nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2007‒08‒08
eleven papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. Valuing A Risky Prospect Less Than Its Worst Outcome: Uncertainty Effect or Task Ambiguity? By Andreas Ortmann; Alexandra Prokosheva; Ondrej Rydval; Ralph Hertwig
  2. Testing Theories of Reciprocity: Do Motivations Matter? By Luca Stanca; Luigino Bruni; Luca Corazzini
  3. The glue of the economic system: the effect of relational goods on trust and trustworthiness. By Leonardo Becchetti; Giacomo Degli Antoni; Marco Faillo; Luigi Mittone
  4. A Prize to Give for: An Experiment on Public Good Funding Mechanisms By Lucca Corazzini; Marco Faravelli; Lucca Stanca
  5. Risk and Rationality: Uncovering Heterogeneity in Probability Distortion By Adrian Bruhin; Thomas Epper
  6. Risk and Rationality: The Effect of Incidental Mood on Probability Weighting By Helga Fehr; Thomas Epper; Adrian Bruhin; Renate Schubert
  7. Live and Dead Issues in the Methodology of Economics By David Colander; Richard P.F. Holt; J. Barkley Rosser, Jr.
  8. Probabilities in Economic Modeling By Itzhak Gilboa; Andrew Postlewaite; David Schmeidler
  9. Experts and Non-experts By Irene Valsecchi
  10. Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size By Helga Fehr-Duda; Adrian Bruhin; Thomas Epper; Renate Schubert
  11. Financial Incentives and Cognitive Abilities: Evidence from a Forecasting Task with Varying Cognitive Load By Ondrej Rydval

  1. By: Andreas Ortmann (Center for Economic Research and Graduate Education, Charles University, and Economics Institute, Academy of Sciences of the Czech Republic (CERGE-EI).); Alexandra Prokosheva (Center for Economic Research and Graduate Education, Charles University, and Economics Institute, Academy of Sciences of the Czech Republic (CERGE-EI).); Ondrej Rydval (Max-Planck-Institute of Economics (Strategic Interaction Group), Jena, Germany); Ralph Hertwig (University of Basel, Switzerland)
    Abstract: Gneezy, List and Wu [Q. J. Econ. 121 (2006) 1283-1309] document that lotteries are often valued less than the lotteries’ worst outcomes. We show how to undo this result.
    Keywords: Risky choice, framing, experiments, task ambiguity, subject confusion
    JEL: C81 C91 C93 D83
    Date: 2007–07–18
  2. By: Luca Stanca (Department of Economics, University of Milan-Bicocca); Luigino Bruni (Department of Economics, University of Milan-Bicocca); Luca Corazzini (Department of Economics, University of Milan-Bicocca)
    Abstract: One of the key issues for understanding reciprocity is how people evaluate the kindness of an action. In this paper we argue that the motivation driving an action plays an important role for the reciprocating response to that action. We test experimentally the hypothesis that reciprocal behavior is stronger in response to actions driven by intrinsic motivation, as opposed to extrinsic motivation. Our results indicate that reciprocity is significantly stronger when extrinsic motivation can be ruled out, both at the aggregate and the individual level. These findings suggest that models of reciprocal behavior should take into account not only outcomes but also intentions and, in particular, motivations: the type of motivation of an action matters for its perceived kindness and, as a consequence, for reciprocity.
    Keywords: Reciprocity, Intrinsic Motivation, Laboratory Experiments
    JEL: D63 C78 C91
    Date: 2007
  3. By: Leonardo Becchetti; Giacomo Degli Antoni; Marco Faillo; Luigi Mittone
    Abstract: The role of “relational goods” is almost unexplored in the literature, yet our experimental results document that, even in their weakest form (opportunity of meeting an unknown player at the end of an experimental game), they significantly affect important “lubricants” of economic activity such as trust and trustworthiness and generate significant departures from the standard Nash equilibrium outcome in trust (investment) games. Our findings suggest that relational goods are an important “source of energy” in economic interactions and that the study of this “neglected particle” of socioeconomic life may produce significant advancements on both positive and normative economics.
    Keywords: relational goods, trust, experimental games
    JEL: C72 C91 A13
    Date: 2007
  4. By: Lucca Corazzini; Marco Faravelli; Lucca Stanca
    Abstract: This paper investigates fund-raising mechanisms based on a prize as a way to overcome free riding in the private provision of public goods, under the assumptions of income heterogeneity and incomplete information about income levels. We compare experimentally the performance of a lottery, an all-pay auction and a benchmark voluntary contribution mechanism. We find that prize-based mechanisms perform better than voluntary contribution in terms of public good provision after accounting for the cost of the prize. Comparing the prize-based mechanisms, total contributions are significantly higher in the lottery than in the all-pay auction. Focusing on individual income types, the lottery outperforms voluntary contributions and the all-pay auction throughout the income distribution.
    Keywords: Auctions, Lotteries, Public Goods, Laboratory Experiments
    JEL: C91 D44 H4
  5. By: Adrian Bruhin (Socioeconomic Institute, University of ZurichAuthor-Name: Helga Fehr; Institute of Economic Research, Swiss Federal Institute of Technology Zurich); Thomas Epper (Institute of Economic Research, Swiss Federal Institute of Technology Zurich)
    Abstract: It has long been recognized that there is considerable heterogeneity in individual risk taking behavior but little is known about the distribution of risk taking types. We present a parsimonious characterization of risk taking behavior by estimating a finite mixture regression model for three different experimental data sets, two Swiss and one Chinese, over a large number of real gains and losses. We find two distinct types of individuals: In all three data sets, the choices of roughly 80% of the subjects exhibit significant deviations from rational probability weighting consistent with prospect theory. 20% of the subjects weight probabilities linearly and behave essentially as expected value maximizers. Moreover, the individuals are assigned to one of these two groups with probabilities of close to one resulting in a low measure of entropy. The reliability and robustness of our classification suggest using a mix of preference theories in applied economic modeling.
    Keywords: individual risk taking behavior, latent heterogeneity, finite mixture regression models
    JEL: D81 C49
    Date: 2007–03
  6. By: Helga Fehr (Institute of Economic Research, Swiss Federal Institute of Technology Zurich); Thomas Epper (Institute of Economic Research, Swiss Federal Institute of Technology Zurich); Adrian Bruhin (Socioeconomic Institute, University of Zurich); Renate Schubert (Institute of Economic Research, Swiss Federal Institute of Technology Zurich)
    Abstract: When valuing risky prospects, people tend to overweight small probabilities and to underweight large probabilities. Nonlinear probability weighting has proven to be a robust empirical phenomenon and has been integrated in decision models, such as cumulative prospect theory. Based on a laboratory experiment with real monetary incentives, we show that incidental emotional states, such as preexisting good mood, have a significant effect on the shape of the probability weighting function, albeit only for women. Women in a better than normal mood tend to exhibit mood-congruent behavior, i.e. they weight probabilities of gains and losses relatively more optimistically. Men’s probability weights are not responsive to mood state. We find that the application of a mechanical decision criterion, such as the maximization of expected value, immunizes men against effects of incidental emotions. 40% of the male participants indeed report applying expected values as decision criterion. Only a negligible number of women do so.
    Keywords: prospect theory, probability weighting function, risk taking behavior, incidental emotions, rationality
    JEL: D81 C91
    Date: 2007–02
  7. By: David Colander; Richard P.F. Holt; J. Barkley Rosser, Jr.
    Abstract: We attempt to clarify divisions made by us in previous work (Colander et al., 2004a,b) between “orthodox, mainstream, and heterodox” in economics, following very useful remarks in Dequech (2007), whom we thank. We also provide specific advice for heterodox economists, namely: worry less about methodology, focus on being economists first and heterodox economists second, and prepare ideas to leave the incubator of heterodoxy to enter the mainstream economic debate.
    Date: 2007–04
  8. By: Itzhak Gilboa (Tel-Aviv University, HEC, and Cowles Foundation, Yale University); Andrew Postlewaite (Department of Economics, University of Pennsylvania); David Schmeidler (Tel-Aviv University and Ohio State University)
    Abstract: Economic modeling assumes, for the most part, that agents are Bayesian, that is, that they entertain probabilistic beliefs, objective or subjective, regarding any event in question. We argue that the formation of such beliefs calls for a deeper examination and for explicit modeling. Models of belief formation may enhance our understanding of the probabilistic beliefs when these exist, and may also help up characterize situations in which entertaining such beliefs is neither realistic nor necessarily rational.
    Keywords: Decision making, Bayesian, Behavioral Economics
    JEL: B4 D8
    Date: 2007–08–02
  9. By: Irene Valsecchi (University of Milano-Bicocca)
    Abstract: The paper is concerned with the interaction between two agents: an expert, announcing his probability that a particular state of the world will occur, and a non-expert decision-maker, who takes action according to his posterior beliefs. The decision-maker considers the expert an experiment of uncertain reliability and takes the received messages as the outcomes of such an experiment. The model of the expert in the decision-maker’s mind bears no relation with any measure of the expert’s actual information. The paper shows that messages will be biased, notwithstanding solidarity between the agents. However, the longer the interaction, the less severe will be the bias.
    Keywords: Opinion, Expert, Instructions
    JEL: D81 L21
    Date: 2007–07
  10. By: Helga Fehr-Duda (Institute of Economic Research, Swiss Federal Institute of Technology Zurich); Adrian Bruhin (Socioeconomic Institute, University of Zurich); Thomas Epper (Institute of Economic Research, Swiss Federal Institute of Technology Zurich); Renate Schubert (Institute of Economic Research, Swiss Federal Institute of Technology Zurich)
    Abstract: It has long been recognized that relative risk aversion over gains increases with stake size. The evidence for losses is mixed, however. Based on experimental data on choices over real gains and losses in China, we find that average behavior under losses is not sensitive to stake size. In the gain domain, increasing relative risk aversion can be attributed to a significant change in probability weights: The probability weighting curve for high gains lies significantly closer to the rational, i.e. linear, weighting line than the curve for low gains. A finite mixture regression analysis of heterogeneity shows that the majority of subjects weight low-gain probabilities much more optimistically than high-gain probabilities. A minority of near rational types do not react to rising stakes at all. Our results question the validity of rank-dependent theories of choice.
    Keywords: Risk Aversion, Stake-Size Effect, Prospect Theory, Latent Heterogeneity
    JEL: D81 C91
    Date: 2007–07
  11. By: Ondrej Rydval (Max Planck Institute of Economics, Jena, Germany.)
    Abstract: I examine how financial incentives interact with intrinsic motivation and especially cognitive abilities in explaining heterogeneity in performance. Using a forecasting task with varying cognitive load, I show that the effectiveness of high-powered financial incentives as a stimulator of economic performance can be moderated by cognitive abilities in a causal fashion. Identifying the causality of cognitive abilities is a prerequisite for studying their interaction with financial and intrinsic incentives in a unifying framework, with implications for the design of efficient incentive schemes.
    Keywords: Financial incentives, Cognitive ability, Heterogeneity, Performance, Experiment
    JEL: C81 C91 D83
    Date: 2007–07–18

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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