
    Keywords: identity, self-serving beliefs, self-image, memory, wishful thinking, anticipatory utility, self control, hedonic treadmill, bargaining, taboos, religion
    JEL: D81 D91 Z13
    Date: 2007–01
  6. By: Matteo Ploner
    Abstract: The paper experimentally investigates the interactions between restrictions to personal autonomy and reciprocity in a Principal-Agent relationship. Previous experimental contributions have shown that actions aimed at restricting decisional autonomy are likely to reduce reciprocity in trust- based relationships. Results in our experiment, which is a modified version of the Investment Game, differ from previous findings and conform more to standard economic predictions. Principals in our interaction do not support the self-determination of agents. On the other side, agents do not show any positive reciprocity when allowed to freely determine their behavior in the game. (This is an updated version of the CEEL Working Paper 2-05)
    Keywords: Principal-Agent relationship, Trust, Reciprocity, Self-Determination, Incentives
    JEL: C72 C91 D23 M50
    Date: 2007
  7. By: Matteo Ploner
    Abstract: Recent years registered a renewed interest in social interactions. However, due to some well-known identification problems, empirical estimation of peer effects remains quite problematic. To overcome problems of this kind, a database providing detailed information on the sequential structure of choices is analyzed. Observations refer to the deposit of money in a personal account devoted to the purchase of food at campus refectories. A clear tendency to conform to directly observed deposits is registered in the data. Furthermore, higher conformism is observed among mutually acquainted individuals.
    Keywords: Social interactions; Identification; Conformism; Social Proximity; Food Purchase
    Date: 2007
  8. By: Bernard M.S. van Praag (SCHOLAR, University of Amsterdam, DIW Berlin, CESifo and IZA)
    Abstract: After having been ignored for a long time by economists, happiness is becoming an object of serious research in 21st century economics. In Section 2 we sketch the present status of happiness economics. In Section 3 we consider the practical applicability of happiness economics, retaining the assumption of ordinal individual utilities. In Section 4 we introduce a cardinal utility concept, which seems to us the natural consequence of the happiness economics methodology. In Section 5 we sketch how this approach can lead to a normative approach to policy problems that is admissible from a positivist point of view. Section 6 concludes.
    Keywords: happiness economics, subjective well-being, equivalence scales, economic policy
    JEL: B21 B41 D63 I31 I38
    Date: 2007–01
  9. By: Kleijnen,Jack P.C. (Tilburg University, Center for Economic Research)
    Abstract: In practice, simulation analysts often change only one factor at a time, and use graphical analysis of the resulting Input/Output (I/O) data. Statistical theory proves that more information is obtained when applying Design Of Experiments (DOE) and linear regression analysis. Unfortunately, classic theory assumes a single simulation response that is normally and independently distributed with a constant variance; moreover, the regression (meta)model of the simulation model's I/O behaviour is assumed to have residuals with zero means. This article addresses the following questions: (i) How realistic are these assumptions, in practice? (ii) How can these assumptions be tested? (iii) If assumptions are violated, can the simulation's I/O data be transformed such that the assumptions do hold? (iv) If not, which alternative statistical methods can then be applied?
    Keywords: metamodels;experimental designs;generalized least squares;multivariate analysis;normality;jackknife;bootstrap;heteroscedasticity;common random numbers; validation
    JEL: C0 C1 C9
    Date: 2007
  10. By: Beckmann, Daniela; Lütje, Torben; Rebeggiani, Luca
    Abstract: This paper offers new insights into the Italian mutual fund industry. Surveying Italian professionals, we do not only reveal typical gender differences but also detect divergence to their German counterparts. While disclosing Italian professionals’ overly positive self-assessment in general, we find evidence for male overconfidence in particular though without being accompanied by excessive control illusion of the own information level. Asset managers’ risk taking reveals further differences: Italian female professionals do not only assess themselves as more risk averse than their male colleagues, they also prefer a more passive portfolio management compared to the level they are allowed to. Moreover, in a tournament scenario near the end of the investment period female asset managers do not try to become the ultimate top performer when they have outperformed their peer group so far. However, in case of underperformance, the risk of deviating from the benchmark makes especially female professionals willing to seize a chance of catching up. Overall, compared to their German counterparts, we find Italian asset managers to be slightly more risk averse. Matching bounded former results on Italian mutual funds, we discuss interdependencies as well as impact of our findings at the individual asset managers’ level on trading activity, management style and performance.
    Keywords: Institutional investors, Gender, Overconfidence, Risk taking, Tournament behavior
    JEL: G23 G14 J16
    Date: 2007–02
  11. By: Nicolas Melissas (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))
    Abstract: This paper analyzes cheap talk in an investment model with information externalities. In contrast to Gossner and Melissas (2006), I allow for (i) competition effects, (ii) positive network externalities and (iii) more than one interviewed player. In the presence of competition effects, a player will never truthfully reveal her information about the realized state of the world. In the presence of positive network externalities, however, there exists a parameter range where, under mild additional conditions, the unique equilibrium is the separating one. Finally, using numerical computations, I show that for a sufficiently large number of interviewed players there exists a separating equilibrium in my entire parameter range.
    Keywords: Cheap Talk,Information Externality, Social Learning, Herd Behaviour
    JEL: D62 D83
    Date: 2007–01
  12. By: Dierendonck, D. van; Haynes, C.; Borrill, C.; Stride, C. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: A sample of 48 managers and 308 staff members of a community health care organization took part in a study to investigate the influence of participating in an upward feedback program on leadership behaviour, both as indicated be self-ratings and subordinates? ratings. The research design consisted of three measurement points within one year. The intervention included managers receiving upward feedback and a management skills workshop. The results showed a negative effect of the program on leadership behaviour as rated by the staff. Furthermore, managers reduced their self-ratings in the condition where they participated in both a feedback session and an management skills workshop.
    Keywords: Leadership Behaviour;Upward Feedback;Management;Self-rating;
    Date: 2007–01–25
  13. By: Rosanas, Josep M. (IESE Business School)
    Abstract: There are many, often mutually inconsistent, theories about organizations that explain organizational phenomena to the same, limited extent. Most of them ignore the ethical dimension completely. In this paper we propose the basic principles for a theory of decision-making in organizations that has ethics at its core. This theory is based on the work of Juan Antonio Pérez López (1991, 1993) and is essentially a humanistic view of the interrelationships between people and their implications for organizational decision-making. First, we show how, in any interrelationship between two people, what each person learns is crucial to the future of the relationship. We then consider the different aspects of what each person learns. Second, we apply the preceding analysis to the organizational context, as a guide to organizational decision making, and show how any decision in an organization needs to be analyzed in terms of three criteria: short-run effectiveness, development of distinctive competence, and unity and identification of employees with the organization.
    Keywords: business ethics; ethical foundations of organization; trust; management theory; learning;
    Date: 2006–10–13
  14. By: Robert J. Oxoby (University of Calgary and IZA)
    Abstract: Research in psychology indicates that individuals often make inferences regarding unknown individual qualities based on potentially irrelevant (but socially observable) information. This paper explores occupational choices when individuals receive imprecise signals regarding ability and use the observable characteristics of previously successful individuals to infer own ability. Individuals who fail to observe successful predecessors of their same type may underestimate their potential for success in the occupation. We discuss the role of these biases in light of the literature on affirmative action and firm incentives.
    Keywords: social Inference, occupational choice, discrimination
    JEL: D63 D83 J64 J70
    Date: 2007–01
  15. By: Nooteboom,Bart (Tilburg University, Center for Economic Research)
    Abstract: Using insights from 'embodied cognition' and a resulting 'cognitive theory of the firm', I aim to contribute to the further development of evolutionary theory of organizations, in the specification of organizations as 'interactors' that carry organizational competencies as 'replicators', within industries as 'populations'. Especially, I analyze how, if at all, 'dynamic capabilities' can be fitted into evolutionary theory. I propose that the prime purpose of an organization is to serve as a cognitive 'focusing device'. Here, cognition has a wide meaning, including perception, interpretation, sense making, and value judgements. I analyse how this yields organizations as cohesive wholes, and differences within and between industries. I propose the following sources of variation: replication in communication, novel combinations of existing knowledge, and a path of discovery by which exploitation leads to exploration. These yield a proposal for dynamic capabilities. I discuss in what sense, and to what extent these sources of variation are 'blind', as postulated in evolutionary theory.
    Keywords: evolutionary economics;organization;cognition;dynamic capabilities
    JEL: D21 L22 O31 B52
    Date: 2007
  16. By: Nooteboom,Bart (Tilburg University, Center for Economic Research)
    Abstract: This paper contributes to the analysis of where and how both exploitation and exploration may take place inside and between communities and organizations. It connects with the discussion of differences between communities of practice and epistemic communities. The analysis allows for differences in cognition within communities of practice ('cognitive distance'). Such distance yields potential novelty but creates problems in utilizing that potential. In communities of practice and epistemic communities different trade-offs are made between the advantages and disadvantages of cognitive distance. Communities of practice are more oriented at exploitation, at relatively small cognitive distance. Exploration may take place in epistemic communities, with larger internal cognitive distance, but may also arise from interaction between different communities of practice, utilizing the distance between them. Organizations serve to provide the basis for the governance of such interaction. This, however, does limit the cognitive distance, and hence exploration potential, within an organization. For more radical exploration, interaction is needed between organizations, at the price of greater efforts to set up and govern collaboration. Next to communities of practice, epistemic communities and organizations, the analysis also includes communities of professionals across different organizations. They also have a role to play in a wider system of organizational forms for exploitation and exploration.
    Keywords: innovation;exploration and exploitation;communities of practice
    JEL: D02 D21 L22 O31 O32
    Date: 2007
  17. By: Nooteboom,Bart (Tilburg University, Center for Economic Research)
    Abstract: Recent insights from the 'embodied cognition' perspective in cognitive science, supported by neural research, provide a basis for a 'methodological interactionism' that transcends both the methodological individualism of economics and the methodological collectivism of (some) sociology, and is consistent with insights from social psychology. It connects with a Mengerian exchange perspective and Hayekian view of dispersed knowledge from Austrian economics. It provides a basis for a new, unified social science that integrates elements from economics, sociology, social psychology and cognitive science. This paper discusses the roots of this perspective, in theory of cognition and meaning, and illustrates its application in a summary of a social-cognitive theory of the firm and an analysis of processes by which trust is built up and broken down.
    Keywords: methodology;philosophy of economics;theory of the firm;trust
    JEL: A14 D01 D21 D63 D74 L22 M14 Z13 B25
    Date: 2007
  18. By: Andersson, Henrik (VTI); Svensson, Mikael (Örebro University)
    Abstract: This study investigates whether or not the scale bias found in contingent valuation (CVM) studies on mortality risk reductions is a result of cognitive constraints among respondents. Scale bias refers to insensitivity and non near-proportionality of the respondents' willingness to pay (WTP) to the size of the risk reduction. Two hundred Swedish students participated in an experiment where their cognitive ability was tested before they took part in a CVM-study where they were asked about their WTP to reduce bus-mortality risk. The results imply that WTP answers from respondents with a higher cognitive ability are less flawed by scale bias.
    Keywords: Cognitive Ability; Contingent Valuation; Mortality Risk; Near-proportionality; Scale Bias
    JEL: D80 I10 Q51
    Date: 2007–02–12

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