nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2007‒03‒31
eleven papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. Direct Evidence on Risk Attitudes and Migration By David A. Jaeger; Holger Bonin; Thomas Dohmen; Armin Falk; David Huffman; Uwe Sunde
  2. Variations on the Theme of Conning in Mathematical Economics By K. Vela Velupillai
  3. Better-Reply Strategies with Bounded Recall By Andriy Zapechelnyuk
  4. Econometric Explorations on Bounded Rationality: The Case of Job Changing Behavior By Bruno Contini; Matteo Morini
  5. Gender, Affect and Intertemporal Consistency: An Experimental Approach By Kendra N. McLeish; Robert J. Oxoby
  6. Rationalizing the Irrational. The Principle of Relative Maximization from Sociobiology to Economics and Its Implications for Ethics By Boari, Mircea
  7. Difficult Choices: To Agonize or not to Agonize? By Edna Ullmann-Margalit
  8. Self-organisation or Selfcreation? From Social Physics to Realist Dynamics By Graeme Donald Snooks
  9. Status, Happiness, and Relative Income By John Beath; Felix FitzRoy
  10. The Benefits of Being Economics Professor A (and not Z) By C. Mirjam van Praag; Bernard M.S. van Praag
  11. Smoking and Social Interaction By Panu Poutvaara; Lars-H. R. Siemers

  1. By: David A. Jaeger (College of William and Mary and IZA); Holger Bonin (IZA and DIW Berlin); Thomas Dohmen (IZA and DIW Berlin); Armin Falk (University of Bonn, IZA, CEPR and DIW Berlin); David Huffman (IZA Bonn); Uwe Sunde (IZA, University of Bonn, CEPR and DIW Berlin)
    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: risk aversion, migration, Germany
    JEL: J61 D81 R23
    Date: 2007–03
  2. By: K. Vela Velupillai
    Abstract: The mathematization of economics is almost exclusively in terms of the mathematics of real analysis which, in turn, is founded on set theory (and the axiom of choice) and orthodox mathematical logic. In this paper I try to point out that this kind of mathematization is replete with economic infelicities. The attempt to extract these infelicities is in terms of three main examples: dynamics, policy and rational expectations and learning. The focus is on the role and reliance on standard .xed point theorems in orthodox mathematical economics.
    Keywords: General Equilibrium Theory, Mathematical Economics, Theory of Policy, Rational Expectations Equilibrium
    JEL: C02 C60 D50 E61
    Date: 2007
  3. By: Andriy Zapechelnyuk
    Abstract: A decision maker (an agent) is engaged in a repeated interaction with Nature. The objective of the agent is to guarantee to himself the long-run average payoff as large as the best-reply payoff to Nature?s empirical distribution of play, no matter what Nature does. An agent with perfect recall can achieve this objective by a simple better-reply strategy. In this paper we demonstrate that the relationship between perfect recall and bounded recall is not straightforward: An agent with bounded recall may fail to achieve this objective, no matter how long recall he has and no matter what better-reply strategy he employs.
    Keywords: Better-Reply Strategies; Regret; Bounded Recall; Fictitious Play; Approachability
    JEL: C73 D81 D83
    Date: 2007–03
  4. By: Bruno Contini (University of Torino, LABORatorio R. Revelli and IZA); Matteo Morini (University of Torino and LABORatorio R. Revelli)
    Abstract: In this paper we question the hypothesis of full rationality in the context of job changing behavior, via simple econometric explorations on microdata drawn from WHIP (Worker Histories Italian Panel). A rational outcome of the job matching process implies a positive tradeoff between future wages and risk-on-the-job. The main result of this paper is that no "rational" tradeoff is observable after controlling for a variety of possible shifters. However, if we control for individual characteristics and replace wage growth by its predictor net of individual effects, the picture changes with the emergence of a significantly positive tradeoff between wage growth and risk-on-the-job. The interpretation is suggestive: while market forces (net of individual effects) drive towards a rational outcome, individual characteristics, instead of reinforcing the "rationality" of a positive tradeoff, lead towards the opposite direction of confounding good and bad options. Our explanation for these findings is that people act on the basis of bounded rationality à la Simon. If our assessment is correct, the implications are powerful: are there reasons to believe that such patterns are found only in the context of job search and worker mobility and not in other instances of economic behavior? Recent literature on bounded rationality strongly suggests the contrary. Why, then, should economists leave unchallenged and unchallengeable the hypothesis of full rationality? Had our investigation aimed at estimating the elasticities of wage growth and job safety of the workers’ utilities, we would have miserably failed. Is this a consequence of a misspecified model or of the wrong behavioral assumptions? Our support unquestionably goes to the latter.
    Keywords: job mobility, bounded rationality, risk on the job
    JEL: D8 J63
    Date: 2007–02
  5. By: Kendra N. McLeish (University of Calgary); Robert J. Oxoby (University of Calgary and IZA)
    Abstract: We conduct experiments in which participants made multiple intertemporal decisions throughout a seven week period. In addition to exploring dynamic consistency and the stability of single period discount rates, our experiments introduce a manipulation to identify the role of positive and negative mood/affect in intertemporal choice. Our results demonstrate that, while individuals’ single period discount rates are stable over time, there is evidence of dynamic inconsistency. While we find no differences in the discount rates of men and women, we find gender differences in the character of hyperbolic discounting in which women display greater patience in their "present bias". We also identify a gender-mood interaction: Negative mood in women yields increased impulsiveness while inducing positive affect in women or affect (positive or negative) in men yields little change.
    Keywords: intertemporal, choice, experiments, gender, affect
    JEL: C91 D91 J16
    Date: 2007–03
  6. By: Boari, Mircea (ESSEC Business School)
    Abstract: Starting with the concept of “rational maximizing individual”, a meta-construct with foundational value in economics and, in general, in human sciences, the paper delineates the territory of an ethics of rationality. It does this by taking fulcrum in findings from evolutionary theory, in particular those regarding spiteful behavior. The paper formulates the principle of “differential fitness maximization”, as expression of relative maximization of fitness and derives its consequences, among which, a core set of normative propositions grounding the said ethics. Thus, the paper strengthens the backbone of the Western philosophical tradition which, in essence, always associated ethical conduct with reason and individualism.
    Keywords: Evolutionary Ethics; Fitness; Normative Ethics; Rational Maximization; Spite
    JEL: A19 B52 C73 D01 P00 Z19
    Date: 2007–02
  7. By: Edna Ullmann-Margalit
    Abstract: What makes a choice difficult, beyond being complex or difficult to calculate? Characterizing difficult choices as posing a special challenge to the agent, and as typically involving consequences of significant moment as well as clashes of values, the article proceeds to compare the way difficult choices are handled by rational choice theory and by the theory that preceded it, Kurt Lewin's "conflict theory." The argument is put forward that within rational choice theory no choice is in principle difficult: if the object is to maximize some value, the difficulty can be at most calculative. Several prototypes of choices that challenge this argument are surveyed and discussed (picking, multidimensionality, "big decisions" and dilemmas); special attention is given to difficult choices faced by doctors and layers. The last section discusses a number of devices people employ in their attempt to cope with difficult choices: escape, "reduction" to non-difficult choices, and second-order strategies.
    Date: 2007–03
  8. By: Graeme Donald Snooks
    Abstract: The currently fashionable theory of self-organisation has its origins in statistical physics. Many believe that the underlying physics model, which is based on inanimate systems, can be employed to explain and predict the emergence of social structures, even of history itself. Some are even convinced that it will be possible to construct a social physics to displace the social sciences. The purpose of this article is to test those claims by reviewing some of the physical studies that have been made of human society, and its conclusion is that those claims cannot be substantiated. The underlying problem is that self-organisation is a one-dimensional theoretical concept that focuses exclusively upon supply-side interactions, from which order and complexity are said to ‘emerge’. But there is a better way. By systematic observation of living systems, both human and non-human, it has been possible to derive a general dynamic theory that embraces a more complex reality, involving a creative exchange between decision-making individuals and the changing needs of their society. I have called this interaction between the dynamic forces of demand and supply in living systems, the process of ‘strategic exchange’. And it is this strategic exchange that determines all other structural relationships in society, including the interaction between its constituent members. It is important in the social sciences, therefore, to move on from social physics to realist dynamics.
    Keywords: agent-based modelling, complexity theory, dynamic-strategy theory, power laws, realist dynamics, self-organised criticality, Snooks-Panov algorithm, social physics, strategic demand
    JEL: C73 A12
    Date: 2007–03
  9. By: John Beath (University of St. Andrews); Felix FitzRoy (University of St. Andrews and IZA)
    Abstract: Models of status based on Frank’s (1985) count of the number of people with lower conspicuous consumption are inconsistent with the extensive empirical literature on happiness and well-being. The alternative approach to consumption interaction which uses some form of relative income has been developed in various contexts. These predict that a representative agent’s well-being will increase with real income or consumption. However, this is again inconsistent with the time-series evidence for advanced economies. In this paper we combine a simple model of relative income with a distribution of ability that correctly predicts both time series results of near constant utility, and the positive, concave crosssectional relation between income, working time and happiness.
    Keywords: status, happiness, relative income
    JEL: D01 D31 D6
    Date: 2007–03
  10. By: C. Mirjam van Praag (University of Amsterdam, Tinbergen Institute, Max Planck Institute of Economics Jena and IZA); Bernard M.S. van Praag (SCHOLAR, University of Amsterdam, Tinbergen Institute, CESifo and IZA)
    Abstract: Alphabetic name ordering on multi-authored academic papers, which is the convention in the economics discipline and various other disciplines, is to the advantage of people whose last name initials are placed early in the alphabet. As it turns out, Professor A, who has been a first author more often than Professor Z, will have published more articles and experienced a faster growth rate over the course of her career as a result of reputation and visibility. Moreover, authors know that name ordering matters and indeed take ordering seriously: Several characteristics of an author group composition determine the decision to deviate from the default alphabetic name order to a significant extent.
    Keywords: performance measurement, incentives, economists, name ordering
    JEL: A11 A14 J32 J44
    Date: 2007–03
  11. By: Panu Poutvaara (University of Helsinki and IZA); Lars-H. R. Siemers (RWI Essen)
    Abstract: We study the social interaction of non-smokers and smokers as a sequential game, incorporating insights from social psychology and experimental economics into an economic model. Social norms affect human behavior such that non-smokers do not ask smokers to stop smoking and stay with them, even though disutility from smoking exceeds utility from social interaction. Overall, smoking is unduly often accepted when accommodating smoking is the social norm. The introduction of smoking and non-smoking areas does not overcome this specific inefficiency. We conclude that smoking bans may represent a required (secondbest) policy.
    Keywords: smoking policy, social norms, guilt aversion, deviant behavior, social interaction
    JEL: I18 D01 D11
    Date: 2007–03

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