nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2007‒04‒09
sixteen papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. Adding a Stick to the Carrot? The Interaction of Bonuses and Fines By Ernst Fehr; Klaus M. Schmidt
  2. The meritocracy as a mechanism to overcome social dilemmas By Gunnthorsdottir, Anna; Vragov, Roumen; Mccabe, Kevin
  3. Trust Games Measure Trust By Daniel Houser; Daniel Schunk; Joachim Winter
  4. Why the Ultimatum Game is not the Ultimate Experiment By Peters, Michael; Halevy, Yoram
  5. Instinctive and Cognitive Reasoning: A Study of Response Times By Ariel Rubinstein
  7. An Approach to Bounded Rationality By Eli Ben-Sasson; Adam Tauman Kalai; Ehud Kalai
  8. Leadership and Overcoming Coordination Failure with Asymmetric Costs By Jordi Brandts; David J. Cooper; Enrique Fatas
  9. Personal Relations and their Effect on Behavior in an Organizational Setting: An Experimental Study By Jordi Brandts; Carles Solà
  10. Biased Risk Perceptions of Longevity and Disability in Old Age By Joan Costa Font
  11. Regulating organizations through codes of corporate governance By David Seidl
  12. Social Norms and the Evolution of Conditional Cooperation By Spichtig, Mathias; Traxler, Christian
  13. Joker: Choice in a simple game with large stakes By Egil Matsen; Bjarne Strøm
  14. What to Maximize if You Must By Aviad Heifetz; Chris Shannon; Yossi Spiegel
  15. An Agent-Based Computational Laboratory for Wholesale Power Market Design By Sun, Junjie; Tesfatsion, Leigh S.
  16. Screening experiments for simulation : a review By Kleijnen,Jack P.C.

  1. By: Ernst Fehr (Institute for Empirical Research in Economics, University of Zurich, Bluemlisalpstrasse 10, CH-8006 Zurich, Switzerland.; Klaus M. Schmidt (Institute for Empirical Research in Economics, University of Zurich, Bluemlisalpstrasse 10, CH-8006 Zurich, Switzerland.
    Abstract: In this paper we report on a principal-agent experiment where the principal can choose whether to rely on an unenforcable bonus contract or to combine the bonus contract with a fine if the agent’s effort falls below a minimum standard. We show that most principals do not use the fine and that the pure bonus contract is more efficient than the combined contract. Our experiment suggests that principals who are less fair are more likely to choose a combined contract and less likely to actually pay the announced bonus. This offers a new explanation for why explicit and implicit incentives are substitutes rather than complements.
    Keywords: moral hazard, bonus contract, implicit incentives, fairness, incentives
    JEL: C7 C9 J3
    Date: 2007–01
  2. By: Gunnthorsdottir, Anna; Vragov, Roumen; Mccabe, Kevin
    Abstract: A new mechanism that substantially mitigates social dilemmas is examined theoretically and experimentally. It resembles the voluntary contribution mechanism (VCM) except that in each decision round subjects are ranked and then grouped according to their public contribution. The game has multiple mostly asymmetric, Pareto-ranked pure-strategy equilibria which are rather counterintuitive, yet experimental subjects tacitly coordinate the payoff-dominant equilibrium reliably and quite precisely. In the VCM grouping is random which, with its arbitrary relation to contribution corresponds to any grouping unrelated to output, for example grouping based on race or gender. The new mechanism resembles a meritocracy since based on how much they contribute; participants are assigned to strata that vary in payoff. The findings shed light on the nature of merit-based social and organizational grouping and provide guidelines for future research and application.
    Keywords: social dilemmas; Nash equilibrium; non-cooperative games; coordination; mechanism design; experiment
    JEL: D7
    Date: 2007–02–10
  3. By: Daniel Houser; Daniel Schunk; Joachim Winter (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: The relationship between trust and risk is a topic of enduring interest. Although there are substantial differences between the ideas the terms express, many researchers from different disciplines have pointed out that these two concepts become very closely related in personal exchange contexts. This raises the important practical concern over whether behaviors in the widely-used “trust game” actually measure trust, or instead reveal more about risk attitudes. It is critical to confront this question rigorously, as data from these games are increasingly used to support conclusions from a wide variety of fields including macroeconomic development, social psychology and cultural anthropology. The aim of this paper is to provide cogent evidence on the relationship between trust and risk in “trust” games. Subjects in our experiment participate either in a trust game or in its risk game counterpart. In the trust version, subjects play a standard trust game and know their counterparts are human. In the risk version, subjects know their counterparts are computers making random decisions. We compare decisions between these treatments, and also correlate behavior with subjects’ risk attitudes as measured by the Holt and Laury (2002) risk instrument. We provide evidence that trusting behavior is different than behavior under risk. In particular, (i) decisions patterns in our trust and risk games are significantly different; and (ii) risk attitudes predict decisions in the risk game, but not the trust game.
    Date: 2006–12–31
  4. By: Peters, Michael; Halevy, Yoram
    Abstract: The Ultimatum Game seems to be the ideal experiment to test the sequential rationality assumptions underlying subgame perfection. We illustrate with a simple example why this interpretation of the experimental results may be misguided. Instead, we approach the ultimatum game as a mechanism designed to elicit information about the preferences and beliefs of players. While remaining agnostic about the right way to interpret preferences, we maintain the assumption that preferences are interdependent - the utility of a player may be a function of other players types. We explain how to recast the best known explanations of the experimental evidence in these terms. We then illustrate how standard arguments can be used to extract the information conveyed by existing experimental results, and how the latter can restrict the set of plausible models of interdependence.
    Date: 2007–03–31
  5. By: Ariel Rubinstein
    Abstract: Lecture audiences and students were asked to respond to virtual decision and game situations at Several thousand observations were collected and the response time for each answer was recorded. There were significant differences in response time across responses. It is suggested that choices made instinctively, that is, on the basis of an emotional response, require less response time than choices that require the use of cognitive reasoning.
    Keywords: Response Time, Instinctive and Cognitive Reasoning, Experimental Game Theory
    JEL: C9
  6. By: Gordon Menzies; Daniel Zizzo
    Abstract: We present a macroeconomic market experiment on the financial determination of exchange rates, and consider whether the assumption that belief formation be treated as a classical hypothesis test, which we label inferential expectations, can explain the effect of uncertainty on exchange rates. In a non-stochastic environment, exchange rates closely follow standard predictions. In our stochastic environment, inferential expectations with a low test size alpha (conservative inferential expectations) predict exchange rates better than rational expectations in ten sessions out of twelve. Belief conservatism appears magnified rather than diminished at the market level, and the degree of belief conservatism seems connected to the failure of uncovered interest rate parity regressions.
    JEL: C91 D84 E50 F31
    Date: 2006–12
  7. By: Eli Ben-Sasson; Adam Tauman Kalai; Ehud Kalai
    Abstract: A central question in game theory and artificial intelligence is how a rational agent should behave in a complex environment, given that it cannot perform unbounded computations. We study strategic aspects of this question by formulating a simple model of a game with additional costs (computational or otherwise) for each strategy. First we connect this to zero-sum games, proving a counter-intuitive generalization of the classic min-max theorem to zero-sum games with the addition of strategy costs. We then show that potential games with strategy costs remain potential games. Both zero-sum and potential games with strategy costs maintain a very appealing property: simple learning dynamics converge to equilibrium.
    Keywords: bounded rationality, zero sum games, potential games, strategic complexity.
  8. By: Jordi Brandts; David J. Cooper; Enrique Fatas
    Abstract: We study how the heterogeneity of agents affects the extent to which changes in financial incentives can pull a group out of a situation of coordination failure. We focus on the connections between cost asymmetries and leadership. Experimental subjects interact in groups of four in a series of weak-link games. The treatment variable is the distribution of high and low effort cost across subjects. We present data for one, two and three low-cost subjects as well as control sessions with symmetric costs. The overall pattern of coordination improvement is common across treatments. Early coordination improvements depend on the distribution of high and low effort costs across subjects, but these differences disappear with time. We find that initial leadership in overcoming coordination failure is not driven by low-cost subjects but by subjects with the most frequent cost. This conformity effect can be due to a kind of group identity or to the cognitive simplicity of acting with identical others.
    Keywords: Experiments, Coordination, Organizational change, Heterogeneous agents, Leadership
    JEL: C70 C90 D63 D64
    Date: 2006–05–12
  9. By: Jordi Brandts; Carles Solà
    Abstract: We study how personal relations affect performance in organizations. In the experimental game we use a manager has to assign different degrees of decision power to two employees. These two employees then have to make distributive decisions which affect themselves and the manager. Our focus is on the effects on managers' assignment of decision power and on employees' distributive decisions of one of the employees and the manager knowing each other personally. Our evidence shows that managers tend to favor employees that they personally know and that these employees tend, more than other employees, to favor the manager in their distributive decisions. However, this behavior does not affect the performance of the employees that do not know the manager. All these effects are independent of whether the employees that know the manager are more or less productive than those who do not know the manager. The results shed light on discrimination and nepotism and its consequences for the performance of family firms and other organizations.
    Keywords: Family firms, nepotism, corporate governance, procedural fairness, experiments
    JEL: C92 D23 M50
    Date: 2006–12–01
  10. By: Joan Costa Font (Universitat de Barcelona)
    Abstract: Rational learning theories postulate that information channels and cognitive biases such as individual optimism may influence an individuals assessment of the risk of undesired events, especially with regard to those that have a cumulative nature. This is the case with disability in old age, which may take place upon survival to an advanced age, and such factors have been regarded as responsible for certain individual behaviours (for example, the limited incidence of insurance purchase). This paper examines the determinants of individual perceptions with regard to disability in old age and longevity. The cumulative nature of such perceptions of risk is tested, and potential biases are identified, including optimism and a set of information determinants. Empirical evidence from a representative survey of Catalonia is presented to illustrate these effects. The findings from this research suggest a significant overestimation of disability in old age, yet this is not the case with longevity. Furthermore, individual perceptions with regard to disability in old age, unlike those with regard to longevity, exhibit on aggregate an optimistic bias and, are perceived as cumulative risks. Gender influences the perceived risk of disability in old age at a population level but not at the individual level, and the opposite holds true for age. Finally, self-reported health status is the main variable behind risk perceptions at both the individual and population level.
    Keywords: longevity, disability in old age, risk perceptions, optimism, cumulative risks
    JEL: I11 D81 I12
    Date: 2007
  11. By: David Seidl
    Abstract: Although codes of corporate governance have come to be widely used as a mode of regulating corporations, our understanding of how they function is still rather limited. In this paper we describe the design of such code regimes and propose a theoretical framework for studying their effects. On the basis of an observation-theoretical approach, codes are conceptualized as schemas of observation that determine the way we evaluate corporations. On the one hand, the effect of a code depends on the extent to which it becomes integrated into recursive cycles of mutual observation between the corporation and the various actors in the field. On the other hand, it also depends on how the code relates to other observational schemas in the field. The paper concludes with some guidelines for empirical research on code regimes.
    Keywords: Codes, Corporate Governance, Ecology, Field, Observation, Rules
    JEL: G34 K22
    Date: 2006–12
  12. By: Spichtig, Mathias; Traxler, Christian
    Abstract: This paper develops a model of social norms and cooperation in large societies. Within this framework we use an indirect evolutionary approach to study the endogenous formation of preferences and the coevolution of norm compliance. Thereby we link the multiplicity of equilibria, which emerges in the presence of social norms, to the evolutionary analysis: Individuals face situations where many others cooperate as well as situations where a majority free-rides. The evolutionary adaptation to such heterogenous environments will favor conditional cooperators, who condition their pro-social behavior on the others' cooperation. As conditional cooperators react flexibly to their social environment, they dominate free-riders as well as unconditional cooperators.
    Keywords: Conditional Cooperation; Indirect Evolution; Social Norms; Heterogenous Environments
    JEL: C70 Z13
    Date: 2007–03
  13. By: Egil Matsen (Department of Economics, Norwegian University of Science and Technology); Bjarne Strøm (Department of Economics, Norwegian University of Science and Technology)
    Abstract: This paper examines data from the Norwegian television game show Joker, where contestants make well-specified choices under risk. The game involves very large stakes, randomly drawn contestants, and ample opportunities for learning. Expected utility (EU) theory gives a simple prediction of choice under weak conditions, as one choice is always first-order stochastically dominating. We document frequent, systematic and costly violations of dominance. Most alternative theories fail to add explanatory power beyond the EU benchmark, but many contestants appear to have a systematic expectation bias that can be related to Tversky and Kahneman?s (1973) "availability heuristic". In addition, there seems to be a stochastic element in choice that is well captured by the so-called Fechner model.
    Keywords: Risky choice; stochastic dominance; choice models; stakes; game show
    JEL: C9 C93 D81
    Date: 2006–12–19
  14. By: Aviad Heifetz; Chris Shannon; Yossi Spiegel
    Abstract: The assumption that decision makers choose actions to maximize their preferences is a central tenet in economics. This assumption is often justi…ed either formally or informally by appealing to evolutionary arguments. In contrast, we show that in almost every game and for almost every family of distortions of a player’s actual payoffs, some degree of this distortion is bene…cial to the player because of the resulting effect on opponents’ play. Consequently, such distortions will not be driven out by any evolutionary process involving payo¤-monotonic selection dynamics, in which agents with higher actual payoffs proliferate at the expense of less successful agents. In particular, under any such selection dynamics, the population will not converge to payo¤-maximizing behavior. We also show that payoff-maximizing behavior need not prevail even when preferences are imperfectly observed.
    Keywords: dispositions, evolution of preferences, genericity, selection dynamics, imperfect observability
  15. By: Sun, Junjie; Tesfatsion, Leigh S.
    Abstract: This study reports on the model development and open-source implementation (in Java) of an agent-based computational wholesale power market organized in accordance with core FERC-recommended design features and operating over a realistically rendered transmission grid subject to congestion effects. The traders within this market model are strategic profit-seeking agents whose learning behaviors are based on data from human-subject experiments. Our key experimental focus is the complex interplay among structural conditions, market protocols, and learning behaviors in relation to short-term and longer-term market performance. Market power findings for a dynamic 5-node transmission grid test case are presented for concrete illustration.
    Keywords: Restructured electricity markets, Market design, Learning Traders, Transmission grid congestion, Market power, Agent-based computational economics
    JEL: C0 C6 D4 D43 L1 L13 L5 Q4
    Date: 2007–03–31
  16. By: Kleijnen,Jack P.C. (Tilburg University, Center for Economic Research)
    Abstract: This article reviews so-called screening in simulation; i.e., it examines the search for the really important factors in experiments with simulation models that have very many factors (or inputs). The article focuses on a most e¢ cient and e¤ective screening method, namely Sequential Bifurcation. It ends with a discussion of possible topics for future research, and forty references for further study.
    Keywords: screening;metamodel;response surface;design
    JEL: C0 C1 C9
    Date: 2007

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