nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2007‒12‒08
fifteen papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. Spurious Complexity and Common Standards in Markets for Consumer Goods By Alexia Gaudeul; Robert Sugden
  2. The Peter Principle: An Experiment By David L. Dickinson; Marie-Claire Villeval
  3. How enforcement institutions affect markets  By B. Arruñada; M. Casari
  4. (Non-) Behavioral Economics - A Programmatic Assessment By Werner Güth
  5. Investment decisions, equivalent risk and bounded rationality By Magni, Carlo Alberto
  6. Changing time and emotions By Pierre-Yves Geoffard; Stéphane Luchini
  7. Communication and Coordination: The Case of Boundedly Rational Players By Ellingsen, Tore; Östling, Robert
  8. The role emotion in strategic issue interpretation: The case of diversity By Patricia Garcia-Prieto; Véronique Tran; Susan Schneider
  9. Genetic Influences on Economic Preferences By David, Cesarini; Dawes, Christopher T.; Johannesson, Magnus; Lichtenstein, Paul; Wallace, Björn
  10. Non-self-centered inequity aversion matters. A model. By Ottone, Stefania; Ponzano, Ferruccio
  11. Altruism, Exchange and Crowding Out of Private Support to the Elderly: Evidence from a Demogrant in Mexico By Laura Juarez
  12. Listen: I am angry! An experiment comparing ways of revealing emotions By Werner Güth; M. Vittoria Levati
  13. Do we buy more or less when we want to learn? The knowledge strategies and structural forms of US cross-border acquisitions By Manuel Portugal Ferreira; Stephen Tallman; Dan Li
  14. Ambiguity Aversion And The Power Of Established Brands By A. V. Muthukrishnan; Luc Wathieu
  15. Leaky Buckets Versus Compensating Justice: An Experimental Investigation By Eva Camacho-Cuena; Tibor Neugebauer; Christian Seidl

  1. By: Alexia Gaudeul (School of Economics and Centre for Competition Policy, University of East Anglia); Robert Sugden (School of Economics and Centre for Competition Policy, University of East Anglia)
    Abstract: Behavioural and industrial economists have argued that, because of cognitive limitations, consumers are liable to make sub-optimal choices in complex decision problems. Firms can exploit these limitations by introducing spurious complexity into tariff structures, weakening price competition. This paper models a countervailing force. Consumers’ choice problems are simplified if competing firms follow common conventions about tariff structures. Because such a ‘common standard’ promotes price competition, a firm’s use of it signals that its products offer value for money. If consumers recognize this effect, there can be a stable equilibrium in which firms use common standards and set competitive prices.
    Keywords: decision-making, naïve consumers, savvy consumers, price competition, common standard effect, cognitive limitations.
    JEL: D83 L13 L15 L51
    Date: 2007–11
  2. By: David L. Dickinson; Marie-Claire Villeval
    Abstract: The Peter Principle states that, after a promotion, the observed output of promoted employees tends to fall. Lazear (2004) models this principle as resulting from a regression to the mean of the transitory component of ability. Our experiment reproduces this model in the laboratory by means of various treatments in which we alter the variance of the transitory ability. We also compare the efficiency of an exogenous promotion standard with a treatment where subjects self-select their task. Our evidence confirms the Peter Principle when the variance of the transitory ability is large. In most cases, the efficiency of job allocation is higher when using a promotion rule than when employees are allowed to self-select their task. This is likely due to subjects’ bias regarding their transitory ability. Naïve thinking, more than optimism/pessimism bias, may explain why subjects do not distort their effort prior to promotion, contrary to Lazear’s (2004) prediction. Key Words: Promotion, Peter Principle, Sorting, Experiment
    JEL: C91 J24 J33 M51 M52
    Date: 2007
  3. By: B. Arruñada; M. Casari
    Date: 2007–11
  4. By: Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group, Jena, Germany)
    Abstract: Economic theory has evolved without paying proper attention to behavioral approaches, especially to social, economic, and cognitive psychology. This has recently changed by including behavioral economics courses in many doctoral study programs. Although this new development is most welcome, the typical topics of the behavioral economics courses are not truly behavioral. More specifically, we question whether eoclassical repairs or game fitting exercises as well as more or less mechanic adaptation processes qualify as behavioral approaches. To avoid criticizing without offering alternatives, we suggest some truly behavioral concepts, especially the satisficing approach.
    Keywords: (Un)Bounded rationality, Satisficing, Learning, Experimental and Behavioral Economics
    JEL: A11 B41 B52 C72 C91
    Date: 2007–12–04
  5. By: Magni, Carlo Alberto
    Abstract: The Net Present Value maximizing model shows fallacies and inconsistencies that may be easily unmasked by performing a cognitive analysis of the decision-making process implied by the maximization problem. The model may be conveniently rescued if the maximizing version of the criterion is shunt aside and a boundedly rational interpretation is given. The resulting ‘mixed strategy’, currently in use by many real-life decision makers, opens up terrain to a fruitful cooperation between bounded and unbounded rationality. This paper is consistent with a fluid and nondichotomous interpretation of dual-process theories.
    Keywords: Finance; Investment decisions; Net Present Value; heuristics; bounded rationality; cognition.
    JEL: D81 G11 B40 G31 A12 M20 G30
    Date: 2007–08
  6. By: Pierre-Yves Geoffard; Stéphane Luchini
    Abstract: In this paper, we consider that our experience of time (to come) depends on the emotions we feel when we imagine future pleasant or unpleasant events. A positive emotion such as relief or joy associated with a pleasant event that will happen in the future induces impatience. Impatience, in our context, implies that the experience of time up to the forthcoming event expands. A negative emotion such as grief or frustration associatedwith an unpleasant event thatwill happen in the future triggers anxiety. This will give the experience of time contraction. Time, therefore, is not exogeneously given to the individual and emotions, which link together events or situations, are a constitutive ingredient of time experience. Our theory can explain experimental evidence which shows that people tend to prefer to perform painful actions earlier than pleasurable ones, contrary to the predictions yielded by the standard exponential discounting framework.
    Date: 2007
  7. By: Ellingsen, Tore (Dept. of Economics, Stockholm School of Economics); Östling, Robert (Dept. of Economics, Stockholm School of Economics)
    Abstract: Using the level-k model of boundedly rational interaction, we fully characterize the effects of pre-play communication in symmetric and generic 2x2 games. We find that one-way communication weakly increases coordination on Nash equilibrium outcomes in all such games. Although one-way communication entails Nash equilibrium when relatively sophisticated players meet, there are games in which average payoffs fall when one-way communication is allowed. Two-way communication can yield higher average payoffs than one-way communication in coordination games such as Stag Hunt, but in other games two-way communication reduces both average payoffs and the degree of coordination below the no-communication level. Extending our analysis to larger and less symmetric games, we find that communication facilitates coordination in all two-player common interest games. However, we also identify games in which communication hampers coordination.
    Keywords: Pre-play communication; coordination games; Stag Hunt; level-k; bounded rationality
    JEL: C72
    Date: 2007–11–27
  8. By: Patricia Garcia-Prieto (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.); Véronique Tran (ESCP EAP, Paris, France); Susan Schneider (University of Geneva, Suisse.)
    Abstract: Strategic issues have the potential to impact organizational performance. These issues are subject to cognitive interpretation by decision-makers and implementers. Some strategic issues are considered to be “hot” because of their potential to evoke strong emotions. In this paper, we argue that the cognitive antecedents involved in strategic issue interpretation are similar to those involved in the determination of emotion. We use “diversity” as an example of strategic issue. We propose that individuals’ salient social identities will shape cognitive antecedents in turn eliciting specific emotions and associated behavioral tendencies. Theoretical and managerial implications are discussed.
    Date: 2007–12
  9. By: David, Cesarini (Department of Economics, Massachusetts Institute of Technology); Dawes, Christopher T. (Political Science Department, University of California, San Diego); Johannesson, Magnus (Dept. of Economics, Stockholm School of Economics); Lichtenstein, Paul (Department of Medical Epidemiology and Biostatistics, Karolinska Institutet); Wallace, Björn (Dept. of Economics, Stockholm School of Economics)
    Abstract: We use the classical twin design to provide estimates of genetic and environmental influences on experimentally elicited preferences for risk and altruism. Our estimates provide strong prima facie evidence that economic preferences are heritable. Approximately 30 percent of the variation in behavior is explained by genetic effects in the best-fitting models. The results suggest a modest role for common environment as a source of phenotypic variation. Based on the findings, we encourage economists to move beyond a black-box treatment of preference formation and suggest that the further study of the codetermination of preferences by genes and environment will lead to a more comprehensive economic science.
    Keywords: Genetics; Altruism; Risk Aversion; Preferences; Experiments
    JEL: C90 D01 D64
    Date: 2007–11–22
  10. By: Ottone, Stefania; Ponzano, Ferruccio
    Abstract: The model by Fehr and Schmidt introduces envy and altruism in the utility function of a representative agent. The aim of this paper is to provide two extensions – non linearity and non self-centredness – to this model. This extension turns out to be more consistent with experimental evidence than the original model.
    Date: 2007–12
  11. By: Laura Juarez (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))
    Abstract: This paper uses a recent demogrant for the elderly in Mexico City to estimate the e¤ect of an exogenous increase in the income of older individuals on the amount of private transfers they receive. My results show that not controlling for the endogeneity of income replicates the positive or small negative e¤ects of income on the amount of private transfers received obtained by previous work. In contrast, my instrumental variables strategy yields negative and signi.cant income e¤ects, not far from the minus one implied by altruistic models, suggesting that a change in the public resources for elderly could be neutralized by the response of private transfers.
    Date: 2007–11
  12. By: Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group, Jena, Germany); M. Vittoria Levati (Max Planck Institute of Economics, Strategic Interaction Group, Jena, Germany)
    Abstract: We report on an experiment designed to explore whether allowing individuals to voice their anger prevents costly punishment. For this sake, we use an ultimatum minigame and distinguish two treatments: one in which responders can only accept or reject the other, and the other in which they can also scold the proposer. By an unannounced successive two-person public goods game, with either the same partner or a different one, we additionally explore how "having a voice" affects later behavior. The evidence supports the conclusion that voicing one's outrage crowds out the need to harm oneself and the other. Yet, this emotional reaction does not lead to increased future cooperation.
    Keywords: Ultimatum bargaining, Public goods game, Outrage, Punishment
    JEL: C72 C78 C92 H41
    Date: 2007–12–04
  13. By: Manuel Portugal Ferreira (Instituto Politécnico de Leiria); Stephen Tallman (Richmond University); Dan Li (Kelley School of Business - Indiana University)
    Abstract: Cross-border acquisitions may be a primary mode for accessing novel knowledge and the building up of knowledge capabilities. However, the successful exploration of novel business and/or location knowledge may require specific structural forms for the incorporation and internal transfer to occur. In this paper we examine the relationship between the knowledge strategy and the structural form of the acquisition, specifically the degree of equity acquired. Our analyses of 439 US cross-border acquisitions revealed a curvilinear effect of location-related knowledge exploration but a linear effect of business-related knowledge exploration on the structural form of cross-border acquisition. We conclude that the knowledge strategy, and perhaps the type of knowledge being sought, is related in complex manners to the structural form adopted.
    Keywords: cross-border acquisitions, knowledge strategy, equity ownership, structural forms, learning
    JEL: M0 M1
    Date: 2007
  14. By: A. V. Muthukrishnan (Hong Kong University of Science and Technology); Luc Wathieu (ESMT European School of Management and Technology)
    Abstract: This paper investigates situations where a sizeable sub-set of consumers prefer an inferior (dominated) offer made by an established brand to a superior (dominating) offer made by a less-established brand. Established brands are those for which consumers hold more confident beliefs concerning overall quality. Through a series of eight experiments, we test the hypothesis that the preference for a dominated established brand is linked to ambiguity aversion, a seemingly unrelated pattern of choice behavior between monetary gambles. We first show a correlation between ambiguity aversion and the preference for dominated established brands. We then demonstrate that the preference for established brands is enhanced when ambiguity aversion is made more salient in unrelated preceding choices. To further study the ambiguity-reducing properties of established brands, the last experiments assign brand names to monetary gambles, and it appears that (a priori unrelated) established brand names increase the likelihood of choosing ambiguous gambles. Overall, this research argues that brand equity for longstanding brands derives (at least in part) from consumers’ tendency to avoid ambiguity.
    Keywords: branding, brand choice, consumer behavior, decision making under uncertainty
    JEL: C91 D10 D80 M31
    Date: 2007–11–29
  15. By: Eva Camacho-Cuena (Autonomous University of Madrid, Spain); Tibor Neugebauer (University of Hanover, Germany); Christian Seidl (University of Kiel, Germany)
    Abstract: Leaky-bucket transactions can be regarded as income transfers allowing for transaction costs. In its most rudimentary form, leaky-bucket transactions trace out the maximum “leakage” of transaction costs before income inequality is exacerbated, or—alternatively—before a welfare loss is experienced. This notion suggests that part of the income transfer should reach the transferee in order to keep the degree of income inequality or social welfare intact. However, in general, this conjecture is theoretically wrong. Rather there exists a unique benchmark such that it holds only for transfers among income recipients below the benchmark. When both are above the benchmark, the transferee has to be given more than the amount taken from the transferor, and when they are on opposite sides of the benchmark, both should experience an income loss. These three cases cover progressive transfers only. Three more cases apply to regressive transfers, and six more cases apply to income gains. Each of these twelve cases is covered by the present paper. Yet experimental research shows poor empirical evidence for this theory. Subjects’ perceptions of maintaining the degree of income inequality rather follow a simple precept: If someone gains income, the other person involved should be positively compensated, and if someone loses income, the other person involved should be negatively compensated. This expresses sort of compensating justice rather than restoration of the former degree of income inequality according to the orthodox theory. Compensating justice is, however, at variance with the transfer principle.
    JEL: D31 D63 C91
    Date: 2007

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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