nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2008‒04‒15
fifteen papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. Common reasoning in games By Robin P. Cubitt; Robert Sugden
  2. Belief Formation: An Experiment With Outside Observers By Kyle Hyndman; Wolf Ehrblatt; Erkut Ozbay; Andrew Schotter
  3. The Descriptive and Predictive Adequacy of Theories of Decision Making Under Uncertainty/Ambiguity By John D Hey; Gianna Lotito; Anna Maffioletti
  4. Probabilistic Choice and Stochastic Dominance By Pavlo R. Blavatskyy
  5. Information and Beliefs in a Repeated Normal-form Game By Dietmar Fehr; Dorothea Kübler; David Danz
  6. Credit Rationing with Symmetric Information By Fioretti, Guido
  7. Neuroeconomics: A Critique of 'Neuroeconomics: A Critical Reconsideration' By Stanton, Angela A.
  8. Performance Pay, Sorting and Social Motivation By Eriksson, Tor; Villeval, Marie-Claire
  9. Incentive Design and Trust: Comparing the Effects of Tournament and Team-Based Incentives on Trust By Oxoby, Robert J.; Friedrich, Colette
  10. Framing and Free Riding: Emotional Responses and Punishment in Social Dilemma Games By Robin P. Cubitt; Michalis Drouvelis; Simon Gächter
  11. The Evolution of Social Norms and Individual Preferences By Rodrigo Harrison; Mauricio Villena
  12. Distributive fairness in an intercultural ultimatum game By Sebastian Goerg; Werner Güth; Gari Walkowitz; Torsten Weiland
  13. Searching for a better deal – On the influence of group decision making, time pressure and gender in a search experiment By Marcela Ibanez; Simon Czermak; Matthias Sutter
  14. The Effect of Intragroup Communication on Preference Shifts in Groups By Brady, Michael P.; Wu, Steven Y.
  15. Risky Decisions in the Large and in the Small: Theory and Experiment By James C. Cox; Vjollca Sadiraj

  1. By: Robin P. Cubitt (School of Economics, University of Nottingham); Robert Sugden (School of Economics, University of East Anglia)
    Abstract: This paper makes three related contributions to noncooperative game theory: (i) a solution concept (the “ICEU solution”), which is generated by an iterative procedure that constructs trinary partitions of strategy sets and deals with problems arising from weak dominance; (ii) a class of models of players’ reasoning, inspired by David Lewis’s work on common knowledge, which can together represent common knowledge of rationality for any consistent conception of individual practical rationality; and, using these ingredients, (iii) a diagnosis of paradoxes associated with the concept of common knowledge of rationality, as represented in Bayesian models of games.
    JEL: C72
    Date: 2008–03
  2. By: Kyle Hyndman (SMU); Wolf Ehrblatt (NYU); Erkut Ozbay (Maryland); Andrew Schotter (NYU)
    Abstract: In this paper we investigate the necessary ingredients for an accurate model of belief formation. Using experimental data from a previous experiment, we bring in a new group of subjects whose job it is to predict the action choices of the subjects from the previous experiment. While the rules we consider are all, strictly speaking, adaptive (being based on past observables), some of the variables we uncover represent fairly sophisticated behaviour. Going from less to more sophisticated, we find that the following are important components of the belief formation process: the history of play, payoffs (whether real or ``imagined" in the sense of \citet{CH99}) of the player whose actions our subjects are predicting and the payoffs of the other player. The paper also documents the presence of subject-specific heterogeneity in both initial beliefs and, to varying degrees, almost all of the variables found to influence beliefs.
    Keywords: Game Theory, Belief Formation, Learning.
    JEL: C70 C91 D83 D84
    Date: 2008–04
  3. By: John D Hey; Gianna Lotito; Anna Maffioletti
    Abstract: In this paper we examine the performance of theories of decision making under uncertainty/ambiguity from the perspective of their descriptive and predictive power, taking into account the relative parsimony of the various theories. To this end, we employ an innovative experimental design which enables us to reproduce ambiguity in the laboratory in a transparent and non-probabilistic way. We find that judging theories on the basis of their theoretical appeal, or on their ability to do well in testing contexts, is not the same as judging them on the basis of their explanatory and predictive power. We also find that the more elegant theoretical models do not perform as well as simple rules of thumb.
    Keywords: Ambiguity, Bingo Blower, Choquet Expected Utility, Decision Field Theory, Decision Making, Expected Utility, Hurwicz Criterion, (Gilboa and Schmeidler) MaxMin EU, (Gilboa and Schmeidler) MaxMax EU, (Ghirardato) Alpha-Model, MaxMin, MaxMax, Minimum Regret, Prospect Theory, Uncertainty.
    JEL: D81 C91
    Date: 2008–04
  4. By: Pavlo R. Blavatskyy
    Abstract: This paper presents an axiomatic model of probabilistic choice under risk. In this model, when it comes to choosing one lottery over another, each alternative has a chance of being selected, unless one lottery stochastically dominates the other. An individual behaves as if he compares lotteries to a reference lottery—a least upper bound or a greatest lower bound in terms of weak dominance. The proposed model is compatible with several well-known violations of expected utility theory such as the common ratio effect and the violations of the betweenness. Necessary and sufficient conditions for the proposed model are completeness, weak stochastic transitivity, continuity, common consequence independence, outcome monotonicity, and odds ratio independence.
    Keywords: Probabilistic choice, first-order stochastic dominance, expected utility theory, random utility model, risk
    JEL: C91 D81
    Date: 2008–04
  5. By: Dietmar Fehr; Dorothea Kübler; David Danz
    Abstract: We study beliefs and choices in a repeated normal-form game. In addition to a baseline treatment with common knowledge of the game structure and feedback about choices in the previous period, we run treatments (i) without feedback about previous play, (ii) with no infor- mation about the opponent?s payo¤s and (iii) with random matching. Using Stahl and Wilson's (1995) model of limited strategic reasoning, we classify behavior with regard to its strategic sophistication and consider its development over time. We use belief statements to track the consistency of subjects' actions and beliefs as well as the accuracy of their beliefs (relative to the opponent's true choice) over time. In the baseline treatment we observe more sophisticated play as well as more consistent and more accurate beliefs over time. We isolate feedback as the main driving force of such learning. In contrast, information about the opponent's payoffs has almost no effect on the learning path. While it has an impact on the average choice and belief structure aggregated over all periods, it does not alter the choices and the belief accuracy in their development over time.
    Keywords: experiments, beliefs, strategic uncertainty, learning
    JEL: C72 C92 D84
    Date: 2008–03
  6. By: Fioretti, Guido
    Abstract: Without denying the importance of asymmetric information, this article purports the view that credit rationing may also originate from a lender's inability to classify loan applicants in proper risk categories. This effect is particularly strong when novel technologies are involved. Furthermore, its relevance may increase with the importance assigned to internal rating systems by the Basel accord. This article presents a measure of the inadequacy of a lender's classification criteria to the qualitative features of prospective borrowers. Even without information asymmetries, credit rationing may occur if this quantity reaches too high a value. Furthermore, some general principles are outlined, that may be used by lenders in order to change their classification criteria.
    Keywords: Credit Rationing; Risk Categories; Internal Rating Systems; Deciding not to Decide; Problem Decomposition
    JEL: D89 E41
    Date: 2008–04–09
  7. By: Stanton, Angela A.
    Abstract: Some economists believe that the work of neuroeconomists threatens the theory of economics. Glenn Harrison’s paper “Neuroeconomics: A Critical Reconsideration” attempts to set the score, though the points he makes are hidden behind the fumes of his anger (Glenn W. Harrison 2008). The field of neuroeconomics is barely into its teenage years; and it is trying to do what? Redesign the field of economics developed over a hundred years? No, that is not what neuroeconomics is trying to do, in spite of all the efforts of some economists trying to place it into that shoebox. Neuroeconomics is a Mendelian-Economics of sort; it is a science that is able to generate data by fixing the environment to some degree and looking to see each individual’s choices from the initiation of the decision-making process to its outcome. Standard economics (SE), on the other hand, looks at the average of the outputs of many individuals and proposes how the human chose those outcomes. The two fields, neuroeconomics and SE, are evaluating two sides of the same coin; one with and the other without ceteris paribus; they are not necessarily in conflict with one another.
    Keywords: A debate over the field of Neuroeconomics
    JEL: C90 D01 B41
    Date: 2008–03–25
  8. By: Eriksson, Tor (Department of Economics, Aarhus School of Business); Villeval, Marie-Claire (Department of Economics, Aarhus School of Business)
    Abstract: Variable pay creates a link between pay and performance but may also help firms in attracting more productive employees. Our experiment investigates the impact of performance pay on both incentives and sorting and analyzes the influence of repeated interactions between firms and employees on these effects. We show that (i) the opportunity to switch from a fixed wage to variable pay scheme increases the average effort level and its variance; (ii) high skill employees concentrate under the variable pay scheme; (iii) however, in repeated interactions, efficiency wages reduce the attraction of performance pay. Social motivation and reputation influence both the provision of incentives and their sorting effect.
    Keywords: Performance pay; incentives; sorting; social motivation; experiment
    JEL: C91 J31 J33 M52
    Date: 2008–04–04
  9. By: Oxoby, Robert J. (University of Calgary); Friedrich, Colette (MIT)
    Abstract: We explore the extent to which the structure of incentives affects trust. We hypothesize that the degree to which different incentive mechanisms emphasize competition (via the perceived intentions of others) and entitlements (via the perceived property rights) will affect individuals’ subsequent behavior. In our experiment, bargaining pairs earned endowments through either tournaments or team-based incentives. Participants engaged in a subsequent trust game in which the sender had access to the total endowment generated by the pair. We find that the structure of the incentive mechanisms has asymmetric effects on observed trust in which participants’ relative performance framed trusting behavior.
    Keywords: trust, incentives, experiments, tournaments
    JEL: J31 J33 C92 D63
    Date: 2008–03
  10. By: Robin P. Cubitt (University of Nottingham); Michalis Drouvelis (University of Nottingham); Simon Gächter (University of Nottingham)
    Abstract: In this paper, we report an experimental investigation of the effect of framing on social preferences, as revealed in a one-shot linear public goods game. We use two indicators to measure social preferences: self-reported emotional responses; and, as a behavioural indicator of disapproval, punishment. Our findings are that, for a given pattern of contributions, neither punishment nor emotion depends on the Give versus Take framing that we manipulate. To this extent, they suggest that the social preferences we observe are robust to framing effects.
    Keywords: framing effects, punishment, emotions, public goods experiments
    JEL: C92 D01 H41
    Date: 2008–03
  11. By: Rodrigo Harrison (Instituto de Economía. Pontificia Universidad Católica de Chile.); Mauricio Villena
    Abstract: Why does an altruistically inclined player behave altruistically in some contexts and egoistically or spitefully in others? This article provides an economic explanation to this question. The basic argument is centered on the idea that social norms shape our preferences through a process of cultural learning. In particular, we claim that, in contexts with a stable norm of reciprocity, an altruistic player can respond in kind to egoistic or spiteful players by behaving either egoistically or spitefully when confronting them and yet continue to be an altruistic player. This is why, instead of studying the evolution of preferences as such, in this work we analyze the evolution of social norms that indirectly determine individual preferences and behavior. Such a study requires that we distinguish between players' behavioral preferences, or those individuals show with their behavior, and players' intrinsic preferences, or those they inherently support or favor. We argue that, whereas the former can change through the evolution of social norms, in this case a reciprocity norm, the latter are not subject to evolutionary pressures and, therefore, we assume them to be given.
    Keywords: Social Norms, Reciprocity, Endogenous
    JEL: C72 A13
    Date: 2008
  12. By: Sebastian Goerg (BonnEconLab, University of Bonn); Werner Güth (Max Planck Institute of Economics); Gari Walkowitz; Torsten Weiland (Max Planck Institute of Economics)
    Abstract: Does geographic or (perceived) social distance between subjects signi?cantly affect proposer and responder behavior in ultimatum bargaining? To answer this question, subjects once play an ultimatum game with three players (proposer, responder, and dummy player) and asymmetric information (only the proposer knows what can be distributed). Treatments differ in their geographical scope in that they involve either one or three subject pools which, in the latter case, structurally differ in their between-subject pool heterogeneity. Observed choice behavior corroborates several stylized facts of this class of ultimatum games which are primarily explained by strategic play and other-regarding preferences. While the extent of self-interested allocation behavior in proposers signi?cantly varies across sites, neither proposers nor responders meaningfully condition their choices on their co-players' provenance or affiliation. Altogether, we do not discern articulate discriminative behavior based on geographic or social distance.
    Keywords: Equity, fairness, social preferences, ultimatum bargaining, redistribution, cross-national experiment
    JEL: C70 C91 D63
    Date: 2008–03–27
  13. By: Marcela Ibanez; Simon Czermak; Matthias Sutter
    Abstract: We study behavior in a search experiment where sellers receive randomized bids from a computer. At any time, sellers can accept the highest standing bid or ask for another bid at positive costs. We find that sellers stop searching earlier than theoretically optimal. Inducing a mild form of time pressure strengthens this finding in the early periods. There are marked gender differences. Men search significantly shorter than women. If subjects search in groups of two subjects, there is no difference to individual search, but teams of two women search much longer than men and recall more frequently.
    Keywords: Search experiment, Time, Group decision, Gender differences
    JEL: C91 C92 D83
  14. By: Brady, Michael P. (U.S. Department of Agriculture); Wu, Steven Y. (Ohio State University)
    Abstract: We use a laboratory gift-exchange game to examine decisions made by groups under three different procedures that dictate how group members interact and reach decisions in comparison to individuals acting alone. We find that group decisions do deviate from those of individuals, but the direction and magnitude of gift exchange depend critically on the procedure. This suggests that no general statements can be made concerning the propensity of groups to exhibit reciprocal or other-regarding behavior relative to individuals. The rules governing how group members can express their preferences and expectations to other group members are critical for determining group outcomes.
    Keywords: group behavior, teams, decision making, social preferences
    JEL: C91 C92
    Date: 2008–04
  15. By: James C. Cox; Vjollca Sadiraj
    Abstract: null
    Date: 2008–01

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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