nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2007‒03‒10
eighteen papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. Sustaining cooperation in trust games By Rigdon, Mary; McCabe, Kevin; Smith, Vernon
  2. Trust and reciprocity in incentive contracting By Rigdon, Mary
  3. Efficiency in the Trust Game: an Experimental Study of Preplay Contracting By Juergen Bracht; Nick Feltovich
  4. Selfish in the End?:An Investigation of Consistency and Stability of individual Behavior By Brosig, Jeannette; Riechmann, Thomas; Weimann, Joachim
  5. Dynamic Models of Segregation in Small-World Networks By Giorgio Fagiolo; Marco Valente; Nicolaas J. Vriend
  6. How do coalitions get built - Evidence from an extensive form coalition game with renegotiation & externalities By Gary E Bolton; Jeannette Brosig
  7. The waning and restoration of social norms: a formal model of the dynamics of norm compliance and norm violation By Paul T. de Beer; Robert H.J. Mosch
  8. ROUTINE AS DEVIATION By Cunha, Joao Vieira da; Cunha, Miguel Pina e; Chia, Robert
  9. Determinants of linear judgment: A meta-analysis of lens model studies By Natalia Karelaia; Robin Hogarth
  10. The Relationship Between Risk Attitudes and Heuristics in Search Tasks: A Laboratory Experiment By Schunk, Daniel; Winter, Joachim
  11. Agency and Anxiety By Michael T. Rauh; Giulio Seccia
  12. Direct Evidence on Risk Attitudes and Migration By David A. Jaeger; Holger Bonin; Thomas Dohmen; Armin Falk; David Huffman; Uwe Sunde
  13. Organisational Structure, Communication and Group Ethics By Matthew Ellman; Paul Pezanis-Christou
  14. What risks do people perceive in everyday life? A perspective gained from the experience sampling method (ESM) By Robin Hogarth; Mariona Portell; Anna Cuxart
  15. How Do Consumers Make Choices? A Summary of Evidence from Marketing and Psychology By Babutsidze, Zakaria
  16. Coordination of Expectations in Asset Pricing Experiments By Cars Hommes; Joep Sonnemans; Jan Tuinstra; Henk van de Velden
  17. The biased balance: observation, formalism and interpretation of a dissymmetric measuring device By Marc Le Menestrel
  18. Individual Well-Being in a Dynamic Perspective By Conchita D’Ambrosio; Joachim R. Frick

  1. By: Rigdon, Mary; McCabe, Kevin; Smith, Vernon
    Abstract: It is well-known in evolutionary game theory that population clustering in Prisoner's Dilemma games allows some cooperative strategies to invade populations of stable defecting strategies. We adapt this idea of population clustering to a two-person trust game. Without knowing it, players are typed based on their recent track record as to whether or not they are trusting (Players 1) and whether or not they are trustworthy (Players 2). They are then paired according to those types: trustors with trustworthy types, and similarly non-trustors with untrustworthy types. In the control comparisons, Players 1 are randomly repaired with Players 2 without regard to type. We ask: are there natural tendencies for people to cooperate more frequently in environments in which they experience more cooperation in comparison with controls?
    Keywords: exchange; trust; reciprocity; cooperation; clustering; bargaining; experimental economics
    JEL: D02 D0
    Date: 2001–08
  2. By: Rigdon, Mary
    Abstract: Principals can attempt to get agents to perform certain actions preferable to the principal by using ex post punishments or rewards to align incentives. Field data is mixed on whether, and to what extent, such informal incentive contracting (paradoxically) crowds out efficient solutions to the agency problem. This paper explores, via a novel set of laboratory experiments, the impact of ex post incentives on informal contracts between principals and agents in bargaining environments in which there are gains from exchange and when there is an opportunity for the principal to relay a no-cost demand of the division of those gains. Incentive contracting in these environments does not crowd-out off-equilibrium cooperation, and at high incentive levels cooperation is crowded in.
    Keywords: incentives; trust; reciprocity; organizations; experimental economics
    JEL: D01 D02 D00
    Date: 2005–05
  3. By: Juergen Bracht; Nick Feltovich
    Abstract: We use a human-subjects experiment to test the effects of a simple mechanism designed to increase cooperation and efficiency in the trust game. In the equilibrium of the standard trust game, the investor does not invest, foreseeing that the allocator would have kept all of the returns from investment. Our mechanism adds a preplay escrow stage, in which the allocator places an amount (possibly zero) into escrow, to be forfeited if he keeps the proceeds of investment for himself. In the experiment, we vary the amounts that can be put into escrow. Our baseline treatment has no escrow. In a second treatment, only low escrow choices are possible, so the equilibrium is unaffected. In our third treatment, there is an escrow amount high enough that, in equilibrium, investment and sharing of the proceeds will occur. Two additional treatments mirror our second and third, except that in these, the escrow amount is randomly chosen and imposed on the allocator. We find that the high escrow amount, when chosen, does lead to the predicted efficient result. Contrary to the equilibrium prediction, we also find substantial investment in both the baseline and “low-escrow” treatments, leading to markedly higher efficiency than predicted (albeit well below that when the high amount is chosen). Over time, however, cooperation and efficiency after low or zero escrow amounts decline. We find only weak evidence for “crowding-out”, which predicts that given a low or zero amount placed into escrow in non-baseline treatments, investment and efficiency would actually be lower than in the baseline. We also find that initially, investment is more likely after allocators place the maximum possible amount into escrow – as if this action by allocators is being (mistakenly) read by investors as a signal that allocators plan to share. All of these results are seen when escrow choices are imposed as well as when they are voluntary.
    Keywords: experiment, trust game, incentives, signal, crowding out
    JEL: C72 D82 A13
    Date: 2006–08
  4. By: Brosig, Jeannette; Riechmann, Thomas; Weimann, Joachim
    Abstract: This paper puts three of the most prominent specifications of ‘other-regarding’ preferences to the experimental test, namely the theories developed by Charness and Rabin, by Fehr and Schmidt, and by Andreoni and Miller. In a series of experiments based on various dictator and prisoner’s dilemma games, we try to uncover which of these concepts, or the classical selfishapproach, is able to explain most of our experimental findings. The experiments are special with regard to two aspects: First, we investigate the consistency of individual behavior within and across different classes of games. Second, we analyze the stability of individual behavior over time by running the same experiments on the same subjects at several points in time. Our results demonstrate that in the first wave of experiments, all theories of other-regarding preferences explain a high share of individual decisions. Other-regarding preferences seem to wash out over time, however. In the final wave, it is the classical theory of selfish behaviorthat delivers the best explanation. Stable behavior over time is observed only for subjects, who behave strictly selfish. Most subjects behave consistently with regard to at least one of the theories within the same class of games, but are much less consistent across games.
    Keywords: individual preferences; consistency; stability; experimental economics
    JEL: C90 C91 C72
    Date: 2007–02
  5. By: Giorgio Fagiolo (Sant’Anna School of Advanced Studies, Pisa); Marco Valente (University of L’Aquila); Nicolaas J. Vriend (Queen Mary, University of London)
    Abstract: Schelling (1969, 1971a,b, 1978) considered a simple proximity model of segregation where individual agents only care about the types of people living in their own local geographical neighborhood, the spatial structure being represented by one- or two-dimensional lattices. In this paper, we argue that segregation might occur not only in the geographical space, but also in social environments. Furthermore, recent empirical studies have documented that social interaction structures are well-described by small-world networks. We generalize Schelling’s model by allowing agents to interact in small-world networks instead of regular lattices. We study two alternative dynamic models where agents can decide to move either arbitrarily far away (global model) or are bound to choose an alternative location in their social neighborhood (local model). Our main result is that the system attains levels of segregation that are in line with those reached in the lattice-based spatial proximity model. Thus, Schelling’s original results seem to be robust to the structural properties of the network.
    Keywords: Spatial proximity model, Social segregation, Schelling, Proximity preferences, Social networks, Small worlds, Scale-free networks, Best-response dynamics
    JEL: C72 C73 D62
    Date: 2007–03
  6. By: Gary E Bolton; Jeannette Brosig
    Abstract: We investigate a three-person coalition game in which one bargainer, the builder, can propose and build a coalition over two stages. In equilibrium, coalition building ends with an efficient grand coalition, while the equilibrium path is contingent on the values of the two-person coalitions and associated externality payoffs. Considering relative payoffs need not change the equilibrium path. Nevertheless, outcomes in the experiment are often inefficient. One explanation is that bargainers have difficulties anticipating the future actions of other bargainers. This problem might be mitigated by allowing bargainers to communicate prior to each stage. A test finds that communication does in fact increase efficiency, although unevenly, and at the cost of the builder. The study implies that the nature and pattern of communication among bargainers is a critical factor in efficient coalition building.
    Keywords: coalitional bargaining, communication, game theory, experiment
    JEL: C7 C9 D7
    Date: 2007–03–06
  7. By: Paul T. de Beer; Robert H.J. Mosch
    Abstract: Recent debates about crime on the one hand and the purported deterioration of values and norms on the other hand implicitly refer to two kinds of coordination mechanisms. Crime is supposed to be a consequence of deficient material incentives in the form of detection and formal sanctions. Values and norms are related to immaterial incentives, such as feelings of shame or loss of reputation, originatingfrom informal social supervision, and by feelings of guilt or repentance, originating from the personal conviction that one ought to behave otherwise. In order to investigate the relationship between rising crime and other breaches of norms on the one hand and the deterioration of both material and immaterial incentives on the other hand, a simple rational choice model is developed. This model proves to be a useful framework for analyzing behavior in a context in which different incentives for individual behavior, i.e. individual self-interest, formal sanctions, internalized social norms and social norms that are enforced by external sanctions, play a role simultaneously. It is shown that the waning and restoration of norms are asymmetric processes in which the restoration of eroded norms involves a much larger effort than was needed to maintain the norms in the original situation.
    JEL: E31 E52 E58
    Date: 2007–02
  8. By: Cunha, Joao Vieira da; Cunha, Miguel Pina e; Chia, Robert
    Abstract: We draw on evidence scattered across thick descriptions of organizations to outline an alternative model of routine. Instead of defining routine as a process of compliance with prescribed rules and procedures we define it as a process of deviation from the prescribed elements of organizations, resulting from the mutual constitution of repetitive work and improvisation. This view of routine underscores its adaptive nature and suggests that flexibility can be achieved not only by nimble and openly innovative organizations but also by large and organizations engaging in ‘closet’ innovation.
    Date: 2007
  9. By: Natalia Karelaia; Robin Hogarth
    Abstract: The mathematical representation of Brunswik’s lens model has been used extensively to study human judgment and provides a unique opportunity to conduct a meta-analysis of studies that covers roughly five decades. Specifically, we analyze statistics of the “lens model equation” (Tucker, 1964) associated with 259 different task environments obtained from 78 papers. In short, we find – on average – fairly high levels of judgmental achievement and note that people can achieve similar levels of cognitive performance in both noisy and predictable environments. Although overall performance varies little between laboratory and field studies, both differ in terms of components of performance and types of environments (numbers of cues and redundancy). An analysis of learning studies reveals that the most effective form of feedback is information about the task. We also analyze empirically when bootstrapping is more likely to occur. We conclude by indicating shortcomings of the kinds of studies conducted to date, limitations in the lens model methodology, and possibilities for future research.
    Keywords: judgment, lens model, linear models, learning, bootstrapping
    JEL: D81 M10
    Date: 2007–02
  10. By: Schunk, Daniel; Winter, Joachim
    Abstract: Experimental studies of search behavior suggest that individuals stop searching earlier than predicted by the optimal, risk-neutral stopping rule. Such behavior could be generated by two different classes of decision rules: rules that are optimal conditional on utility functions departing from risk neutrality, or heuristics derived from limited cognitive processing capacities and satisfycing. To discriminate among these two possibilities, we conduct an experiment that consists of a standard search task as well as a lottery task designed to elicit utility functions. We find that search heuristics are not related to measures of risk aversion, but to measures of loss aversion.
    Keywords: search; heuristics; utility function elicitation; risk attitudes; prospect theory
    JEL: D83 C91
    Date: 2007–02
  11. By: Michael T. Rauh (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Giulio Seccia (Department of Economics, University of Southampton)
    Abstract: In this paper, we introduce the psychological concept of anxiety into agency theory. An important benchmark in the anxiety literature is the inverted-U hypothesis which states that an increase in anxiety improves performance when anxiety is low but reduces it when anxiety is high. We consider a version of the Holmstrom-Milgrom linear principal-agent model where the agent conforms to the inverted-U hypothesis and investigate the nature of the optimal linear contract. We find that although high-powered incentives can be demotivational, a profit-maximizing principal never offers them. In contrast, the principal may optimally engage in a demotivational level of monitoring. Moreover, since risk can be motivational, the principal may refrain from eliminating it even when monitoring is costless. Indeed, the principal may even add pure noise to the contract in order to motivate the agent, contradicting the informativeness principle. Finally, incentives and monitoring can be strategic substitutes or complements in our model.
    JEL: L0
    Date: 2006–09
  12. By: David A. Jaeger (College of William and Mary and IZA); Holger Bonin (IZA and DIW); Thomas Dohmen (IZA and DIW); Armin Falk (University of Bonn, IZA, CEPR, and DIW); David Huffman (IZA); Uwe Sunde (IZA, University of Bonn, CEPR, and DIW)
    Abstract: Geographic mobility is important for the functioning of labor markets because it brings labor resources to where they can be most efficiently used. It has long been hypothesized that individuals' migration propensities depend on their attitudes towards risk, but the empirical evidence, to the extent that it exists, has been indirect. In this paper, we use newly available data from the German Socio-Economic Panel to measure directly the relationship between migration propensities and attitudes towards risk. We find that individuals who are more willing to take risks are more likely to migrate between labor markets in Germany. This result is robust to stratifying by age, sex, education, national origin, and a variety of other demographic characteristics, as well as to the level of aggregation used to define geographic mobility. The effect is substantial relative to the unconditional migration propensity and compared to the conventional determinants of migration. We also find that being more willing to take risks is more important for the extensive than for the intensive margin of migration.
    Keywords: Migration, attitudes, risk
    Date: 2007–03
  13. By: Matthew Ellman; Paul Pezanis-Christou
    Abstract: This paper investigates experimentally how organisational decision processes affect the moral motivations of actors inside a firm and firm's resulting willingness to forego profits in order to reduce harming a third party. In a "vertical" treatment, one insider unilaterally sets the harm-reduction strategy; the other can only accept or quit. In a "horizontal" treatment, the insiders decide by consensus. Our 2-by-2 design also controls for communication effects. In our data, communication makes vertical firms more ethical, because voice leads subordinates to feel responsible for what their firms do (mitigating "responsibility-alleviation"). These firms are also more ethical than the horizontal firms in which our bargaining data reveal a dynamic form of "responsibility dilution" and our chat data indicate an enhanced "insider-outsider" e ffect.
    Keywords: experimental economics, group decision-making, organisational structure,
    JEL: C91 C92 D21 D63 D64 D70
    Date: 2007–02–01
  14. By: Robin Hogarth; Mariona Portell; Anna Cuxart
    Abstract: The experiential sampling method (ESM) was used to collect data from 74 parttime students who described and assessed the risks involved in their current activities when interrupted at random moments by text messages. The major categories of perceived risk were short-term in nature and involved “loss of time or materials” related to work and “physical damage” (e.g., from transportation). Using techniques of multilevel analysis, we demonstrate effects of gender, emotional state, and types of risk on assessments of risk. Specifically, females do not differ from males in assessing the potential severity of risks but they see these as more likely to occur. Also, participants assessed risks to be lower when in more positive self-reported emotional states. We further demonstrate the potential of ESM by showing that risk assessments associated with current actions exceed those made retrospectively. We conclude by noting advantages and disadvantages of ESM for collecting data about risk perceptions.
    Keywords: Experiential sampling method; risk perception; risk assessment; gender differences; multi-level analysis; simultaneous vs. retrospective judgment
    JEL: C39 C93 M10
  15. By: Babutsidze, Zakaria (UNU-MERIT)
    Abstract: In this paper I review the evidence from marketing and psychology literature about the purchase behavior of consumers. I concentrate on the characteristics of the choice process, choice of the external information source and nature of the information obtained from these sources. The impact of important systematic differences among consumers and products on choice behavior is also discussed.
    Keywords: Consumer Choice, Information, Decision-making, Marketing
    JEL: D91 D81 M31
    Date: 2007
  16. By: Cars Hommes; Joep Sonnemans; Jan Tuinstra; Henk van de Velden
  17. By: Marc Le Menestrel
    Abstract: This paper studies a balance whose unobservable fulcrum is not necessarily located at the middle of its two pans. It presents three different models, showing how this lack of symmetry modifies the observation, the formalism and the interpretation of such a biased measuring device. It argues that the biased balance can be an interesting source of inspiration for broadening the representational theory of measurement.
    Keywords: representational theory of measurement, biased measurement, bias, rationality, irrationality, observer, dependence, indeterminacy, invariance
    JEL: A0 B4 C0 D0
  18. By: Conchita D’Ambrosio (Università di Milano-Bicocca and DIW Berlin); Joachim R. Frick (DIW Berlin, TU Berlin and IZA Bonn)
    Abstract: This paper explores the determinants of individual well-being as measured by self-reported levels of satisfaction with income. Making full use of the panel data nature of the German Socio-Economic Panel, we provide empirical evidence for well-being depending on absolute and on relative levels of income in a dynamic framework. This finding holds after controlling for other influential factors in a multivariate setting. The main novelty of the paper is the consideration of dynamic aspects: individual’s own history as well as the relative income performance with respect to the others living in the society under analysis do play a major role in the assessment of well-being.
    Keywords: Interdependent Preferences, Inequality Aversion, Status, Subjective Well-Being, SOEP.
    JEL: D63 I31 D31
    Date: 2007

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