nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2008‒03‒25
nineteen papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. Risk-Taking Tournaments: Theory and Experimental Evidence By Nieken, Petra; Sliwka, Dirk
  2. Face-to-Face Lying – an experimental study in Sweden and Japan By Holm, Håkan J.; Kawagoe, Toshiji
  3. Institutions, Motivations and Public Goods: Theory, Evidence and Implications for Environmental Policy By Andrew Reeson
  4. Professionals' endorsement of behavioral finance: Does it impact their perception of markets and themselves? By Menkhoff, Lukas; Nikiforow, Marina
  5. Forecasting the Risk Attitudes of Women and Men: An Experimental Test of the Strength of Gender Stereotypes By Oleksandr Lugovskyy; Philip J. Grossman
  6. Self-Knowledge and Self-Deception By H. Peyton Young
  7. Incorporating fairness motives into the Impulse Balance Equilibrium concept: an application to experimental 2X2 games By Tavoni, Alessandro
  8. Leadership and Gender: An Experiment By Philip J. Grossman; Mana Komai
  9. Learning by Trial and Error By H. Peyton Young
  10. An auction mechanism for public goods provision: an experimental study By DIEV, Pavel; HICHRI, Walid
  11. Search Pathways to Innovation By Tommy Clausen
  12. The effect of early cognitive ability on earnings over the life-cycle By Torberg Falch; Sofia Sandgren
  13. Risk aversion in low income countries: Experimental evidence from Ethiopia By Yesuf, Mahmud; Bluffstone, Randy
  14. Non Utility Maximizing Behaviour: Probabilistic Choice in a Budget Set “Box”. Properties of Expected Demand Functions By Larsson, Lars-Göran
  15. A Short Measure of Four Types of Personal Optimism: Ability, Rivalry, Chance, and Social Support (ARCS) By Diemo Urbig
  16. Productivity effects of innovation, stress and social relations By Weehuizen, Rifka; Sanditov, Bulat; Cowan, Robin
  17. Detection Biases in Bluffing By Holm, Håkan J.
  18. Do Financial Literacy and Mistrust Affect 401(k) Participation? By Julie R. Agnew; Stephen P. Utkus; Jean A. Young
  19. Do Charity Ratings Matter? By Vidhi Chhaochharia; Suman Ghosh

  1. By: Nieken, Petra (University of Cologne); Sliwka, Dirk (University of Cologne)
    Abstract: We study risk-taking behavior in a simple two person tournament in a theoretical model as well as a laboratory experiment. First, a model is analyzed in which two agents simultaneously decide between a risky and a safe strategy and we allow for all possible degrees of correlation between the outcomes of the risky strategies. We show that risk-taking behavior crucially depends on this correlation as well as on the size of a potential lead of one of the contestants. We find that the experimental subjects acted mostly quite well in line with the derived theoretical predictions.
    Keywords: tournaments, competition, risk-taking, experiment
    JEL: M51 C91 D23
    Date: 2008–03
  2. By: Holm, Håkan J. (Department of Economics, Lund University); Kawagoe, Toshiji (Department of Complex Systems)
    Abstract: This paper investigates face-to-face lying and beliefs associated with it. In experiments in Sweden and Japan, subjects answer questions about personal characteristics, play a face-to-face sender-receiver game and participate in an elicitation of lie-detection beliefs. The previous finding of too much truth-telling (compared to the equilibrium prediction) also holds in the face-to-face setting. A new result is that although many people claim that they are good at lie-detection, few reveal belief in this ability when money is at stake. Correlations between the subjects’ characteristics and their behavior and performances in the game are also explored.
    Keywords: Lying; Game theory; Truth detection; Lie-detection; Experiment
    JEL: C72 C91 D82
    Date: 2008–02–29
  3. 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
  4. By: Menkhoff, Lukas; Nikiforow, Marina
    Abstract: This paper provides evidence on the hypothesis that many behavioral finance patterns are so deeply rooted in human behavior that they are difficult to overcome by learning. We test this on a target group which has undoubtedly very strong incentives to learn efficient behavior, i.e. fund managers. We split this group into endorsers and non-endorsers of behavioral finance. Endorsers do, indeed, view markets differently as they regard stronger influences from behavioral biases. However, when it comes to the perception of one's own behavior the endorsement of behavioral finance becomes almost meaningless, even though endorsers otherwise do adapt behavior to their endorsement.
    Keywords: behavioral finance, fund managers, biasess
    JEL: G10 D83
    Date: 2008–03
  5. By: Oleksandr Lugovskyy; Philip J. Grossman (Department of Economics, St. Cloud State University)
    Abstract: This paper experimentally investigates the role of gender-based stereotypes in the forecasting of risk attitudes. Subjects predict the gamble choice of target subjects in one of three treatments: 1) Visual – the predictor can only observe the target; 2) Information – the predictor has information about the targets’ response to two statements from a risk-preference survey; and 3) Combined – the predictor both observes the targets and has the targets’ two responses to the risk-preference survey. Our results suggest that stereotypes play a considerable role in forming predictions about others’ risk attitudes and that these stereotypes persist even when more relevant information is available.
    Keywords: Experiment, Gender, Risk
    Date: 2006–10
  6. By: H. Peyton Young
    Abstract: A person is concerned about self-image if his utility function depends, not only on his actions, but also on his beliefs about what sort of person he is. This dual motivation problem makes it difficult, and in some cases impossible, for someone to learn who he really is based solely on his revealed behavior. Indeed, there are very simple situations, involving just two actions and two possible identities, such that, if there is any initial uncertainty about one's true identity, it will never be resolved even when one has an infinite number of opportunities to act.
    Keywords: Knowledge, Self-Signalling, Learning
    JEL: C70 D83
    Date: 2008
  7. By: Tavoni, Alessandro
    Abstract: Substantial evidence has been accumulated in recent empirical works on the limited ability of the Nash equilibrium to rationalize observed behavior in many classes of games played by experimental subjects. This realization has led to several attempts aimed at finding tractable equilibrium concepts which perform better empirically, often by introducing a reference point to which players compare the available payoff allocations, as in impulse balance equilibrium (Selten & Chmura, forthcoming) and in the inequity aversion model (Fehr & Schmidt,1999). The purpose of this paper is to review some features of this recent literature and to propose a new, empirically sound, unifying concept which combines elements of fairness with reference considerations.
    Keywords: Fairness; Inequity aversion; Aspiration level; Impulse balance; Behavioral economics; Experimental economics; Jacknife estimator
    JEL: D63 D01 C72 C91
    Date: 2007–10
  8. By: Philip J. Grossman; Mana Komai (Department of Economics, St. Cloud State University)
    Abstract: We present an information based model of leadership in a setting that exhibits the familiar problems of free riding and coordination failure. Leaders have superior information about the value of the project in hand and can send a costly signal to their uninformed followers to persuade them to cooperate in the project. Followers voluntarily choose whether or not to follow the better informed leader. We provide experimental evidence that, when the leaders’ gender is revealed to their followers, female subjects hesitate to lead (send a costly signal) while followers’ behavior does not indicate any gender discrimination. Such behavior is not observed among the male leaders.
    Keywords: Leadership, Information, Gender, Free Riding, Coordination Problem
    JEL: C92 H41
    Date: 2008–01
  9. By: H. Peyton Young
    Abstract: A person learns by trial and error if he occasionally tries out new strategies, rejecting choices that are erroneous in the sense that they do not lead to higher payoffs. In a game, however, strategies can become erroneous due to a change of behavior by someone else. We introduce a learning rule in which behavior is condition on whether a player experiences an error of the first or second type. This rule, called interactive trial and error learning, implements Nash equilibrium behavior in any game with generic payoffs and at least one pure Nash equilibrium.
    Keywords: Learning, Adaptive Dynamics, Nash Equilibrium, Bounded Rationality
    JEL: C72 D83
    Date: 2008
  10. By: DIEV, Pavel; HICHRI, Walid
    Abstract: We experiment a new mechanism for the provision of a discrete public good: in a fixed period individuals can contribute several times; at any moment they can see the total amount collected; at the end of the period, the public good is provided if the amount covers the cost. We find that the ability of the mechanism to provide efficiently the public good decreases with the amount of the provision cost.
    Keywords: Public Goods; Experiments; Mechanism Design
    JEL: C92 H41
    Date: 2008
  11. By: Tommy Clausen (Centre for Technology, Innovation and Culture, University of Oslo)
    Abstract: Organizational search processes is an important source of firm level heterogeneity in evolutionary - behavioural theory. Combining insights from established and recent evolutionary-behavioural theory we propose that R&D and managerial perceptions constitute two distinct search pathways to innovation. R&D is in this context a measure of institutionalized routine based search, while managerial perception of problems captures situational and cognitive search. Using a new survey of industrial enterprises we find that these search pathways are related to product, process, organizational and market innovation at the firm level, although in a diverse way.
    Date: 2008–03
  12. By: Torberg Falch (Department of Economics, Norwegian University of Science and Technology); Sofia Sandgren (Royal Institute ofTechnology, Stockholm, Sweden, and Department of Economics, Norwegian University of Science and Technology, Norway)
    Abstract: This paper utilizes information on cognitive ability at age ten and earnings information from age 20 to 65 to estimate the return to ability over the life-cycle. Ability measured at an early age is not influenced by the individual’s choices of schooling and other circumstances. We find that most of the unconditional return to early cognitive ability goes through educational choice. The conditional return is increasing for low levels of experience and non-increasing for experience above about 15-25 years. The return is similar for men and women, and highest for individuals with academic education. Only a small part of the return can be explained by higher probability to have a supervisory position.
    Keywords: Cognitive ability; life-cycle; earnings; IQ
    Date: 2008–03–01
  13. By: Yesuf, Mahmud; Bluffstone, Randy
    Abstract: "Production systems in low-income developing countries are generally poorly diversified, focusing on rainfed staple crop production and raising livestock. These activities are inherently risky and investment and production decisions by farm households are therefore made within environments that are affected by risk. Because of poorly developed or absent credit and insurance markets it is difficult to pass any of these risks to a third party. As a result, it is often found that even when the expected net return is high, households are reluctant to adopt new agricultural technologies when they involve risk. Better understanding risk behavior will be essential for identifying appropriate farm-level strategies for adaptation to climate change by low-income farmers. Despite risk's potentially central role in farm investment decisions, there have been few attempts to estimate the magnitude and nature of risk aversion of farm households in low-income developing countries. To partially close this gap, this paper uses an experimental approach applied to 262 households in the Ethiopian highlands with real payoffs. By incorporating both small and large stakes and gains and losses into the experiment, we test for the presence of low stake risk aversion and loss aversion. We find that more than 50 percent of the households are severely or extremely risk averse. This contrasts with studies in Asia where most household decision-makers exhibit moderate to intermediate risk aversion. We find that households that stand to lose as well as gain something from participation in games are significantly more risk averse than households playing gains-only games. This strongly suggests that agricultural extension efforts involving losses as well as gains may face systematic resistance by farmers in low-income, high-risk environments. Promotion of technologies with downside risks – even if the upside potential is enormous – should therefore be combined with insurance or other support. We also find that even without the possibility of losses households are much more averse to risk when stakes are high. Results indicate that insurance or other support can likely be phased out. After initial successes have convinced farmers that technologies are viable, risk aversion declines. There are also significant differences in risk averting behavior between relatively poorer and wealthier farm households, which is consistent with decreasing absolute risk aversion. This suggests that as wealth is built up households are willing to take on more risk in exchange for higher returns. Both these findings suggest a strong path dependence. Efforts to develop poor rural areas through promotion of risky technologies should take this path dependence into account. Early successes are important, but households should also be allowed to build up wealth before they are challenged or tempted to take on more risky ventures. Furthermore, the finding that even without the possibility of losses households are much more risk averse when stakes are higher, suggests that agricultural extension should start modestly before asking households to take on larger gambles." from Authors' Abstract
    Keywords: experimental studies, loss aversion, risk aversion, Risk management, econometric models, Farm households,
    Date: 2007
  14. By: Larsson, Lars-Göran (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: In this paper we use some(even a convex) probabilistic frequency functions in two choice variables defined over the budget set” box” and calculate the expected demand to study its properties The expected demands have own price negativity , are normal goods and are homogeneous of degree zero*. The detailed properties of deterministic demand functions can be replaced with similar properties for some expected demand functions the latter found with fewer and behaviourally less restrictive assumptions. To assume a deterministic utility function to be maximized is more restrictive in a behavioural sense than assuming random choice between some boundaries.<p>
    Keywords: Non-maximising behaviour; Bounded rationality; Random choice; Expected demand
    JEL: C60 D01 D11
    Date: 2008–03–18
  15. By: Diemo Urbig (Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy)
    Abstract: Self-efficacy, which can be defined as optimism about one's own ability to exercise required actions, has received a lot of attention in research on entrepreneurs' and managers' decision making. This attention led to the development of corresponding measurement instruments. However, there is no equivalent measure of the more general personal optimism that jointly captures on equivalent bases abilities and other sources of uncertainty, which one might be more or less optimistic about. I develop a measurement instrument of four dimensions of personal optimism: ability optimism (self- efficacy), rivalry optimism (being better than others), chance optimism (being a lucky devil or fearing of bad-luck), and social support optimism (others help and support me and are trustworthy). Correlations between subscales are intuitive and backed by theory. I replicate corresponding results from previous studies that used different measures, e.g. life-orientation (LOT-R), self-efficacy (NGSE), and social optimism at the societal level from the POSO scale. This new personal optimism measurement instrument is very much like the life-orientation test (LOT-R), but it provides more insights regarding the structure of optimism. Whenever self-efficacy or control beliefs are of interest, the ARCS or ACS scales should be used to control for complementary world beliefs. I also illustrate the special role of one item in NGSE, which in contrast to all other NGSE items refers to a comparative instead of an absolute judgment.
    Keywords: personal optimism, social optimism, chance optimism, self-efficacy
    Date: 2008–03–14
  16. By: Weehuizen, Rifka (UNU-MERIT, Maastricht University); Sanditov, Bulat (UNU-MERIT, Maastricht University); Cowan, Robin (UNU-MERIT, Maastricht University)
    Abstract: Innovation is a source of increasing productivity, but it is also a source of stress. Psychological research shows that moderate stress increases the productivity of an actor, but above a certain level, additional stress decreases productivity. Stress is reduced by coping behaviour of the actor, and in addition it is buffered by social relations. However, high levels of stress negatively affect social relations, causing social erosion. In a formal model including inter-agent dynamics, we show that the variables moderating stress levels are of crucial importance for identifying the overall effects of different rates of innovation on productivity. The model shows among other things that the existence and nature of relationships of people determine the extent to which a certain rate of innovation effectively results in increasing productivity. In addition, it shows the possibility of multiple equilibria - under some parameter values both high- and low-stress steady states exist; and the dynamics exhibit hysteresis. At very high levels of stress, innovation can result in a dissolution of social relations, and has a negative relationship with the rate of economic growth.
    Keywords: innovation, work-related stress, social relationships
    JEL: O4 J28 C61
    Date: 2008
  17. By: Holm, Håkan J. (Department of Economics, Lund University)
    Abstract: Beliefs in signals that reveal lies or truths are widespread. These signals may lead to a truth or lie detection bias if the probability that such a signal is perceived by the receiver is contingent on the truth value of the sender’s message. Such detection biases are analyzed theoretically in a bluffing game. The detection bias shrinks the equilibrium set to a unique non-pooling equilibrium, in which the better a player is at detecting lies the more often the opponent player will lie. With proper deception techniques such biases can in principle be used to extract hidden information.
    Keywords: Bluffing; Game theory; Truth detection; Lie detection; Detection bias
    JEL: C72 D82
    Date: 2008–02–29
  18. By: Julie R. Agnew; Stephen P. Utkus; Jean A. Young
    Abstract: The private pension landscape has changed dramatically over the past quarter century, with a decisive shift away from traditional defined benefit plans toward defined contribution plans, primarily 401(k)s. Under the typical 401(k), individuals are responsible for making their own retirement saving decisions. The first, and most important, decision is whether to participate in the plan. As many as one-third of participants choose not to join, sparking concern about their retirement security...
    Date: 2007–10
  19. By: Vidhi Chhaochharia (Department of Finance, School of Business, University of Miami); Suman Ghosh (Department of Economics, College of Business, Florida Atlantic University)
    Abstract: This paper investigates whether donor contributions to charities responds to the information incorporated in charity ratings. Using charity ratings data from 1999-2004, we find that ratings do have a significant effect on contributions received. We find that charities that have the lowest rating have 16 % less contributions as compared to charities with the highest rating. In addition we find that charities in turn react to lower ratings by increasing their fundraising expenditures. Our results suggest that ratings do have an effect in reducing the asymmetry of information that exists amongst donors and the charities.
    Date: 2008–02

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