nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2007‒12‒15
eighteen papers chosen by
Marco Novarese
University of the Piemonte Orientale

  2. Virtual world experimentation: An exploratory study By Thomas Chesney; Swee-Hoon Chuah; Robert Hoffmann
  3. Re-reading Jevons's Principles of Science - Induction Redux By K. Vela Velupillai
  4. Resolute Choice in interaction: a qualitative experiment. By Lotito, Gianna
  6. Institutions for Intuitive Man By Christoph Engel
  7. Billiards and Brains: Cognitive Ability and Behavior in a p-Beauty Contest By Burnham, Terence C.; Cesarini, David; Wallace, Björn; Johannesson, Magnus; Lichtenstein, Paul
  8. Testing Guilt Aversion By Ellingsen, Tore; Johannesson, Magnus; Tjøtta, Sigve; Torsvik, Gaute
  9. Risk, Timing and Overoptimism in Private Placements and Public Offerings By Cécile Carpentier; Jean-François L'Her; Stephan Smith; Jean-Marc Suret
  10. Voluntary Teaming and Effort By Claudia Keser; Claude Montmarquette
  11. Sequential Reciprocity in Two-Player, Two-Stage Games: An Experimental Analysis By Dhaene G.; Bouckaert J.
  12. Risky Choice and Type-Uncertainty in "Deal or No Deal?" By Gee, C.
  13. The Classroom as a Potential Space-teaching Negotiation through Paradox By Laurence, de Carlo
  14. Cost-Benefit Analysis of Psychological Therapy By David Clark; Martin Knapp; Richard Layard; Guy Mayraz
  15. Family ties, incentives and development: a model of coerced altruism By Alger, Ingela; Weibull, Jörgen
  16. Trust in Private and Common Property Experiments By James C. Cox; Elinor Ostrom; James M. Walker; Jamie Castillo; Eric Coleman; Robert Holahan; Michael Schoon; Brian Steed
  17. Comparison of Mean-Variance Theory and Expected-Utility Theory through a Laboratory Experiment By Andrea Morone
  18. Evolution, Cooperation, and Repeated Games (based on work with D. Fudenberg) By Eric Maskin

  1. By: Ernst Fehr; Jean-Robert Tyran
    Abstract: Much evidence suggests that people are heterogeneous with regard to their abilities to make rational, forward-looking decisions. This raises the question as to when the rational types are decisive for aggregate outcomes and when the boundedly rational types shape aggregate results. We examine this question in the context of a long-standing and important economic problem: the adjustment of nominal prices after an anticipated monetary shock. Our experiments suggest that two types of bounded rationality – money illusion and anchoring – are important behavioral forces behind nominal inertia. However, depending on the strategic environment, bounded rationality has vastly different effects on aggregate price adjustment. If agents’ actions are strategic substitutes, adjustment to the new equilibrium is extremely quick, whereas under strategic complementarity, adjustment is both very slow and associated with relatively large real effects. This adjustment difference is driven by price expectations, which are very flexible and forward-looking under substitutability but adaptive and sticky under complementarity. Moreover, subjects’ expectations are also considerably more rational under substitutability.
    Date: 2007–10
  2. By: Thomas Chesney (Nottingham University Business School); Swee-Hoon Chuah (Nottingham University Business School); Robert Hoffmann (Nottingham University Business School)
    Abstract: We explore the scientific potential of virtual worlds for experimental economists. In particular, we report the results of a series of virtual world experiments designed to examine the suitability of (a) users as subjects and (b) the computer interface as an experimental platform. Formal results and informal observations from the sessions are discussed in terms of the methodological opportunities and challenges of virtual experimentation generally.
    Keywords: virtual worlds, laboratory experiments, human values survey
    JEL: C72 C88 C99 Z13
    Date: 2007–09–12
  3. By: K. Vela Velupillai
    Abstract: In this paper I try to substantiate the thesis that Jevons may have been too harsh on the vices of induction and generously optimistic about the virtues of deduction, as discussed, primarily, in his magnum opus, The Principles of Science [6]. With this aim in mind the paper attempts to suggest (modern), recursion theoretic, theoretical technologies that could reduce and, under conditions that I claim would be acceptable to Jevons, even eliminate the inductive indeterminacies that he had emphasised.
    Keywords: Jevons, Inductiion, Inductive Inference, Bayes's Rule
    JEL: B16 B31 C11 C63
    Date: 2007
  4. By: Lotito, Gianna
    Abstract: The purpose of this paper is that of extending the model of Resolute Choice (McClennen 1990) to a situation of interaction and comparing its performance with the Sophisticated-subgame perfect equilibrium model in an experiment. A non-cooperative game in which two players with different preference orderings over outcomes move sequentially is adopted as a framework to compare the two models. I consider those combinations of the players' preference structures which generate the different plans and find those game situations where either one or two outcomes Pareto-dominant over Sophisticated Choice exist. Two definitions of Resolute Choice are therefore tested, which allow to discriminate choice between two different Pareto dominant outcomes. In the experiment three games with the same structure but different payoffs are played. The design allows preliminary group discussion among the players about the decisions to be taken, which is taped and transcribed. The results show support for Resolute Choice as Pareto dominance, while the ability of Resolute Choice as Nash bargaining to explain behaviour is quite limited. The subjects' motivations are very useful in interpreting the results. They show that choice for a Pareto dominant outcome is mainly driven by the idea of Pareto optimality itself. Motivations differ slightly according to which strategy is chosen to reach one of the Pareto dominant outcomes. A result to be noted is the relevance of the different payoffs of the games in motivating choice. The method used in the experiment to elicit the subjects' responses is the strategy method. A direct consequence is that the results are all in terms of strategies chosen by subjects. In view of this, an alternative way to look at the experiment results has been tried, which consists in a simulation of the outcomes of the games that would have resulted from direct interaction among the players. The results have then been compared to the ones from the experiment.
    Keywords: dynamic decision making, myopia, sophistication, resoluteness, non-cooperative game
    JEL: C91 C72 D80
    Date: 2007–12
  5. By: David Dequech
    Date: 2007
  6. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: By its critics, the rational choice model is routinely accused of being unrealistic. One key objection has it that, for all nontrivial problems, calculating the best response is cognitively way too taxing, given the severe cognitive limitations of the human mind. If one confines the analysis to consciously controlled decision-making, this criticism is certainly warranted. But it ignores a second mental apparatus. Unlike conscious deliberation, this apparatus does not work serially but in parallel. It handles huge amounts of information in almost no time. It only is not consciously accessible. Only the end result is propelled back to consciousness as an intuition. It is too early to decide whether the rational choice model is ultimately even descriptively correct. But at any rate institutional analysts and institutional designers are well advised to take this powerful mechanisms seriously. In appropriate contexts, institutions should see to it that decision-makers trust their intuitions. This frequently creates a dilemma. For better performance is often not the only goal pursued by institutional intervention. Accountability, predictability and regulability are also desired. Sometimes, clever interventions are able to get them both. Arguably, the obligation to write an explicit set of reasons for a court decision is a case in point. The judge is not obliged to report the mental processes by which she has taken her decision. Justification is only ex post control. Intuitive decision-making is even more desirable if the underlying social problem is excessively complex (NP hard, to be specific), or ill-defined. Sometimes, it is enough for society to give room for intuitive decision-making. For instance, in simple social dilemmas, a combination of cheater detection and punishing sentiments does the trick. However, intuition can be misled. For instance, punishing sentiments are triggered by a hurt sense of fairness. Now in more complex social dilemmas, there are competing fairness norms, and people intuitively choose with a self-serving bias. In such contexts, institutions must step in so that clashing intuitions do not lead to social unrest.
    Keywords: intuition, consciousness, rational choice, heuristics, ill-defined social problems, institutions
    JEL: B52 C72 D01 D02 D81 K40 K42
    Date: 2007–08
  7. By: Burnham, Terence C. (Program for Evolutionary Dynamics, Harvard University); Cesarini, David (Department of Economics, Massachusetts Institute of Technology); Wallace, Björn (Dept. of Economics, Stockholm School of Economics); Johannesson, Magnus (Dept. of Economics, Stockholm School of Economics); Lichtenstein, Paul (Department of Medical Epidemiology and Biostatistics, Karolinska Institutet)
    Abstract: "Beauty contests" are well-studied, dominance-solvable games that generate two interesting results. First, most behavior does not conform to the unique Nash equilibrium. Second, there is considerable unexplained heterogeneity in behavior. In this work, we evaluate the relationship between beauty contest behavior and cognitive ability. We find that subjects with high cognitive ability exhibit behavior that is closer to the Nash equlibrium. We examine this finding through the prism of economic and biological theory.
    Keywords: beauty contest; rationality; cognitive ability; Nash equlibrium
    JEL: C90 D01
    Date: 2007–12–10
  8. By: Ellingsen, Tore (Dept. of Economics, Stockholm School of Economics); Johannesson, Magnus (Dept. of Economics, Stockholm School of Economics); Tjøtta, Sigve (Department of Economics, University of Bergen); Torsvik, Gaute (Department of Economics, University of Bergen)
    Abstract: Guilt averse individuals experience a utility loss if they believe they let someone down. In particular, generosity depends on what the donor believes that the recipient expects to receive. In experimental work, several authors have identified a positive correlation between such second-order donor beliefs and generous behavior, as predicted by the guilt aversion hypothesis. However, the correlation could alternatively be due to a “false consensus effect,” i.e., the tendency of people to believe others to think like themselves. In order to test the guilt aversion hypothesis more rigorously, we conduct three separate experiments: a dictator game experiment, a complete information trust game experiment, and a hidden action trust game experiment. In the experiments we inform donors about the beliefs of their respective recipients, while eliciting these beliefs so as to maximize recipient honesty. The correlation between generous behavior and donors’ second-order beliefs is close to zero in all three experiments.
    Keywords: guilt aversion; beliefs; generosity; experiments
    JEL: C91 D64
    Date: 2007–12–07
  9. By: Cécile Carpentier; Jean-François L'Her; Stephan Smith; Jean-Marc Suret
    Abstract: We examine whether risk, timing or mispricing hypotheses can explain the underperformance of private and public equity issuers, in Canada, where both categories share several common characteristics. Adding an investment risk factor to the TFPM reduces, but does not eliminate, the underperformance. Four arguments, including financial constraints and poor operating performance, do not support the timing hypothesis. Our results for their part support the mispricing hypothesis. The market correctly assesses the investment projects of value firms, but tends to overestimate those of glamour firms. For both types of issues, the underperformance is explained by investors’ overoptimism relative to glamour/high-investment firms. <P>Nous tentons de vérifier laquelle des hypothèses de risque, de timing ou d’irrationalité peut expliquer la sous performance à long terme des émetteurs de placement privés et public au Canada, où ces deux types de financement ont en commun plusieurs caractéristiques. L’ajout d’un facteur d’investissement au modèle à trois facteurs réduit, mais n’élimine pas, cette sous performance. Quatre arguments, incluant ceux des contraintes financières et de la faible performance opérationnelle contredisent l’hypothèse du timing. Nos résultats tendent à confirmer l’hypothèse de l’irrationalité. Le marché évalue correctement les projets d’investissement des sociétés de valeur, mais sur estime ceux des titres de croissance. Pour les deux types de financement, la sous performance est expliquée par le sur optimisme des investisseurs au sujet des entreprises de croissance à fort niveau d’investissement.
    Keywords: Private placements, seasoned equity offerings, long-run performance, timing, overoptimism, risk, Placements privés, placements publics subséquents, performance à long terme, fenêtre d’opportunité, sur optimisme, risque
    JEL: G12 G14 G34
    Date: 2007–11–01
  10. By: Claudia Keser; Claude Montmarquette
    Abstract: In a series of experimental games, each of two players may choose between remuneration based on either private or team effort. Although at least one of the players has the subgame perfect equilibrium strategy to choose remuneration based on private effort, we frequently observe team remuneration chosen by both players. Team remuneration allows for high payoff for each player for cooperation, but at the same time provides individual incentives to take a free ride on the other player's effort. Due to significant cooperation we observe that in team remuneration participants make higher profits than in private remuneration. We also observe that, when participants are not given the option of private remuneration, they cooperate significantly less.
    Keywords: Team effort, voluntary collaboration, experimental economics
    JEL: C72 C90 H41 J33
    Date: 2007
  11. By: Dhaene G.; Bouckaert J.
    Abstract: We experimentally test Dufwenberg and Kirchsteiger’s (2004) theory of sequential reciprocity in a sequential prisoner’s dilemma (SPD) and a mini-ultimatum game (MUG). Data on subjects’ behavior and first and second-order beliefs allow us to classify their behavior as a material best response, a reciprocity best response, both, or none. In both games, about 80% of the first-movers’ behavior is a material best response, a reciprocity best response, or both. The remaining 20% of first-movers almost always make choices that are “too kind” according to the theory of reciprocity. Second-movers’ behavior, in both games, is fully in line with the predictions of the theory. Average behavior and beliefs, across subjects, are found to be compatible with a sequential reciprocity equilibrium in the SPD, but not in the MUG. We also found first- and second-order beliefs to be unbiased in the SPD, and nearly unbiased in the MUG, with the exception that first-movers in the MUG significantly overestimated the second-mover’s rejection rate of unequal offers.
    Date: 2007–11
  12. By: Gee, C.
    Abstract: This paper uses data from the popular television game-show, "Deal or No Deal?", to analyse the way individuals make choices under risk. In a unique approach to the problem, I present a formal game-theoretical model of the show in which both the contestant and the banker are modelled as strategic players. I use standard techniques to form hypotheses of how rational expected utility-maximisers would behave as players in the game and I test these hypotheses with the relevant choice data. The main result is that an increasing o¤er function is the result of optimal behaviour when the banker is uncertain about the contestant.s risk attitudes. This result provides a theoretical foundation to the empirical model of the banker that pervades the literature. Estimates of the coefficient of relative risk aversion are consistent with estimates from other studies and estimates of the discernment parameter suggest contestants have difficulty making choices.
    Keywords: Choice under Risk, Expected Utility, Asymmetric Information, Risk-Aversion
    JEL: C72 C93 D81 D82
    Date: 2007–11
  13. By: Laurence, de Carlo (ESSEC Business School)
    Abstract: In this article, we describe and analyze a way of teaching negotiation which recognizes and accepts paradoxes, such as caring and frustrating the students at the same time and helping them being more autonomous while manipulating them. In this analysis, the classroom is considered tantamount to a transitional space (Winnicott). This way of teaching is not the easiest one for the professor and for the students, as it is shown. But it helps the students to really listen to others, to sincerely try to understand the rational of others, and finally be more creative in the options they propose, all skills and capacities necessary to better negotiate.
    Keywords: Creativity; Negotiation; Paradox; Teaching; Transitional Space; Winnicott
    JEL: I20 I29
    Date: 2007–06
  14. By: David Clark; Martin Knapp; Richard Layard; Guy Mayraz
    Abstract: At present six million people are suffering from clinical depression or anxiety disorders, but only aquarter of them are in treatment. NICE Guidelines prescribe the offer of evidence-basedpsychological therapy, but they are not implemented, due to lack of therapists within the NHS. Wetherefore estimate the economic costs and benefits of providing psychological therapy to people notnow in treatment.The cost to the government would be fully covered by the savings in incapacity benefits andextra taxes that result from more people being able to work. On our estimates the cost could berecovered within two years - and certainly within five. And the benefits to the whole economy aregreater still.This is not because we expect the extra therapy to be targeted especially at people withproblems about work. It is because the cost of the therapy is so small (£750 in total), the recoveryrates are so high (50%) and the cost of a person on IB is so large (£750 per month).These findings strongly reinforce the humanitarian case for implementing the NICEGuidelines. Current proposals for doing this would require some 8,000 extra psychological therapistswithin the NHS over the next six years.
    Keywords: depression, anxiety, cost-benefit analysis, cognitive behavioural therapy, psychologicaltherapists
    JEL: H5 I1
    Date: 2007–10
  15. By: Alger, Ingela (Carleton University); Weibull, Jörgen (Dept. of Economics, Stockholm School of Economics)
    Abstract: We analyze the effects of family ties on the incentives for production of effort, where family ties are defined as a mixture of true and coerced altruism between family members. We model families as pairs of siblings. Each sibling exerts effort in order to obtain output under uncertainty. A social norm dictates that a sibling with a high output must share a specified amount of this output with his sibling, if the latter's output is low. Siblings may be truly altruistic towards each other, but not to a larger degree than dictated by the social norm. We compare such informal family insurance with actuarially fair formal insurance. We show that coerced family altruism reduces individual efforts in equilibrium. However, individuals always benefit ex ante from living in families with coerced altruism, as compared with living in autarky. We show that a certain degree of coerced family altruism is robust as a social norm in a society of selfish individuals. Finally, we show that if family members are sufficiently altruistic to each other, then informal family insurance by way of coerced altruism may outperform actuarially fair insurance programs.
    Keywords: altruism; coerced altruism; family ties; insurance; moral hazard
    JEL: D02 D13
    Date: 2007–10–24
  16. By: James C. Cox; Elinor Ostrom; James M. Walker; Jamie Castillo; Eric Coleman; Robert Holahan; Michael Schoon; Brian Steed
    Abstract: We report the results from a series of experiments designed to investigate behavior in two settings that are frequently posited in the policy literature as generating different outcomes: private property and common property. The experimental settings closely parallel earlier experimental studies of the investment or trust game. The primary research question relates to the effect of the initial allocation of property rights on the level of trust that subjects will extend to others with whom they are linked. We find that assigning the initial endowments as common property of each of N pairs of a first mover and second mover leads to marginally greater cooperation or trust than when the initial endowments are fully owned by the two individual movers as their, respective, private property. Subjects’ decisions are also shown to be correlated with attitudes toward trust and fairness that are measured in post-experiment questionnaires.
    Date: 2007–11
  17. By: Andrea Morone (University of Bari.)
    Abstract: In the 40.s and early 50. two decision theories were proposed and have since dominated the scene of the fascinating field of decision-making. In 1944 . when von Neumann and Morgenstern showed that if preferences are consistent with a set of axioms then it is possible to represent these preferences by the expectation of some utility function . Expected Utility theory provides a natural way to establish .measurable utility.. In the early 50.s Markowitz introduced the Mean-Variance theory that is the basis of modern portfolio selection theory. Even if both models were analyzed from virtually all possible points of view; although they were tested against several generalizations; even though they seem to be the most attractive theories of decision making, they were never tested against each other. This paper will try to fill this gap. It investigates, using experimental data, which of these two models represent a better approximation of subjects. preferences.
    Keywords: Expected utility, Mean variance, preference functional, pair wise choice, experiments.
    JEL: C92 G12
    Date: 2007–10
  18. By: Eric Maskin (School of Social Science, Institute for Advanced Study)
    Date: 2007–12

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.