nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2008‒04‒29
seventeen papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. The Bayesian Fallacy: Distinguishing Four Kinds of Beliefs By Khalil, Elias
  2. Why does unemployment hurt the employed?: evidence from the life satisfaction gap between the public and private sectors By Simon Luechinger; Stephan Meier; Alois Stutzer
  3. Preferences for One-Shot Resolution of Uncertainty and Allais-Type Behavior By Dillenberger, David
  4. Minimal Social Cues in the Dictator Game By Rigdon, Mary; Ishii, Keiko; Watabe, Motoki; Kitayama, Shinobu
  5. Social Preferences and Public Economics: Mechanism Design when Social Preferences Depend on Incentives By Samuel Bowles; Sung-Ha Hwang
  6. Ashamed to be Selfish By Dillenberger, David; Sadowski, Philipp
  7. Does Fairness of the Outside Option Matter? By Maroš Servátka; Radovan Vadovic
  8. Adaptive microfoundations for emergent macroeconomics By Edoardo Gaffeo; Domenico Delli Gatti; Saul Desiderio; Mauro Gallegati
  9. Artificial Markets under a Complexity Perspective By Alejandro Reveiz Herault
  10. China’s Institutional Architecture: A New Institutional Economics and Organization Theory Perspective on the Links between Local Governance and Local Enterprises By Krug, B.; Hendrischke, H.
  11. Belbin Revisited: The Construct Validity of the Interplace II Team Role Instrument By Dierendonck, D. van; Groen, R.
  12. The (non)Theory of the Knowledge Firm By Paul Walker
  13. Strategy-proofness vs. Efficiency in Matching with Indifferences: Redisigning the NYC High School Match By Atila Abdulkadiroglu; Parag A Pathak; Alvin E Roth
  14. Analysts, Incentives, and Exaggeration By Timothy Shields
  15. Homo Sapiens Sapiens Meets Homo Strategicus at the Laboratory By Ludovic Renou; Ralph C. Bayer
  16. Workers behavior and labor contract : an evolutionary approach By Victor Hiller
  17. Ethics Programs and Ethical Cultures: A Next Step in Unraveling their Multi-Faceted Relationship By Kaptein, S.P.

  1. By: Khalil, Elias
    Abstract: This paper distinguishes among four kinds of beliefs: conviction, confidence, perception, conception. Conviction concerns self-ability:“I can build these stairs.” Confidence also concerns the self—ut focuses on the assertion of will in the face of weakness of will. Perception is about the environment such as weather prediction. Conception is also about the environment—but usually couched with context. While convictions are noncognitive and nonevidential beliefs, the other beliefs are either cognitive, evidential, or both. This paper uses the terms “cognition” and “evidentiality” as axes to distinguish the four beliefs. While “cognitive beliefs” are about one’s environment, “noncognitive beliefs” are about one’s self. While the cognitive/noncognitive divide is unconventional, it generates a payoff in light of the evidentiality axis. While “evidential beliefs” are correctable via Bayes’s rule, “nonevidential beliefs” are not. However, when the nonevidential belief is about the environment, the evidence can at least make the belief more (or less) warranted—where “warrantability” is a weaker criterion than “correctability.” And when the nonevidential belief is about the self, i.e., a conviction, the evidence cannot even make the belief more (or less) warranted. The evidence itself develops when one tries to test a conviction. This paper highlights that convictions are the basis of tenacity—crucial for entrepreneurship and economic growth. This paper further demonstrates how three major theories of action—standard rationality, normative theory, and procedural rationality—fail to distinguish the four kinds of beliefs. They, hence, commit, although in different ways, a set of confusions called here the “Bayesian fallacy.”
    Keywords: Cognitive Dissonance; Internal Motivations (convictions); Normative Theory (embodied cognition); Other Beliefs (confidence; perception; conception); Procedural Rationality Theory (pragmatism); Self-Perception Theory; Standard Rationality Theory
    JEL: B49 B59
    Date: 2008–04–26
  2. By: Simon Luechinger; Stephan Meier; Alois Stutzer
    Abstract: High rates of unemployment entail substantial costs to the working population in terms of reduced subjective well-being. This paper studies the importance of individual economic security, in particular, job security, in workers' well-being by exploiting sector-specific institutional differences in the exposure to economic shocks. Public servants have stricter dismissal protection and face a lower risk of their organization's bankruptcy than do private sector employees. The empirical results for individual panel data for Germany and repeated cross-sectional data for the United States and the European Union show that the sensitivity of subjective well-being to fluctuations in unemployment rates is much lower in the public sector than in the private. This suggests that increased economic insecurity constitutes an important welfare loss associated with high general unemployment.
    Keywords: Unemployment ; Job security
    Date: 2008
  3. By: Dillenberger, David
    Abstract: Experimental evidence suggests that individuals are more risk averse when they perceive risk gradually. We address these findings by studying a decision maker (DM) who has recursive preferences over compound lotteries and who cares about the way uncertainty is resolved over time. DM has preferences for one-shot resolution of uncertainty if he always prefers any compound lottery to be resolved in a single stage. We establish an equivalence between dynamic preferences for one-shot resolution of uncertainty and static preferences that are identified with the behavior observed in Allais-type experiments. The implications of this equivalence on preferences over information systems are examined. We define the gradual resolution premium and demonstrate its magnifying effect when combined with the usual risk premium. In an intertemporal context, preferences for one-shot resolution of uncertainty capture narrow framing.
    JEL: D81 D80
    Date: 2008–04–09
  4. By: Rigdon, Mary; Ishii, Keiko; Watabe, Motoki; Kitayama, Shinobu
    Abstract: This paper reports results of an incentivized laboratory experiment manipulating an extremely weak social cue in the Dictator Game. Prior to making their decision, we present dictators with a simple visual stimlulus: either three dots in a “watching-eyes” configuration, or three dots in a neutral configuration. The watching-eyes configuration is suggestive of a schematic face—a stimuli that is known to weakly activate the fusiform face area of the brain (Tong, et al., 2000; Bednar and Miikkulainen, 2003; Johnson and Morton, 1991). Given the experimental evidence for automatic priming of watching eyes of others, it is thus reasonable to hypothesize that even though the social cue is very weak, this activation might be sufficient to produce a significant change in social behavior. Our results demonstrate that such a weak social cue does increase giving behavior—even under conditions of complete anonymity—and this difference in behavior across subjects is entirely explained by differences in the choice behavior of males. In fact, males in our treatment condition, who typically act more selfishly than do females in conditions of complete anonymity, give twice as much to anonymous recipients than females give.
    Keywords: dictator game; social preferences; laboratory experiment; social distance
    JEL: C70 D01 C91
    Date: 2008–03–26
  5. By: Samuel Bowles; Sung-Ha Hwang
    Abstract: Social preferences such as altruism, reciprocity, intrinsic motivation and a desire to uphold ethical norms are essential to good government, often facilitating socially desirable allocations that would be unattainable by incentives that appeal solely to self-interest. But experimental and other evidence indicates that conventional economic incentives and social preferences may be either complements or substitutes, explicit incentives crowding in or crowding out social preferences. We investigate the design of optimal incentives to contribute to a public good under these conditions. We identify cases in which a sophisticated planner cognizant of these non-additive effects would make either more or less use of explicit incentives, by comparison to a naive planner who assumes they are absent
    Keywords: Social preferences, implementation theory, incentive contracts, incomplete contracts
    JEL: D52 D64 H21 H41
    Date: 2008–03
  6. By: Dillenberger, David; Sadowski, Philipp
    Abstract: We study a two-stage choice problem, where alternatives are allocations between the decision maker (DM) and a passive recipient. The recipient observes choice behavior in stage two, while stage one choice is unobserved. Choosing selfishly in stage two, in the face of a fairer available alternative, may inflict shame on DM. DM has preferences over sets of alternatives that represent period two choices. We axiomatize a representation that identifies DM's selfish ranking, her norm of fairness and shame. Altruism is the most prominent motive that can explain non-selfish choice. We identify a condition under which shame to be selfish can mimic altruism, when only stage-two choice is observed by the experimenter. An additional condition implies that the norm of fairness can be characterized as the Nash solution of a bargaining game induced by the second-stage choice problem. The representation is generalized to allow for finitely many recipients and applied to explain a social decision maker's incentive for obfuscation.
    JEL: C78 D63 D81 D64 D78 D80
    Date: 2008–04–16
  7. By: Maroš Servátka (University of Canterbury); Radovan Vadovic
    Abstract: Experimental evidence suggests that the size of the foregone outside option does not affect the behavior of the opponent in a lost wallet and pie sharing games but that it matters in a mini-ultimatum game. In this paper we experimentally test a conjecture that it is the fairness property of the outside option which could be responsible for this effect. We compare the behavior of subjects in the lost wallet game when they face a fully unequal (“unfair”) outside option, i.e., the first mover gets 10 and the second mover gets nothing, and when they face an equal (“fair”) outside option, i.e., both get an equal amount of 5. Contrary to our conjecture we do not find a significant difference.
    Keywords: Experimental economics; Outside option; Fairness
    JEL: C72 C78 C91
    Date: 2008–04–13
  8. By: Edoardo Gaffeo; Domenico Delli Gatti; Saul Desiderio; Mauro Gallegati
    Abstract: In this paper we present the basics of a research program aimed at providing microfoundations to macroeconomic theory on the basis of computational agentbased adaptive descriptions of individual behavior. To exemplify our proposal, a simple prototype model of decentralized multi-market transactions is offered. We show that a very simple agent-based computational laboratory can challenge more structured dynamic stochastic general equilibrium models in mimicking comovements over the business cycle.
    Keywords: Microfoundations of macroeconomics, Agent-based economics, Adaptive behavior
    JEL: C63 E10 O11
    Date: 2008
  9. By: Alejandro Reveiz Herault
    Abstract: The focus of this study is to build, from the ‘bottom-up’, a market with artificially intelligent adaptive agents based on the institutional arrangement of the Colombian Foreign Exchange Market (1994-1999) in order to determine simple agents’ design, rules and interactions that are sufficient to create interesting behaviours at the macroscopic level – emerging patterns that replicate the properties of the time series from the case study. Tools from artificial intelligence research, such as genetic algorithms and fuzzy logic, are the basis of the agents’ mental models, which in turn are used for forecasting, quoting and learning purposes in a double auction market. Sets of fuzzy logic rules yield adequate, approximately continuous risk and utility preferences without the need to fix their mathematical form ex-ante. Statistical properties of financial time series are generated by the artificial market, as well as some additional non-linearity linked to the existence of a crawling band. Moreover, the behaviour of the simulated exchange rate is consistent with currency band theory. Agent’s learning favours forecasting rules based on regulatory signals against rules based on fundamental information. Also, intra-day volatility is strongly linked to the rate of arrival and size of real sector trades. Intra-day volatility is also a function of the frequency of learning and search specialisation. It is found that when a moderately low frequency of learning is used, volatility increases.
    Date: 2008–04–17
  10. By: Krug, B.; Hendrischke, H. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: We start our exploration of China’s institutional change by asking what the China experience can tell us about institutional economics and organization theory. We point to under-researched areas such as the formation of firms and the interplay between firms and local politics. Our findings support the dynamic capability approach which concentrates on activities rather than on pre-defined groups and models institution building as a co-operative game between the local business community and local government agencies. We find that the analysis of firms has to set in before they are formed by entrepreneurs and networks and we identify political management as a core competence of these two groups. While this contradicts the conventional view of clientelism or principle agent relations as institutional building blocks, we don’t propose competing models. Instead, we suggest focusing on a dynamic process in which the role of players can change. Faced with the spontaneous emergence of institutions, our concept of institutional architecture captures the fact that the two models can co-exist side by side and that, once the dichotomy between formal and informal institutions is given up, there can be a transition from local patron-client relations to local business-state coordination.
    Keywords: institutional change;entrepreneurship;networks;dynamic capabilities;diversity and convergence of institutions
    Date: 2008–04–17
  11. By: Dierendonck, D. van; Groen, R. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: In the present study the construct validity of the revised edition of the Belbin Team Roles measure, the so-called Interplace II program, is tested. Three parallel parts were used to determine someone’s team roles. The sample included 1434 persons who were asked to fill out the self-perception inventory and the self-perception assessment, whereas the observer assessment sheet was filled out by at least four observers. The inter-rater reliability appeared to be satisfactory across all team roles. As for the construct validity, which was studied in a multitrait-multimethod design using structural equation modeling, the results revealed that the discriminant and convergent validity for the instrument as a whole is good; only a small effect could be contributed to method variance.
    Keywords: teams;Belbin;team roles;multitrait-multimethod methodology
    Date: 2008–04–17
  12. By: Paul Walker (University of Canterbury)
    Abstract: This paper argues that the mainstream approaches to the theory of the firm do not provide a theory of the human capital based or knowledge based firm. We examine the textbook (neoclassical) theory of the firm, the transaction cost model, the incentive-system approach and the Grossman Hart Moore approach to the firm and argue that none of them are able to fully capture the changes to the firm that the movement towards a knowledge economy entails. We also consider the effects of knowledge on the location of production.
    Keywords: Theory of the firm; Knowledge economy; Human-capital based firm
    JEL: L14 L23
    Date: 2008–04–10
  13. By: Atila Abdulkadiroglu; Parag A Pathak; Alvin E Roth
    Date: 2008–04–18
  14. By: Timothy Shields
    Abstract: Sell-side analysts are compensated, at least in part, by brokerage commissions. These commissions create an incentive to bias forecasts to generate trade. Thus, analysts have clear economic incentives to deceive and traders have economic incentives to detect deception. Prior analytical theories of information transmission games starkly predict that there will always be some deception (with trade) at best and uninformative messages (and no trade) at worst when the sender's and receiver's incentives are not aligned. Prior experimental evidence of information transmission games show senders do elect to deceive, although they send messages more informative than theory predicts. Likewise, receivers rely more upon messages than theory predicts. Can behavior that deviates from prediction be explained by normative social behavior, such as trust and honesty? Alternatively, are subjects boundedly rational, failing to sufficiently consider other players' incentives when predicting their decisions? To answer these questions, I design and conduct an experiment to investigate whether forecasting and trading behaviors are best explained by analytical theory, limited strategic sophistication, or social norms. The experimental results confirm a majority of subjects adopt dishonest forecasting strategies, but at the same time, a majority of subjects adopts trusting trading strategies. Additionally, subjects do not appear to revise trading behavior despite evidence of deceptive forecasts. The results suggest subjects' behavior within the setting is better explained by limited strategic sophistication than by social normative behavior or sequential rationality. <P>Les analystes du « côté vendeur » sont rémunérés, du moins en partie, au moyen de commissions de courtage. Ces commissions représentent une incitation à fausser les prévisions dans le but d'accroître les activités du marché. Ainsi, les analystes font l'objet de stimulants économiques clairs qui les portent à décevoir, tandis que les négociateurs ont des stimulants économiques qui les incitent à détecter la déception. Les théories analytiques avancées antérieurement à partir des jeux de transmission de l'information prédisent, de façon catégorique, qu'il existera toujours une certaine déception (avec transaction) dans le meilleur des cas et des messages dénudés de renseignements (et sans transaction) dans le pire des cas, à moins que les stimulants de l'émetteur et du récepteur ne concordent. La preuve expérimentale qui a été faite dans le passé par les jeux de transmission de l'information a démontré que les émetteurs choisissent effectivement de décevoir, même si leurs messages sont plus informatifs que la théorie laisse entendre. De la même façon, les récepteurs comptent davantage sur les messages que ce qui est proposé par la théorie. Le comportement qui s'écarte des prédictions peut-il s'expliquer par un comportement social normatif, en l'occurrence la confiance et l'honnêteté? Par ailleurs, les sujets font-ils preuve de rationalité limitée et négligent-ils de considérer suffisamment les stimulants des autres joueurs au moment de prédire leurs décisions? Dans le but de répondre à ces questions, je mets au point, puis je conduis une expérience visant à observer les comportements liés aux prévisions et à la négociation et à établir si ces comportements s'expliquent mieux par la théorie analytique, la sophistication stratégique limitée ou les normes sociales. Les résultats de l'expérience confirment que, d'une part, une majorité de sujets adoptent des stratégies prévisionnelles malhonnêtes et, d'autre part, une majorité de sujets adoptent des stratégies commerciales fondées sur la confiance. De plus, les sujets ne semblent pas revoir leur comportement face au marché, malgré l'évidence de prévisions décevantes. Les résultats portent à croire qu'on peut mieux expliquer le comportement des sujets, dans un contexte donné, par la sophistication stratégique limitée que par le comportement social normatif ou la rationalité séquentielle.
    Keywords: analyst forecast, levels of sophistication, social norm, bounded rationality, trust, honesty , prédictions des analystes, niveau de sophistication, norme sociale, rationnalité limitée, confiance, honnêteté
    Date: 2008–04–01
  15. By: Ludovic Renou; Ralph C. Bayer
    Abstract: Homo Strategicus populates the vast plains of Game Theory. He knows all logical implications of his knowledge (logical omniscience) and chooses optimal strategies given his knowledge and beliefs (rationality). This paper investigates the extent to which the logical capabilities of Homo Sapiens Sapiens resemble those possessed by Homo Strategicus. Controlling for other-regarding preferences and beliefs about the rationality of others, we show, in the laboratory, that the ability of Homo Sapiens Sapiens to perform complex chains of iterative reasoning is much better than previously thought. Subjects were able to perform about three iterations of reasoning on average.
    Keywords: iterative reasoning; depth of reasoning; logical omniscience; rationality; experiments; other-regarding preferences
    JEL: C70 C91
    Date: 2008–04
  16. By: Victor Hiller (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Ecole d'économie de Paris - Paris School of Economics - Université Panthéon-Sorbonne - Paris I)
    Abstract: This article investigates the co-evolution of labor relationships and workers preferences. According to recent experimental economics findinggs on social preferences, the workforce is assumed to be heterogeneous. It is composed by both cooperative and non-cooperative workers. In addition, firms differ by the type of contract they offer (explicit or implicit). Finally, both the distribution of preferences and the degree of contractual completeness are endogeneized. Preferences evolve through a process of cultural transmission and the proportion of implicit contracts is driven by an evolutionary process. The complementarity between the transmission of cooperation and the implementation of implicit contracts leads to multiple equilibria which allow for path-dependence. This property is illustrated by the evolutions of American and Japanese labor contracts during the Twentieth century.
    Keywords: Explicit contract, implicit contract, cultural transmission, preferences for reciprocity, path dependence.
    Date: 2008–04
  17. By: Kaptein, S.P. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: The objective of an ethics program is to improve the ethical culture of an organization. To date, empirical research treats at least one of these concepts as a one-dimensional construct. This paper demonstrates that by conceptualizing both constructs as multi-dimensional, a better understanding of the relationship between the two concepts can be achieved. Employing the corporate ethical virtues model, eight dimensions of ethical culture are distinguished. Nine components of an ethics program are specified. To assess the relationship between ethical programs and ethical cultures, a survey of 4,056 members of the U.S. working population was conducted. The results show that the relationship between the individual components of an ethics program and ethical culture differs. Implications for research and practice are discussed.
    Keywords: ethics program;ethical culture;virtue theory
    Date: 2008–04–17

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