nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2007‒02‒24
nine papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. Classic coordination failures revisited: the effects of deviation costs and loss avoidance By Giovanna Devetag; Andreas Ortmann
  2. Network Formation and Strategic Firm Behaviour to Explore and Exploit. By Muge Ozman
  3. Anonymity, Reciprocity, and Conformity: Evidence from Voluntary Contributions to a National Park in Costa Rica By Alpizar, Francisco; Carlsson, Fredrik; Johansson-Stenman, Olof
  4. Learning about one’s relative position and subjective well-being By Daniel Miles; Máximo Rossi
  5. Disposition effect and gender By Newton, Da Costa Jr; Carlos, Mineto; Sergio, Da Silva
  6. Sharpening Intertemporal Prospect Theory By Pushpa, Rathie; Carlos, Radavelli; Sergio, Da Silva
  7. Consumers Sentiment and Cognitive Macroeconometrics Paradoxes and Explanations By Maurizio Bovi
  8. Heterogeneity and learning in inflation expectation formation: an empirical assessment By Emiliano Santoro; Damjan Pfajfar
  9. Good Law & Economics needs suitable microeconomic models: the case against the application of standard agency models to the professions By Lorenzo Sacconi

  1. By: Giovanna Devetag; Andreas Ortmann
    Abstract: Are communication failures common? We revisit a classic example of experimental coordination failure and explore, in a 2x2 design, the effects of deviation costs and loss avoidance. Our results suggest how to engineer coordination successes in the laboratory, and possibly in the wild.
    Keywords: coordination games, Pareto-ranked equilibria, payoff-asymmetric equilibria, optimization incentives, robustness, coordination failure
    JEL: C72 C92
    Date: 2007
  2. By: Muge Ozman
    Abstract: The aim of this paper is to investigate the effect of technological opportunities and knowledge tacitness on inter-firm network formation, under two different industry regimes. In the first regime environment is stable and the aim of firms is to exploit knowledge. In this case, they attribute more value to repeated interactions with geographically close firms. In the second regime, there is environmental turbulence, which increases the value of access to novel information from distant partners for exploration. The question addressed is, under these regimes how do technological opportunities and knowledge tacitness influence structure of networks? The main contribution of the paper different from previous work is that it explicitly models the effect of history between two firms on networks that form. A simulation model is carried out where firms select partners and learn from them, which further shapes their selection process. The results reveal that in both regimes richer technological opportunities and higher tacitness generates local and global star firms depending on the parameter range.
    Date: 2007
  3. By: Alpizar, Francisco (Environment for Development Center, Tropical Agricultural and Higher Education Center (CATIE)); Carlsson, Fredrik (Department of Economics, School of Business, Economics and Law, Göteborg University); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: We investigate the role of anonymity, reciprocity, and conformity for voluntary contributions, based on a natural field experiment conducted at a national park in Costa Rica. Contributions made in public in front of the solicitor are 25% higher than contributions made in private. Giving subjects a small gift before requesting a contribution increases the likelihood of a positive contribution. At the same time, the conditional contribution decreases. The total effect of giving a gift is positive but small, and taking the cost of the gift into account, it is far from profitable. When the subjects are told that the typical contribution of others is $2 (a small contribution), the probability of a contribution increases and the conditional contribution decreases, compared with providing no reference information. Providing a high reference level ($10) increases the conditional contributions. Overall, the total effects have the expected signs, although the magnitudes are smaller than what one might have expected based on existing evidence from laboratory experiments. <p>
    Keywords: Voluntary contributions; anonymity; reciprocity; conformity; natural field experiment
    JEL: C93 Q50
    Date: 2007–02–21
  4. By: Daniel Miles (Facultad de Economía, Universidad de Vigo); Máximo Rossi (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: In this paper we show evidence which suggests that changes in an individual’s relative position affects his subjective well-being. In this sense, our findings are in line with those who argue that a felicity function should take into account both, absolute and relative position. Our result are based on a simple experimental design to discuss whether learning about one’s relative position affects subjective well-being. Additionally, using nonexperimental data we find a significant association between subjective well-being and relative wage.
    Keywords: relative income, subjective well-being
    JEL: C91 I31
    Date: 2006–09
  5. By: Newton, Da Costa Jr; Carlos, Mineto; Sergio, Da Silva
    Abstract: Investors seem to hold on to their losing stocks to a greater extent than they hold on to their winning stocks. This well-document behavioral regularity is termed disposition effect (Shefrin and Statman 1985). We set an experiment to replicate results from a previous study of the disposition effect (Weber and Camerer 1998), and further show that a subject’s gender may interfere with the effect’s detection.
    JEL: G11
    Date: 2006
  6. By: Pushpa, Rathie; Carlos, Radavelli; Sergio, Da Silva
    Abstract: Prospect theory [4] of risky choices has been extended to encompass intertemporal choices [6]. Presentation of intertemporal prospect theory suffers from minor mistakes, however [2]. To clarify the theory we restate it and show further mistakes in current presentations ([6], [2]) of value and discount functions.
    JEL: D91
    Date: 2006
  7. By: Maurizio Bovi (ISAE - Institute for Studies and Economic Analyses)
    Abstract: Using data from the Business Surveys Unit of the European Commission as a long-running-continental-scale experiment, this paper examines how, and how accurately, people assess economic systems. Data show both commonsense (e.g. people know the past better than the future) and puzzling results (e.g. there is a systematic bias in forecasts). The former support the reliability of the surveys, the latter are in sharp contrast with the standard maintained hypothesis of a world populated by calculating and unemotional maximizers. The dualism of behavior may be fruitfully explored via cognitive psychology, according to which both logic and emotions systematically drive people’s choices.
    Keywords: Beliefs, survey research, consumer sentiment, cognitive economics.
    JEL: C42 C82 D12 D84
    Date: 2006–04
  8. By: Emiliano Santoro; Damjan Pfajfar
    Abstract: Relying on Michigan Survey's monthly micro data on inflation expectations we try to determine the main features - in terms of sources and degree of heterogeneity - of inflation expectation formation over different phases of the business cycle. Different learning rules have been applied to the data, in order to test whether agents are learning and whether their expectations are converging towards perfect foresight. Results suggest that behaviour of agents in the right hand side of the distribution is more associated with learning dynamics. Tests for "static" and "dynamic" versions of sticky information are also conducted. Only agents in the middle of the distribution are regularly updating their information sets. Evidence of rational inattention has been found for agents comprised in the upper end of the distribution. We identify three regions of the overall distribution corresponding to different expectation formation processes, which display a heterogeneous response to main macroeconomic indicators : a static or highly autoregressive (LHS) group, a "nearly" rational group (middle), and a group of agents (RHS) behaving in accordance to adaptive learning and sticky information. The latter, generally speaking, are too "pessimistic" as they overreact to macroeconomic fluctuations.
    Keywords: Heterogeneous Expectations, Adaptive Learning, Sticky Information, Survey Expectations
    JEL: E31 C53 D80
    Date: 2006
  9. By: Lorenzo Sacconi
    Abstract: Notwithstanding its widespread acceptance in the law & economics literature, agency theory could not be in general the most suitable microeconomic modeling for designing efficient and fair economic transactions institutions. The case against the standard principal-agent modeling is made about liberalizations of professional services that introduced schemes of professionals’ remuneration contingent on outcomes – i.e. “contingent fees” for lawyers. If the relationship between the professional and clients is seen according to the principal-agent model, contingency fees can be economically justified as an efficient incentive for the professional’s effort. The case is quite different, however, if the situation is seen as one of bounded rationality and unforeseen and asymmetrically gathered events. Remunerations contingent on outcomes in these contexts can generate pathological incentives. This paper argues that the professional relationship is an authority relationship based of contractual incompleteness, which requires the reliance on trustworthiness of the authority position’s holder. Hence I propose a model for understanding the professional relationship which extends the “formal vs. real authority” model proposed a few years ago by Aghion and Tirole (1997). This leads to underline the essential role played by behavioral hypothesis on professionals’ “endogenous” adherence to ethical standards that prevent conflict of interests and induce the professional’s identification with her clients’ interests, based on reciprocity and conformist preferences. A game theoretical thought experiment aimed at checking the case for or against using agency models in modeling the professional relationship is then carried out. It shows that (i) in the case of a self-interested lawyer, notwithstanding that utilitarian efficiency is safeguarded, contingent fees leads to not respecting the fiduciary obligations with at least one client (to detriment of Pareto optimality and impartial and loyal treatment of all clients) for only the ex post mostly remunerative cases are litigated. (ii) In the case of the lawyer’s willingness to comply with deontology standards - requiring impartial protection of all the clients’ rights, under a condition of minimal individual rationality - contingent fees lead nevertheless to neutralization of the deontological motivation and to a loss of efficiency in utilitarian sense. A Pareto optimal, impartial, as well as efficient, arrangement aimed at maximizing the total volume of damage compensation is then considered. Nevertheless the main result is that under a contingent fee contract, even if these motivations were available, the professional could not carry out them because the logic of the contract doesn’t allow pooling different cases’ damage compensations in order of carrying out redress across the lucky and unlucky clients.
    Keywords: lawyers’ contingent fees, principal-agent, incomplete contracts, authority, professional ethics, fiduciary duties, reciprocity, conformist preferences.
    Date: 2006

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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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.