nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2008‒03‒08
thirteen papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. Exchange Rate Determination: A Model of the Decisive Role of Central Bank Cooperation and Conflict By Robin Pope; Reinhard Selten; Sebastian Kube; Johannes Kaiser; Jürgen von Hagen
  2. Beggar Thy Neighbour Exchange Rate Regime Misadvice  from Misapplications of Mundell (1961) and the Remedy By Robin Pope
  3. Presentation Effects in Cross-Cultural Experiments - An Experimental Framework for Comparisons By Sebastian J. Goerg; Gari Walkowitz
  4. The Economics and Psychology of Personality Traits By Borghans Lex; Lee Duckworth Angela; Heckman James J.; Weel Bas ter
  5. Job Assignments, Intrinsic Motivation and Explicit Incentives By Julia Nafziger
  6. An experimental test of the deterrence hypothesis By Hörisch, Hannah; Strassmair, Christina
  7. Institutions, Motivations and Public Goods: Theory, Evidence and Implications for Environmental Policy By Andrew Reeson
  8. Managerial Compensation in a Two-Level Gift-Exchange Experiment By Nils Hesse; Fernanda Rivas
  9. The Impact of (In)Equality of Opportunities on Wealth Distribution : Evidence from Ultimatum Games By Grimalda, Gianluca; Kar, Anirban; Proto, Eugenio
  10. Experts' Stated Behavior By Boulaksil, Y.; Franses, Ph.H.B.F.
  11. Doubts and equilibria By Antonio Cabrales; Jose Ramon Uriarte
  12. Isolation, Assurance and Rules : Can Rational Folly Supplant Foolish Rationality? By Peter J. Hammond
  13. Organizational Change Perspectives on Software Process Improvement By Müller, Sune Dueholm; Mathiassen, Lars; Balshøj, Hans Henrik

  1. By: Robin Pope; Reinhard Selten; Sebastian Kube; Johannes Kaiser; Jürgen von Hagen
    Abstract: Opinion is divided on whether it is better to have a single world   money or variable exchange rates.  Pope, Selten and von Hagen (2003)   propose that fresh light would be shed via an analysis that allows   for seven complexity impacts on the exchange rate that are   underplayed (where not entirely absent) from current analyses: 1) the   role of official sector, including its central bank; 2) the numerous   official and private sector goals; 3) the disparate degrees of market   power of different sorts of private agents; 4) the documentation that   essentially all shocks to the exchange rate are generated by human   decisions; 5) the non-maximising heuristics that in the complex   economy agents use; 6) heterogenous beliefs.  This paper analyses a   closed form game theoretic solution of version 1 of a model that   combines impacts 1 to 4 with the conventional finance assumption that   all agents maximise their utility.  Impact 1) precludes private   agents being able to destabilise the exchange rate against the   cooperation of the central banks required by the game theoretic   solution.  Impact 4) excludes random events and other exogenous   shocks such as meteors falling from the sky.  The rational maximising   assumption in turn precludes all other sources of shocks and thus any   need for a variable exchange rate to equilibrate after shocks.  We   then modify version 1 of our model substituting for the maximising   assumption impacts 5 to 7, impacts that allow shocks from humans to   be consistently incorporated.  We do so by means of an experimental   investigation which indicates that central bankers less than fully   cooperate, leaving scope for private speculators to support their   preferred currency.  From the viewpoint of the game theoretic   equilibrium, the resultant exchange rate changes render equilibrium   unspecified.  A single world money avoids disruptive exchange rate   changes from less than fully cooperating central banks, exchange rate   changes caused by central bank conflicts and that cannot be   classified as equilibrating.
    Keywords: central bank; cooperation; conflict; exchange rate; experiment; market power; heuristics; heterogenous beliefs; personality; interpersonal dynamics; friendship; complex; destabilising speculators, irrational central bankers
    JEL: F31 F33 B40 B59 C79 C90 C91 C92
    Date: 2007–12
  2. By: Robin Pope
    Abstract: Economists invoke Mundell (1961) in arguing for the general policy of   a flexible exchange rate regime as a means of restoring equilibria   after shocks. But there is a discrepancy between the intent of the   general policy and attempts at its implementation as identified by   specific changes in exchange rates.  When we assemble the set of   specific changes called for by distinct economists operating as   advocates for individual countries, these are uniformly in the form   of beggar-thy-neighbour advice – ie travesties of objectively   identifying disequilibria and a menace to international cooperation   and peace.  This paper traces the unintended travesties to problems   of complexity and uncertainty, problems that implicitly are assumed   absent in Mundell (1961) rendering the situation so simple that   equilibria are transparent.  The problems remained essentially   unaddressed when economists extended Mundell (1961) via expected   utility theory since this theory also ignores the impossibility of   maximising and the complexities of central bankers, private firms and   others in doing the evaluation stage in reaching decisions.  The   problems can be overcome by modelling within SKAT, the Stages of   Knowledge Ahead Theory.  This paper points to experimental evidence   in support of the view that under all sorts of disequilibrating   shocks, currency unions outperform flexible currencies by eliminating   the inefficiencies generated by exchange rate uncertainty.
    Keywords: optimal currency area; exchange rate regime; certainty effects;   policy; beggar-thy-neighbour; SKAT the Stages of Knowledge Ahead Theory; complexity; equilibrium; small world; shocks; expenditure-switching shocks; supply-side shocks; demand shocks; experiment, safety, international competitiveness.
    JEL: D80 F31
    Date: 2007–11
  3. By: Sebastian J. Goerg; Gari Walkowitz
    Abstract: This paper investigates the impact of game presentation dependent on   ethnical affiliation. Two games representing the same logical and strategical problem are   introduced. Presented games are continuous prisoner’s dilemma games where decision makers   can choose an individual level of cooperation from a given range of possible actions. In the   first condition, a positive transfer creates a positive externality for the opposite player. In   the second condition, this externality is negative. Accomplishing a cross-cultural experimental   study involving subjects from the West Bank and Jerusalem (Israel) we test for a strategic   presentation bias applying these two conditions. Sub jects in the West Bank show a substantially   higher cooperation level in the positive externality treatment. In Jerusalem no   presentation effect is observed. Critically discussing our findings, we argue that a cross-cultural   comparison leads to only partially meaningful and opposed results if only one treatment   condition is evaluated. We therefore suggest a complementary application and consideration of   different presentations of identical decision problems within cross-cultural research.
    Keywords: Cooperation, presentation of decision problems, framing, methodology, cross-cultural research
    JEL: A13 C72 C91 F51 Z13
  4. By: Borghans Lex; Lee Duckworth Angela; Heckman James J.; Weel Bas ter (ROA rm)
    Abstract: This paper explores the interface between personality psychology andeconomics. We examine the predictive power of personality and the stability ofpersonality traits over the life cycle. We develop simple analytical frameworksfor interpreting the evidence in personality psychology and suggest promisingavenues for future research.
    Keywords: education, training and the labour market;
    Date: 2008
  5. By: Julia Nafziger
    Abstract: This paper considers the interplay of job assignments with the intrinsic and extrinsic motivation of an agent. Job assignments influence the self confidence of the agent, and thereby his intrinsic motivation. Monetary reward allow the principal to complement intrinsic motivation with extrinsic incentives. The main result is that the principal chooses an inefficient job assignment rule to enhance the agent's intrinsic motivation even though she can motivate him with monetary rewards. This shows that, in the presence of intrinsically motivated agents, it is not possible to separate job assignment decisions from incentive provision.
    Keywords: Intrinsic and Extrinsic Motivation, Job Assignments
    JEL: D82 J31 J33 M12
  6. By: Hörisch, Hannah; Strassmair, Christina
    Abstract: Crime has to be punished, but does punishment reduce crime? We conduct a neutrally framed laboratory experiment to test the deterrence hypothesis, namely that crime is weakly decreasing in deterrent incentives, i.e. severity and probability of punishment. In our experiment, subjects can steal from another participant's payoff. Deterrent incentives vary across and within sessions. The across subject analysis clearly rejects the deterrence hypothesis: except for very high levels of incentives, subjects steal more the stronger the incentives. We observe two types of subjects: selfish subjects who act according to the deterrence hypothesis and fair-minded subjects for whom deterrent incentives backfire.
    Keywords: deterrence; law and economics; incentives; crowding out; experiment
    JEL: K42 C91 D63
    Date: 2008–02–26
  7. 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
  8. By: Nils Hesse (Albert-Ludwigs Universität Freiburg); Fernanda Rivas (Universidad Carlos III de Madrid)
    Abstract: In times of increasing international competition firms demand concessions from employees to carry out necessary restructuring measures, which can partly be resisted by workers, whose behavior at work can not be fully contracted upon. At the same time, management compensations are perceived as too high by the majority of the population. In our paper we explore to what extent these two observations are related. In a two-level gift-exchange experiment it is asked if the managerial compensation influences workers' effort decisions and workers' willingness to accept wage cuts. We compare sessions in which the managerial compensation is public information with private information sessions. Our data suggests that the managerial compensations in public wage sessions are signiffcantly negatively correlated with the workers' effort choices -in particular after wage cuts. The profit-maximizing strategy for the firm is to compress wages when the managerial compensation is public information.
    Keywords: managerial compensation, social preferences, laboratory experiment, gift-exchange, e¤ort, downsizing
    JEL: C92 J33 M12 M52
    Date: 2007–12
  9. By: Grimalda, Gianluca (Department of Economics, University of Warwick); Kar, Anirban (Department of Economics, University of Warwick); Proto, Eugenio (Department of Economics, University of Warwick)
    Abstract: We study the impact on payoff distribution of varying the probability (opportunity) that a player has of becoming the proposer in an ultimatum game (UG). Subjects' assignment to roles within the UG was randomised before the interactions. Subjects played 20 rounds anonymously and with random rematching at each round. We compare the outcomes of four different settings that differed according to the distribution of opportunities between the pair of players in each round, and across the whole 20 rounds. The results clearly point to the existence of a discontinuity in the origin of the opportunity spectrum.Allowing a player a 1% probability of becoming the proposer brings about significantly lower offers and higher acceptance rates with respect to the benchmark case where a player has no such a chance. As such probability is raised to 20% and 50%, this same trend continues, but the effects are generally no longer significant with respect to the 1% setting. In one case the monotonic pattern is violated. We conclude that subjects in our experiment appear to be motivated mostly by the purely symbolic aspect of opportunity rather than by the actual fairness in the allocation of opportunities.
    Date: 2008
  10. By: Boulaksil, Y.; Franses, Ph.H.B.F. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: We ask various experts, who produce sales forecasts that can differ from earlier received model-based forecasts, what they do and why they do so. A questionnaire with a range of questions was completed by no less than forty-two such experts who are located in twenty different countries. We correlate the answers to these questions with actual behavior of the experts. Our main findings are that experts have a tendency to double count and to react strongly to recent volatility in sales data. Also, experts who feel more confident give forecasts that differ most from model-based forecasts.
    Keywords: model forecasts;expert forecasts;decision making;stated behavior
    Date: 2008–01–09
  11. By: Antonio Cabrales; Jose Ramon Uriarte
    Abstract: In real life strategic interactions decision-makers are likely to entertain doubts about the degree of optimality of their play. To capture this feature of real choice-making, we present here a model based on the doubts felt by an agent about how well is playing a game. The doubts are coupled with (and mutually reinforced by) imperfect discrimination capacity, which we model here by means of similarity relations. We assume that each agent builds procedural preferences defined on the space of expected payoffsstrategy frequencies attached to his current strategy. These preferences, together with an adaptive learning process lead to doubt-based selection dynamic systems. We introduce the concepts of Mixed Strategy Doubt Equilibria, Mixed Strategy Doubt-Full Equilibria and Mixed Strategy Doubtless Equilibria and show the theoretical and the empirical relevance of these concepts
    Keywords: Doubts, Bounded rationality, Evolutionary dynamics, Decision theory
    JEL: C72 C73 D81
    Date: 2008–02
  12. By: Peter J. Hammond (Department of Economics, University of Warwick)
    Abstract: Consider an “isolation paradox” game with many identical players. By definition, conforming to a rule which maximizes average utility is individually a strictly dominated strategy. Suppose, however, that some players think “quasi-magically” in accordance with evidential (but not causal) decision theory. That is, they act as if others’ disposition to conform, or not, is affected by their own behavior, even though they do not actually believe there is a causal link. Standard game theory excludes this. Yet such “rational folly” can sustain “rule utilitarian” cooperative behavior. Comparisons are made with Newcomb’s problem, and with related attempts to resolve prisoner’s dilemma.
    Date: 2008
  13. By: Müller, Sune Dueholm (Department of Business Studies, Aarhus School of Business); Mathiassen, Lars (Georgia State University); Balshøj, Hans Henrik (Systematic Software Engineering)
    Abstract: Many software organizations have engaged in Software Process Improvement (SPI) and experienced the challenges related to managing such complex organizational change efforts. As a result, there is an increasing body of research investigating change management in SPI. To provide an overview of what we know and don’t know about SPI as organizational change, this paper addresses the following question: What are the dominant perspectives on SPI as organizational change in the literature and how is this knowledge presented and published? All journals on the AIS ranking list were screened to identify relevant articles and Gareth Morgan’s organizational metaphors (1996) were used to analyze this literature considering the following dimensions of each article: organizational perspective (metaphor), knowledge orientation (normative versus descriptive), theoretical emphasis (high versus low), main audience (practitioner versus academic), geographical origin (Scandinavia, the Americas, Europe, or the Asia-Pacific), and publication level (high versus low ranked journal). The review demonstrates that the literature on SPI as organizational change is firmly grounded in both theory and practice, and Scandinavia and the Americas are the main contributors to this research. The distribution of articles across Morgan’s metaphors is uneven and reveals knowledge gaps that present new avenues for research. The current literature offers important insights into organizational change in SPI from machine, organism, and brain perspectives. Practitioners may use these articles as a guide to SPI insights relevant to their improvement initiatives. In contrast, the impact of culture, dominance, psychic prison, flux and transformation, and politics in SPI have only received scant attention. We argue that these perspectives offer important insights into the challenges involved in managing change in SPI. Researchers are therefore advised to engage in new SPI research based on one or more of these perspectives. Overall, the paper provides a roadmap to help identify insights and specific articles related to SPI as organizational change.
    Keywords: Software Process Improvement; Organizational Change; Organizational Metaphors; Images of Organization; Literature Review
    Date: 2008–01–17

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