nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2008‒02‒23
fifteen papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. The Determinants of Managerial Decisions Under Risk By Martin G. Kocher; Ganna Pogrebna; Matthias Sutter
  2. Does Variance matter? Expectations of price return and variability in an asset pricing experiment. By Giulio Bottazzi; Giovanna Devetag; Francesca Pancotto
  3. A Prize to Give for: An Experiment on Public Good Funding Mechanisms By Luca Corazzini; Marco Faravelli; Luca Stanca
  4. Single versus Multiple Prize Contests to Finance Public Goods: Theory and Experimental Evidence By Marco Faravelli; Luca Stanca
  5. The Important Thing Is not (Always) Winning but Taking Part: Funding Public Goods with Contests By Marco Faravelli
  6. Co-evolution of capabilities and preferences in the adoption of new technologies By Consoli, Davide
  7. Edgar Allen Poe's Riddle: Do Guessers Outperform Misleaders in a Repeated Matching Pennies Game? By Kfir Eliaz; Ariel Rubinstein
  8. Expertise and Bias in Decision Making By Bourjade, Sylvain; Jullien, Bruno
  9. On the Scientific Status of Economic Policy: A Tale of Alternative Paradigms By Giorgio Fagiolo; Andrea Roventini
  10. Risk Aversion and Trade Union Membership By Laszlo Goerke; Markus Pannenberg
  11. Ignoring attributes in choice experiments By Carlsson, Fredrik; Kataria, Mitesh; Lampi, Elina
  12. Influence of time delay on choice between gambles: Savoring the emotion By Luigi Mittone; Lucia Savadori
  13. Why do I like people like me? By Manuel F. Bagues; Maria Jose Perez Villadoniga
  14. Is justice blind? An examination of disparities in homicide sentencing in Colombia, 1980-2000 By Mariana Martínez; Fabio Sánchez T.; Holly Kosiewicz
  15. Technology Adoption Subsidies: An Experiment with Managers By Rob Aalbers; Eline van der Heijden; Jan Potters; Daan van Soest; Herman Vollebergh

  1. By: Martin G. Kocher; Ganna Pogrebna; Matthias Sutter
    Abstract: In hierarchical organizations the role of a team leader often requires making decisions which do not necessarily coincide with the majority opinion of the team. However, these decisions are final and binding for all team members. We study experimentally why, and under which conditions, leaders resort to such decisions. In our experiment, teams are presented with several paired lottery choices. They decide by majority voting which lottery from the lottery pair they prefer to be played out. After all members of the team have made their choices, the team leader is informed about the outcome of the vote and has an opportunity either to confirm or to alter the majority decision. We find that leaders overrule their teams in 35% of cases and such decisions are primarily driven by divergent preferences of leaders and the other team members. Male, younger and more risk seeking (as opposed to female, older and more risk averse) leaders overrule decisions of ordinary team members more often. We discuss the implications of our findings for the management of organizations.
    Keywords: leadership, risk attitude, managerial decisions, collective choice, choice under risk.
    JEL: C91 C92 D91 M14
  2. By: Giulio Bottazzi; Giovanna Devetag; Francesca Pancotto
    Abstract: In this work we describe a laboratory experiment on the emergence and coordination of expectations in a pure exchange framework. We consider a simple two asset economy with a riskless bond and a risky stock. Each market is composed of six experimental subjects who act as financial advisors of myopic risk-averse utility maximizing investors and are rewarded according to how well their forecasts perform in the market. In one treatment subjects must only make forecasts of the future return; in a second treatment they must also provide a confidence range for their prediction. The realized asset price is derived from a Walrasian market equilibrium equation with feedback from individual forecasts. We use subjects' confidence range as as indirect measure of perceived risk, and we analyze the aggregate dynamics of the resulting markets. Our experimental markets present substantial volatility that in some cases tend to increase with time, and no evidence of bubble formation. The treatment in which subjects must provide a confidence range presents lower price fluctuation compared to the baseline treatment. Finally, the behavior of subjects may often be described by simple linear forecasting rules.
    Keywords: experimental economics, expectations, coordination, asset pricing
    JEL: C91 C92 D84 G12 G14
    Date: 2008
  3. By: Luca Corazzini; Marco Faravelli; Luca 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 H41
    Date: 2007–12
  4. By: Marco Faravelli; Luca Stanca
    Abstract: This paper investigates single and multiple prize contests as incentive mechanisms for the private provision of public goods, under the assumptions of income heterogeneity and incomplete information about income levels. We compare experimentally a one-prize contest with a three-prize contest in a case where theory predicts that several prizes maximise revenues. We find that, contrary to the theoretical predictions, total contributions are significantly higher in the one-prize contest. In both treatments contributions converge towards theoretical predictions over successive rounds, but the effects of repetition are different: convergence is fast in the one-prize treatment, while gradual and with some undershooting in the three-prize treatment. Focusing on individual income types, the better performance of the single-prize contest is largely explained by the contributions of high income individuals: a single larger prize provides a more effective incentive for richer individuals than three smaller prizes.
    Keywords: Auctions; Public Goods; Laboratory Experiments
    JEL: C91 D44 H41
    Date: 2007–12
  5. By: Marco Faravelli
    Abstract: This paper considers a public good game with heterogeneous endowments and incomplete information affected by extreme free-riding. We overcome this problem through the implementation of a contest in which several prizes may be awarded. We identify a monotone equilibrium, in which the contribution is strictly increasing in the endowment. We prove that it is optimal for the social planner to set the last prize equal to zero, but otherwise total expected contribution is invariant to the prize structure. Finally, we show that private provision via a contest Pareto-dominates public provision and is higher than the total contribution raised through a lottery.
    Keywords: Contests; Public Goods; Prizes.
    JEL: D44 H41
    Date: 2008–01
  6. By: Consoli, Davide
    Abstract: The objective of this paper is to propose a multidisciplinary approach for the analysis of demand and innovation. It combines insights from studies on technology diffusion, evolutionary economics and cognitive psychology to argue that consumption and demand are learning processes driven by trial-and-error, rather than by ex-ante maximization. The paper presents a heuristic synthesis to incorporate learning processes in the determination of consumption preferences and capabilities. The case of banking service innovation in the UK is presented as an illustrative example of the outlined dynamics.
    Keywords: Demand; Innovation; Technology Adoption; Learning
    JEL: D12 D83 O33
    Date: 2008–02–15
  7. By: Kfir Eliaz; Ariel Rubinstein
    Date: 2008–02–18
  8. By: Bourjade, Sylvain; Jullien, Bruno
    Abstract: In this paper, we develop a model of a decision maker using an expert to obtain information. The expert is biased toward some favoured decision but cares also about its reputation on the market for experts. We then analyse the corresponding decision game depending on the nature of the informational linkage with the market. In the case where the expert is biased in favour of the status quo, the final decision is always biased in the same direction. Moreover, it is better to rely on experts biased against the status quo. We also show that it is optimal to publically disclose the expert report. Finally, we prove that the intuitive results that hiring an honest inside expert raises the outside expert's incentives to report truthfully holds when reports are public but not when they are secret.
    Keywords: Experts; Bias; Reputation; Merger Control
    JEL: D82 L40
    Date: 2004–11
  9. By: Giorgio Fagiolo; Andrea Roventini
    Abstract: In the last years, a number of contributions has argued that monetary -- and, more generally, economic -- policy is finally becoming more of a science. According to these authors, policy rules implemented by central banks are nowadays well supported by a theoretical framework (the New Neoclassical Synthesis) upon which a general consensus has emerged in the economic profession. In other words, scientific discussion on economic policy seems to be ultimately confined to either fine-tuning this "consensus" model, or assessing the extent to which "elements of art" still exist in the conduct of monetary policy. In this paper, we present a substantially opposite view, rooted in a critical discussion of the theoretical, empirical and political-economy pitfalls of the neoclassical approach to policy analysis. Our discussion indicates that we are still far from building a science of economic policy. We suggest that a more fruitful research avenue to pursue is to explore alternative theoretical paradigms, which can escape the strong theoretical requirements of neoclassical models (e.g., equilibrium, rationality, etc.). We briefly introduce one of the most successful alternative research projects -- known in the literature as agent-based computational economics (ACE) -- and we present the way it has been applied to policy analysis issues. We conclude by discussing the methodological status of ACE, as well as the (many) problems it raises.
    Keywords: Economic Policy, Monetary Policy, New Neoclassical Synthesis, New Keynesian Models, DSGE Models, Agent-Based Computational Economics, Agent-Based Models, Post-Walrasian Macroeconomics, Evolutionary Economics.
    Date: 2008–02–14
  10. By: Laszlo Goerke; Markus Pannenberg
    Abstract: In an open-shop model of trade union membership with heterogeneity in risk attitudes, a worker's relative risk aversion can affect the decision to join a trade union. Furthermore, a shift in risk attitudes can alter collective bargaining outcomes. Using German panel data (GSOEP) and three novel direct measures of individual risk aversion, we find evidence of a significantly positive relationship between risk aversion and the likelihood of union membership. Additionally, we observe a negative correlation between bargained wages in aggregate and average risk preferences of union members. Our results suggest that an overall increase in risk aversion contributes to wage moderation and promotes employment.
    Keywords: Employment, membership, risk aversion, trade union
    JEL: J
    Date: 2008
  11. By: Carlsson, Fredrik (Department of Economics, School of Business, Economics and Law, Göteborg University); Kataria, Mitesh (Department of Policy Analysis, National Environmental Research Institute); Lampi, Elina (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: In this paper we use follow-up questions to investigate whether attributes have been ignored in a choice experiment on environmental goods. This information is subsequently used in the estimation of the model by restricting the individual parameters for the ignored attributes to zero. We then separately estimate the marginal willingness to pay (WTP) for the whole sample and for those who took all attributes into account. We find no significant differences in mean marginal WTP between these two models. However, when taking the shares of respondents who considered both the environmental and the cost attributes (52 -69 percent of the respondents) into account, then the marginal WTPs for each attribute change if the respondents who ignored the attributes have a zero WTP. Hence, not taking into account whether respondents have considered the attribute could give biased welfare estimates and wrong policy implications. We also investigate whether any socioeconomic characteristics can explain who ignores attributes, and find that very few of the variables are significant, indicating that we can only partly explain the behavior.<p>
    Keywords: Choice experiment; WTP; ignoring attributes; follow-up question
    JEL: D61 Q50 Q51
    Date: 2008–02–20
  12. By: Luigi Mittone; Lucia Savadori
    Abstract: In two laboratory studies involving 285 undergraduate students presented with a one-shot real choice we observe a systematic influence of time delay on the preferences for two lotteries, equal in expected value, but different in the degree of probability and outcome. The more the outcome is postponed (2 weeks, 1 month, 3 months, 6 months), the more individuals prefer the lottery offering a higher value (400 Euro) but a lower probability (.02) compared to the one offering a lower value (14 Euro) but a higher probability (.60). We explain these findings assuming a savoring hypothesis according to which, for highly emotional events, individuals prefer to postpone the desirable outcome, enjoying the savoring experience of anticipating the future emotions. It also suggests that for decisions where uncertainty resolution is postponed in the future, people will underweight the probability and overweight the outcome.
    Keywords: intertemporal choice, time delay, time horizon, gambles, risk
    Date: 2008
  13. By: Manuel F. Bagues; Maria Jose Perez Villadoniga
    Abstract: In many dimensions the ability to assess knowledge depends critically on the observer's own knowledge of that dimension. Building on this feature, this paper offers both theoretical and empirical evidence showing that, in those tasks where multidisciplinary knowledge is required, evaluations exhibit a similar-to-me effect: candidates who excel in the same dimensions as the evaluator tend to be ranked relatively higher. It is also shown that, if races or genders differ in their distribution of ability, group discrimination will arise unless evaluators (i) are well informed about the extent of intergroup differences and (ii) they may condition their assessments on candidates' group belonging.
    Keywords: Statistical discrimination, Evaluation biases
    JEL: J71 D82
    Date: 2008–02
  14. By: Mariana Martínez; Fabio Sánchez T.; Holly Kosiewicz
    Abstract: Evidence has repeatedly shown that disparities in crime sentences can be attributed to certain variables considered outside the legal dimensions of the case. The majority of research that investigates factors that contribute to such disparities has primarily focused on crimes of varying severities adjudicated in the U.S. court system. We expand research on this topic by focusing on disparities in homicide sentences using data from over 9000 homicide cases tried in Colombia from 1980 – 2000. We specifically explore whether judges use substantive rationality when deciding the length of the offender’s sentence and if the sentence should be above the legal minimum set for the severity of the crime according to the criminal code under which it is adjudicated. Results reveal that disparities in homicida sentences can be attributed to extra-legal variables such as: the city in which the homicide trial took place, where the body of the victim was retrieved, and whether the defendant was identified by an ID parade. However, we also find evidence that suggests that legal variables such as the defendant’s previous criminal record and the aggravating circumstances of the case engender greater differences in sentence outcomes than non-legal variables previously mentioned. Explanations and policy implications are discussed.
    Date: 2007–01–14
  15. By: Rob Aalbers (SEO Economic Research, Amsterdam); Eline van der Heijden (Tilburg University); Jan Potters (Tilburg University); Daan van Soest (Tilburg University); Herman Vollebergh (Erasmus University Rotterdam)
    Abstract: We evaluate the impact of technology adoption subsidies on in- vestment behavior in an individual choice experiment. In a laboratory setting professional managers are confronted with an intertemporal decision problem in which they have to decide whether or not to search for, and possibly adopt, a new technology. Technologies differ in the per-period benefits they yield, and their purchase price increases with the per-period benefits provided. We introduce a subsidy on the more expensive technologies (that also yield the larger per-period benefits), and find that the subsidy scheme induces agents to search for and adopt these more expensive technologies even though the subsidy itself is too small to render these technologies profitable. We speculate that the result is driven by the positive connotation (affect) that the concept 'subsidy' invokes.
    Keywords: framed field experiment; search model; technology subsidies
    JEL: C9 D8 H2
    Date: 2007–10–25

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