nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2008‒05‒10
nine papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. Is the Lure of Choice Reflected in Market Prices? Experimental Evidence Based on the 4-Door Monty Hall Problem By Siddiqi, Hammad
  2. Feedback and Incentives : Experimental Evidence By Tor Eriksson; Anders Poulsen; Marie-Claire Villeval
  3. Reciprocity, Exchange and Redistribution. An experimental investigation inspired by Karl Polanyi’s The Economy as Instituted Process By Giuseppe Danese; Luigi Mittone
  4. Comparing Small-Group and Individual Behavior in Lottery-Choice Experiments By Ronald J. Baker II; Susan K. Laury; Arlington W. Williams
  5. Risk Aversion By Pavlo R. Blavatskyy
  6. on the efficiency of team-based meritocracies By Gunnthorsdottir, Anna; Vragov, Roumen; seifert, Stefan; McCabe, Kevin
  7. Moral Hazard and Peer Monitoring in a Laboratory Microfinance Experiment By Timothy N. Cason; Lata Gangadharan; Pushkar Maitra
  8. Estimating Cognitive Gaps Between Indigenous and Non-Indigenous Australians By Andrew Leigh; Xiaodong Gong
  9. A Tool for Measuring Institutional Leadership and Its Implementation for the Evaluation of Organizational Leadership Capability By Kurmet Kivipõld; Maaja Vadi

  1. By: Siddiqi, Hammad
    Abstract: The lure of choice is a behavioral bias with important implications for financial markets. The question of whether this bias survives in market equilibrium is an issue that can be tackled with experimental economics methods. Here, we use the 4-door Monty Hall as a tool to measure the lure of choice both at the individual as well as the market level. We find that if individuals exhibit this bias then market prices also reflect this bias, hence, trading activity alone is not sufficient to reduce or eliminate the lure of choice. The bias, both at the individual as well as the market level, is robust to learning. If at least two traders strongly exhibit this bias, then competition between them is sufficient to outweigh the impact of other biases in judgment. This result has important implications for models with heterogeneous traders. Furthermore, the lure of choice is found to be compatible with event-style market efficiency
    Keywords: Judgment Errors; Lure of Choice; Monty Hall; Group Experiments; Event Efficiency; Asset Pricing; Behavioral Bias Behavioral Bias; Asset Pricing
    JEL: G10 C92 G12
    Date: 2007–04–15
  2. By: Tor Eriksson (Department of economics - University of Aarhus); Anders Poulsen (School of economics - University of East Anglia); Marie-Claire Villeval (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: This paper experimentally investigates the impact of different pay and relative performance information policies on employee effort. We explore three information policies: No feedback about relative performance, feedback given halfway through the production period, and continuously updated feedback. The pay schemes are a piece rate payment scheme and a winner-takes-all tournament. We find that, regardless of the pay scheme used, feedback does not improve performance. There are no significant peer effects in the piece-rate pay scheme. In contrast, in the tournament scheme we find some evidence of positive peer effects since the underdogs almost never quit the competition even when lagging significantly behind, and frontrunners do not slack off. Moreover, in both pay schemes information feedback reduces the quality of the low performers’ work.
    Keywords: evaluation ; feedback ; information ; laboratory experiments ; peer effects ; performance pay ; piece rate ; tournament
    Date: 2008
  3. By: Giuseppe Danese; Luigi Mittone
    Abstract: Inspired by Karl Polanyi’s writings on three allocation modes, namely reciprocity, exchange and redistribution, we first tested a reciprocity ring with ten players. The baseline treatment, with no possibility of socialisation, displayed very low levels of allocative efficiency. Consistently with the Polanyian approach to reciprocity, we found that inducing the notion of symmetry among the players increased efficiency levels significantly. We then simulated a market exchange, with significant allocative efficiency gains. We conclude that indirect-reciprocity rings among anonymous players can seldom function in the absence of definite institutional refinements, promoting forms of symmetry-acknowledgement.
    Keywords: Reciprocity, Redistribution, Exchange, Comparative Institutional Analysis.
    JEL: Z13 D02 C91
    Date: 2008
  4. By: Ronald J. Baker II (Millersville University of Pennsylvania); Susan K. Laury (Georgia State University); Arlington W. Williams (Indiana University Bloomington)
    Abstract: Lottery-choice experiments are conducted to compare risk preferences revealed by three-person groups versus isolated individuals. A lottery-choice experiment consists of a menu of paired lottery choices structured so that the crossover point from a low-risk to a high-risk lottery can be used to infer the degree of risk aversion. A between-subjects experiment of group versus individual lottery-choice decisions reveal that there is not a significant difference in the average crossover point, but lottery choices are affected by a significant interaction between subject composition (individual or group) and lottery winning percentage. Also, a three-phased individual-group-individual sequenced experiment reveals that the count of safe lotteries chosen by groups is, on average, significantly greater than the mean of the individual members. Finally, making a phase-two group decision has a significant impact on subsequent phase-three individual decisions relative to the initial phase-one (individual) decisions.
    Keywords: lab experiments, risk preferences, group decisions
    JEL: C91 C92 D80
    Date: 2008–05
  5. By: Pavlo R. Blavatskyy
    Abstract: Risk aversion is traditionally defined in the context of lotteries over monetary payoffs. This paper extends the notion of risk aversion to a more general setup where outcomes (consequences) may not be measurable in monetary terms and people may have fuzzy preferences over lotteries, i.e. they may choose in a probabilistic manner. The paper considers comparative risk aversion within neoclassical expected utility theory, a constant error/tremble model and a strong utility model of probabilistic choice (which includes the Fechner model and the Luce choice model as special cases). The paper also provides a new definition of relative riskiness of lotteries.
    Keywords: Risk aversion, more risk averse than, riskiness, probabilistic choice,expected utility theory, Fechner model, Luce choice model
    JEL: D00 D80 D81
    Date: 2008–04
  6. By: Gunnthorsdottir, Anna; Vragov, Roumen; seifert, Stefan; McCabe, Kevin
    Abstract: According to theory a pure meritocracy is efficient because individual members are competitively rewarded according to their individual contributions to society. However, purely individually based meritocracies seldom occur. We introduce a new model of social production called “team-based meritocracy” (TBM) in which individual members are rewarded based on their team membership. We demonstrate that as long as such team membership is both mobile and competitively based on contributions, individuals are able to tacitly coordinate a complex and counterintuitive asymmetric equilibrium that is close to Pareto-optimal, possibly indicating that such a group-based meritocracy could be a social structure to which humans respond with particular ease. Our findings are relevant to many contemporary societies in which rewards are at least in part determined via membership in organizations such as for example firms, and organizational membership is increasingly determined by contribution rather than privilege.
    Keywords: social stratification; meritocracies; mechanism design; non-cooperative games; experiment; team production.
    JEL: D20 C72
    Date: 2008–01–07
  7. By: Timothy N. Cason; Lata Gangadharan; Pushkar Maitra
    Abstract: Most problems with formal sector credit lending to the poor in developing countries can be attributed to the lack of information and inadequate collateral. One common feature of successful credit mechanisms is group-lending, where the loan is advanced to an individual if he/she is a part of a group and members of the borrowing group can monitor each other. Since group members have better information about each other compared to lenders, peer monitoring is often less expensive than lender monitoring. Theoretically this leads to greater monitoring and greater rates of loan repayments. This paper reports the results from a laboratory experiment of group lending in the presence of moral hazard and (costly) peer monitoring. We compare peer monitoring treatments when credit is provided to members of the group sequentially and simultaneously, and individual lending with lender monitoring. The results depend on the relative cost of monitoring by the peer vis-à-vis the lender. In the more typical case where the cost of peer monitoring is lower than the cost of lender monitoring, our results suggest that peer monitoring results in higher loan frequencies, higher monitoring and higher repayment rates compared to lender monitoring. In the absence of monitoring cost differences, performance is mostly similar across group and individual lending schemes, although loan frequencies and monitoring rates are sometimes modestly greater with group lending. Within group lending, although the dynamic incentives provided by sequential leading generate the greatest equilibrium surplus, simultaneous group leading provides equivalent empirical performance.
    Keywords: Group Lending, Monitoring, Moral Hazard, Laboratory Experiment, Loans, Development
    JEL: G21 C92 O2
    Date: 2008–03
  8. By: Andrew Leigh; Xiaodong Gong
    Abstract: Improving cognitive skills of young children has been suggested as a possible strategy for equalising opportunities across racial groups. Using data on 4-5 year olds in the Longitudinal Survey of Australian Children, we focus on two cognitive tests: the Peabody Picture Vocabulary Test (PPVT) and the ‘Who Am I?’ test (WAI). We estimate the test score gap between Indigenous and non-Indigenous children to be about 0.3 to 0.4 standard deviations, suggesting that the typical Indigenous 5 year-old has a similar test score to the typical non-Indigenous 4 year-old. Between one-third and two-thirds of the Indigenous/non-Indigenous test score gap appears to be due to socio-economic differences, such as income and parental education. We review the literature on test score differences in Australia, and find that our estimated gaps are lower than most of those found in the literature. This implies that the test score gap between Indigenous and non-Indigenous children may widen over the lifecycle, a finding that has implications for policies aimed at improving educational opportunities for Indigenous children.
    Keywords: cognitive ability, racial differentials, early childhood
    JEL: I20 J15
    Date: 2008–04
  9. By: Kurmet Kivipõld (University of Tartu, Faculty of Economics and Business Administration and Lääne-Viru School of Applied Sciences); Maaja Vadi (University of Tartu, Faculty of Economics and Business Administration)
    Abstract: The concept of Institutional Leadership opens up some essential aspects of organizational leadership capability that could be defined as the collective ability of leadership to detect and cope with changes in the external environment by maintaining the primary goals of the organization. The aim of this paper is to design a tool to measure institutional leadership and evaluate organizational leadership capability. Leadership came under greater focus within the institutional context at the end of the 1990s. On the one hand, this arose from the necessity to transfer leadership capabilities into the strategic assets of institutions, on the other, it is due to other approaches to management (i.e. cascading leadership, intellectual capital, organizational learning, knowledge management and self-organizing systems). The thing that unites all these approaches is their attempt to improve an organization's ability to adapt in a complex environment, and it is proposed that the ability to adapt is based on the knowledge of organizational members and to the extent that this knowledge is embedded in the pattern of organizational structure. Therefore, institutional leadership is an important issue for studying and improving the transformation of knowledge in the structure of an organization. A total of 445 respondents from six Estonian organizations participated by completing a questionnaire about institutional leadership. Next, a quantitative analysis was performed and sets of factors obtained from a partial least squares (PLS) regression and Cronbach alpha test. Finally, the pattern of individual items (statements) within each of the factors was identified and the results which indicate organizational leadership capability were plotted.
    Keywords: leadership, institutional leadership, intellectual capital, knowledge management, organizational learning, organizational structure, self-organizing systems, strategic management
    JEL: M10
    Date: 2008

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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