nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2008‒02‒16
fourteen papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. The Dynamic Interplay of Inequality and Trust - An Experimental Study By Ben Greiner; Axel Ockenfels; Peter Werner
  2. On the Role of Non-equilibrium Focal Points as Coordination Devices By Antoni Bosch-Domènech; Nicolaas J. Vriend
  3. What Behavioural Economics Teaches Personnel Economics By Uschi Backes-Gellner; Donata Bessey; Kerstin Pull; Simone Tuor
  4. Foolishness and Identity: Amartya Sen and Adam Smith By Caroline Gerschlager
  5. Towards Understanding Life Cycle Saving Of Boundedly Rational Agents: A Model With Feasibility Goals By Binswanger, J.
  6. A Simple Bounded-Rationality Life Cycle Model By Binswanger, J.
  7. Error Cascades in Observational Learning: An Experiment on the Chinos Game By Francesco Feri; Miguel A. Melendez-Jimenez; Giovanni Ponti; Fernando Vega Redondo
  8. Institutions, Motivations and Public Goods: Theory, Evidence and Implications for Environmental Policy By Andrew Reeson
  9. Stability of risk preference By Claudia R. Sahm
  10. Effects of Profitable Downsizing on Collective Bargaining By Sven Fischer; Werner Güth; Christoph Köhler
  11. Learning within a Markovian Environment By Javier Rivas
  12. CREATIVITY IN ENTREPRENEURSHIP EDUCATION By Yar, Daniel; Wennberg, Karl; Berglund, Henrik
  13. Are Genetic Algorithms a good basis for economic learning models? By Sylvie Geisendorf
  14. Communication and Gulit in a Prisoner's Dilemma By Miettinen, T.; Suetens, S.

  1. By: Ben Greiner (Harvard Business School); Axel Ockenfels (University of Cologne, Department of Economics); Peter Werner (University of Cologne, Department of Economics)
    Abstract: We study the interplay of inequality and trust in a dynamic game, where trust increases efficiency and thus allows higher growth of the experimental economy in the future. We find that trust is initially high in a treatment starting with equal endowments, but decreases over time. In a treatment with unequal endowments, trust is initially lower yet remains relatively stable. The difference seems partly due to the fact that equal start positions increase subjects' inclination to condition their trust decisions on wealth comparisons, whereas conditional trust is much less prevalent with unequal initial endowments. As a result, with respect to efficiency, the initially more unequal economy fares worse in the short run but better in the long run, and the disparity of wealth distributions across economies mitigates over time.
    Keywords: inequality, trust, growth, laboratory experiments
    JEL: C73 C92 D63 E25 O15
    Date: 2007–10
  2. By: Antoni Bosch-Domènech (Universitat Pompeu Fabra and CREA, Barcelona); Nicolaas J. Vriend (Queen Mary, University of London)
    Abstract: Considering a pure coordination game with a large number of equivalent equilibria, we argue, first, that a focal point that is itself not a Nash equilibrium and is Pareto dominated by all Nash equilibria, may attract the players' choices. Second, we argue that such a non-equilibrium focal point may act as an equilibrium selection device that the players use to coordinate on a closely related small subset of Nash equilibria. We present theoretical as well as experimental support for these two new roles of focal points as coordination devices.
    Keywords: Coordination game, Focal point, Nash equilibrium, Equilibrium selection, Coordination device
    JEL: C72 C91
    Date: 2008–02
  3. By: Uschi Backes-Gellner (Institute for Strategy and Business Economics, University of Zurich); Donata Bessey (Institute for Strategy and Business Economics, University of Zurich); Kerstin Pull (Eberhard Karls Universitaet Tuebingen); Simone Tuor (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: In this survey article, we review results from behavioural and experimental economics that have a potential application in the field of personnel economics. While personnel economics started out with a “clean” economic perspective on human resource management (HRM), recently it has broadened its perspective by increasingly taking into account the results from laboratory experiments. Besides having inspired theory-building, the integration of behavioural economics into personnel economics has gone hand in hand with a strengthening of empirical analyses (field experiments and survey data) complementing the findings from the laboratory. Concentrating on employee compensation as one particular field of application, we show that for personnel economics there is indeed much to be learnt from the recent developments in behavioural economics. Moreover, integrating behavioural economics into personnel economics bears the chance of eventually reconciling personnel economics and “classic” HRM analysis that has a long tradition of relying on social psychology as a classical point of reference.
    Keywords: Behavioural Economics, Personnel Economics
    JEL: J3 M52 C9
    Date: 2008–02
  4. By: Caroline Gerschlager (Free University of Brussels, DULBEA, av. F. D. Roosevelt, 50, B-1050 Brussels,)
    Abstract: Drawing on Amartya Sen the paper aims at a better understanding of the motivational foundation of the economic agent by analysing Adam Smith’s insights into the foolishness of human ambitions. It inquires whether there is another side to the pursuit of self-interest in Adam Smith and particularly accentuates his parable of the poor man’s son as a prototypical example. Complementing the standard views of the self and their recent extensions, the present analysis of the parable advances a description of economic identity based on selfreflexivity and conscious change of preferences.
    Keywords: hypertrophic self-love, self-deceit, illusion, change of preference, self-reflexivity.
    JEL: B B21 B D
    Date: 2008–01
  5. By: Binswanger, J. (Tilburg University, Center for Economic Research)
    Abstract: This paper develops a new life cycle model that aims to describe the savings and asset allocation decisions of boundedly rational agents. The paper?s main theoretical contribution is the provision of a simple, tractable and parsimonious framework within which agents make forward looking decisions in the absence of full contingent planning. Instead, agents pursue two simple so-called feasibility goals. The paper uses this framework to shed light on important empirical patterns of asset allocation that are puzzling from the point of view of existing models.
    Keywords: Behavioral economics;bounded rationality;equity shares;feasibility goals;life cycle saving;stock market participation.
    JEL: D81 D91
    Date: 2008
  6. By: Binswanger, J. (Tilburg University, Center for Economic Research)
    Abstract: Life cycle saving decisions belong to the most complex financial decisions that we are faced with in our life. Psychologists have found that when making complex decisions people use short-cuts in the form of minimum requirements for particular attribute categories of choice options. This paper presents a new simple life cycle model where agents do invoke such minimum requirements. The model is highly tractable and parsimonious. Calibrations show that it allows us to better understand important data on saving and asset allocation. It is shown that the model is much better able to explain these data than standard workhorse models even when generously controlling for subtle differences in the ?degrees of freedom? between the new and existing models.
    Keywords: Asset allocation;behavioral economics;bounded rationality;life cycle saving;noncompensatory decision making;threshold goals.
    JEL: D81 D91
    Date: 2008
  7. By: Francesco Feri; Miguel A. Melendez-Jimenez; Giovanni Ponti; Fernando Vega Redondo
    Abstract: The paper reports an experimental study based on a variant of the popular Chinos game, which is used as a simple but paradigmatic instance of observational learning. There are three players, arranged in sequence, each of whom wins a fixed price if she manages to guess the total number of coins lying in everybody’s hands. Our evidence shows that, despite the remarkable frequency of equilibrium outcomes, deviations from optimal play are also significant. And when such deviations occur, we find that, for any given player position, the probability of a mistake is increasing in the probability of a mistake of her predecessors. This is what we call an error cascade, which we rationalize by way of a simple model of “noisy equilibrium”.
    Keywords: positional learning, error cascades
    JEL: C92 D8
    Date: 2008
  8. By: Andrew Reeson (CSIRO Sustainable Ecosystems, Australia)
    Abstract: In economic terms, the environment is largely a public good. Contributing to a public good is costly to an individual, while the benefits are enjoyed by all. Despite this, many people voluntarily contribute to public goods, both in laboratory economic experiments and through day-to-day environmental decisions. These voluntary contributions are largely motivated intrinsically, that is satisfaction comes from the act itself rather than external rewards. Policy interventions are often required to increase the provision of public goods to the socially optimal level, which usually take the form of extrinsic incentives such as payments or regulations. Theoretical and empirical evidence from psychology and economics suggests that such extrinsic incentives can crowd out the intrinsic motivations which underlie voluntary contributions. As a result, a policy may have less than the anticipated impact. It is even possible for a costly policy intervention to lead to a decrease in overall public good provision, as individuals cease to contribute voluntarily. This paper argues that environmental policy design should proceed with caution in the presence of intrinsic motivations. Weak regulations and small, competitive financial incentives have the greatest potential for negative effects. Recognising and supporting existing efforts can crowd in, rather than crowd out, voluntary contributions. With careful design and implementation, there is the potential to maintain and support intrinsic motivations while also providing robust extrinsic incentives.
    Keywords: public goods; environmental policy; intrinsic motivation; crowding out
    JEL: H4 Q0
    Date: 2008–01
  9. By: Claudia R. Sahm
    Abstract: Stability of preferences is central to how economists study behavior. This paper uses panel data on hypothetical gambles over lifetime income in the Health and Retirement Study to quantify changes in risk tolerance over time and differences across individuals. The maximum-likelihood estimation of a correlated random effects model utilizes information from 12,000 respondents in the 1992-2002 HRS. The results support constant relative risk aversion and career selection on preferences. While risk tolerance changes with age and macroeconomic conditions, persistent differences across individuals account for 73% of the systematic variation. The measure of risk tolerance also relates to actual stock ownership.
    Date: 2007
  10. By: Sven Fischer (Department of Economics, University College London); Werner Güth (Max Planck Institute of Economics, Jena); Christoph Köhler (Friedrich-Schiller-University Jena, Institute for Sociology, Economic and Social Structure Group)
    Abstract: We experimentally test how acceptance thresholds react to the decision of the proposer in a three party ultimatum game to exclude one of two responders with veto power from the game. We elicit responder acceptance thresholds in case the proposer decides to exclude one of them, what increases the available pie, and in case he doesn't exclude him despite strong monetary incentives. We ?nd that on the aggregate level the proposer's decision has no effect on acceptance thresholds. However, if the proposer excludes one responder, the distribution of thresholds becomes bimodal, indicating a polarization in behavior.
    Keywords: bargaining, experiment, labor markets
    JEL: C91 J52
    Date: 2008–02–12
  11. By: Javier Rivas
    Abstract: We investigate learning in a setting where each period a population has to choose between two actions and the payoff of each action is unknown by the players. The population learns according to reinforcement and the environment is non-stationary, meaning that there is correlation between the payoff of each action today and the payoff of each action in the past. We show that when players observe realized and foregone payoffs, a suboptimal mixed strategy is selected. On the other hand, when players only observe realized payoffs, a unique action, which is optimal if actions perform different enough, is selected in the long run. When looking for efficient reinforcement learning rules, we find that it is optimal to disregard the information from foregone payoffs and to learn as if only realized payoffs were observed.
    Keywords: Adaptive Learning, Markov Chains, Non-stationarity, Reinforcement Learning
    JEL: C73
    Date: 2008
  12. By: Yar, Daniel (University College of Borås); Wennberg, Karl (Dept. of Business Administration, Stockholm School of Economics); Berglund, Henrik (Chalmers University of Technology)
    Abstract: This paper uses social cognitive theory to investigate entrepreneurial intent among participants in graduate entrepreneurship programs. To the best of our knowledge, the paper is the first to investigate the importance of creativity in entrepreneurship education and theoretical models of entrepreneurial intentions. Specifically, we test whether students creative potential is related to their intention to engage in entrepreneurship. Theoretically derived hypotheses are tested using multiple and ordinal regression analyses. We find that high scores on a creativity test and prior entrepreneurial experiences were positively associated with entrepreneurial intentions, whereas perception of risks had a negative influence. Our theoretical predictors of entreprenurial intention received strong support, indicating that creativity should be considered in models of entrepreneurial intentions. Yet, the use of intentions as dependent variable has its know weaknesses in that we might not distinguish between 'dreamers' and 'doers'. The findings indicate that exercises in creativity can be used to raise entrepreneurial intentions of students in entrepreneurship education. Heterogeneity in creative styles among students also points to the problems of a ‘one-size-fits-all’ approach to entrepreneurship education.
    Keywords: Entrepreneurship education; intentions; creativity
    Date: 2008–01–01
  13. By: Sylvie Geisendorf (Department of Economics, University of Kassel)
    Abstract: Genetic Algorithms (GA) have been used for some years now to depict learning in economic models. Some authors criticize their use on the basis that they are a biologically motivated procedure having nothing to do with human learning. One argument of this paper is that the criticism of GA is focused at the wrong point – and was probably incurred by the much too simple applications we have seen so far. It is not primarily the origin of a model we should be concerned of, but its general characteristics and the specification in its current use. After a brief introduction into the procedure the paper tries to show why GA offer some important features for the modelling of bounded rationality. Learning models based on them are among the few that create novelty and describe the mechanisms of selection, recombination and variation by which novelty is generated. The paper discusses the criticism of GA and argues that the biological origin of the model should not be a substantial problem. The biological features of the model are only a shell in which the general mechanisms of evolutionary processes are imbedded. An up to now underestimated problem however lies in the adequate specification of the fitness function of GA. Proponents as well as critics of GA seemed to have overlooked the necessary distinction between internal fitness criteria of the agents and external criteria of the economy. Both are relevant for economic selection processes and have their proper place in the model. If this is respected GA based learning models can be a useful tool to investigate economic evolution.
    Keywords: Evolutionary Economics, Genetic Algorithms, Learning, Bounded Rationality, Modelling, Methodological work
    Date: 2007–12
  14. By: Miettinen, T.; Suetens, S. (Tilburg University, Center for Economic Research)
    Abstract: In this paper we measure experienced guilt in a prisoner?s dilemma experiment with pre-play communication. We find that feelings of guilt only arise in the case of unilateral defection and that they are stronger when players have mutually agreed to cooperate. We also find that fining unilateral defection reduces feelings of guilt.
    Keywords: cooperation;guilt;experiments;prisoner?s dilemma;pre- play communication
    JEL: C91 D74
    Date: 2008

This nep-cbe issue is ©2008 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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