nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2008‒05‒24
ten papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. The Behaviour of Corporate Actors. A Survey of the Empirical Literature By Christoph Engel
  2. The Behavioural Economics of Climate Change By Brekke, Kjell Arne; Johansson-Stenman, Olof
  3. On Feelings as a Heuristic for Making Offers in Ultimatum Negotiations By Stephen, Andrew T.; Pham, Michel Tuan
  4. Cognitive Forward Induction and Coordination without Common Knowledge: An Experimental Study By Andreas Blume; Andreas Blume; Uri Gneezy
  5. The social science of economics By Brian Loasby
  6. The psychology of financial markets: Keynes, Minsky and emotional finance By Sheila Dow
  7. Psychological Traits and Earnings Differences Among Men: A Study of Second - Generation Immigrants in Sweden By Hanes, Niklas; Norlin, Erik
  8. Students' Academic Self Perception By Arnaud Chevalier; Steve Gibbons; Andy Thorpe; Sherria Hoskins
  9. Hayek's challenge to economists By Brian Loasby
  10. Measuring People's Trust By John F. Ermisch; Diego Gambetta; Heather Laurie; Thomas Siedler; S.C. Noah Uhrig

  1. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Much of behavioural research, both in economics and in psychology, is limited in one respect: it tests isolated individuals. In many practically relevant situations, there are discernible actors, but these actors are not individuals. Rather firms, regulatory bodies, associations, countries or international organisations become active. The social problem at hand is best understood if one attributes judgement and decision making to higher level aggregates of individuals. Which elements from the rich body of behavioural evidence transfer to these corporate actors? Are there other deviations from the predictions of the rational choice model, not present or studied in individuals? This paper surveys the empirical literature from experimental economics, psychology, sociology and law. While some building blocks, like the behaviour of managers and of ad hoc groups, are relatively well understood, our knowledge about the effects of more elaborate internal structure on the dealings of corporate actors with the outer world is still relatively limited.
    Keywords: Behaviour, Firms, Organizations, Associations, Groups
    JEL: C92 D21 D23 K22 L20
    Date: 2008–05
  2. By: Brekke, Kjell Arne (Department of Economics, University of Oslo); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: This paper attempts to bring some central insights from behavioural economics into the economics of climate change. In particular, it discusses (i) implications of prospect theory, the equity premium puzzle and time inconsistent preferences in the choice of discount rate used in climate change cost assessments, and (ii) the implications of various kinds of social preferences for the outcome of climate negotiations. Several reasons are presented for why it appears advisable to choose a substantially lower social discount rate than the average return on investments. It also seems likely that taking social preferences into account increases the possibilities of obtaining international agreements, compared to the standard model. However, there are also effects going in the opposite direction, and the importance of sanctions is emphasised.<p>
    Keywords: Behavioural economics; prospect theory; equity premium puzzle; social preferences; climate negotiations.
    JEL: D63 Q54
    Date: 2008–05–19
  3. By: Stephen, Andrew T.; Pham, Michel Tuan
    Abstract: This research examines how the reliance on emotional feelings as a heuristic influences the proposal of offers in negotiations. Results from three experiments based on the classic ultimatum game show that, compared to proposers who do not rely on their feelings, proposers who rely on their feelings make less generous offers in the standard ultimatum game, more generous offers in a variant of the game allowing responders to make counteroffers, and less generous offers in the dictator game where no responses are allowed. Reliance on feelings triggers a more literal form of play, whereby proposers focus more on how they feel toward the offers themselves than on how they feel toward the possible outcomes of these offers, as if their offers were the final outcomes. Proposers relying on their feelings also tend to focus on gist-based, simpler construals of negotiations that capture only the essential aspects of the situation.
    Keywords: affect; emotions; heuristics; bargaining; ultimatum game; affect as information; affect heuristic; trust in feelings
    JEL: D81 D11 D71 A13 A12 C70 D83
    Date: 2008–05–08
  4. By: Andreas Blume; Andreas Blume; Uri Gneezy
    Abstract: . . .
    Date: 2008–05
  5. By: Brian Loasby (SCEME, University of Stirling)
    Abstract: The argument of this paper is that much modern economics is drastically undersocialised because it lacks an understanding of the distinctive characteristics of the evolved human mind, despite the significant insights provided by three of our most famous economists, Adam Smith, Alfred Marshall and Friedrich Hayek. This deficiency results from a failure to apply what may be considered the defining principle of economics, that of analysing the implications of scarcity. These implications challenge the adequacy of a theoretical structure based on the confrontation of preference functions and opportunity sets, even when extended to include formal interdependence, as in game theory; they require both a more modest view of human cognitive abilities and a more extensive view of human motivation and potential.
    Keywords: Adam Smith, Alfred Marshall, Hayek
    JEL: B41 Z1
    Date: 2007–11
  6. By: Sheila Dow (SCEME, University of Stirling)
    Keywords: uncertainty, Keynes, Minsky, emotional finance
    JEL: B41
    Date: 2008–05
  7. By: Hanes, Niklas (Department of Economics, Umeå University); Norlin, Erik (Department of Economics, Umeå University)
    Abstract: The purpose of this study is to analyse the impact of psychological traits on earnings differentials between second-generation immigrants and individuals with native-born parents. The study is based on the cohort of men born in 1973 and residing in Sweden in December 1990. In this paper we use an indicator of psychological ability measured in connection to the military enrolment test in Sweden. The results show that the measure of psychological traits is an important determinant of earnings at the age of 30. Using an Oaxaca-Blinder decomposition we find that the earnings differences between second-generation immigrants and individuals with native born parents to a large part are explained by differences in endowments of psychological traits.
    Keywords: Earnings differentials; psychological traits; military enrolment test; secondgeneration immigrants; Oaxaca-Blinder decomposition
    JEL: J15 J24 J61 J71
    Date: 2008–05–15
  8. By: Arnaud Chevalier (Dept. of Economics, Royal Holloway, University of London, Egham, TW20 OEX + Geary Institute, University College Dublin); Steve Gibbons (Department of Geography, London School of Economics + Centre for Economics Performance, London School of Economics); Andy Thorpe (Department of Economics, University of Portsmouth, Portsmouth); Sherria Hoskins (Department of Psychology, University of Portsmouth, Portsmouth)
    Abstract: Participation rates in higher education differ persistently between some groups in society. Using two British datasets we investigate whether this gap is rooted in students’ misperception of their own and other’s ability, thereby increasing the expected costs to studying. Among high school pupils, we find that pupils with a more positive view of their academic abilities are more likely to expect to continue to higher education even after controlling for observable measures of ability and students’ characteristics. University students are also poor at estimating their own test-performance and over-estimate their predicted test score. However, females, white and working class students have less inflated view of themselves. Self-perception has limited impact on the expected probability of success and expected returns amongst these university students.
    Keywords: Test performance, self-assessment, higher education participation, academic selfperception
    JEL: I21 J16 Y80
    Date: 2007–09–24
  9. By: Brian Loasby (SCEME, University of Stirling, UK)
    Abstract: Bruce Caldwell argues that Hayek eventually favoured an evolutionary response, and he endorses this recommendation. I am increasingly inclined to agree, although I believe that the concept of evolution needs to be handled with some care. Hayek himself was cautious, not least in The Sensory Order, where he carefully avoided any discussion of the relative roles of evolution within the species and evolution within the individual. He does not even attempt to explain why the sensory order is formed before the physical order. However we can supplement Hayek’s theory of the mind – which seems to be broadly consistent with contemporary neuroscience – with earlier attempts to explain the development of human knowledge.
    Keywords: Hayek, Marshall, evolution
    JEL: Z1 B41
    Date: 2007–10
  10. By: John F. Ermisch (Institute for Social and Economic Research); Diego Gambetta (Nuffield College, Oxfod); Heather Laurie (Institute for Social and Economic Research); Thomas Siedler (DIW Berlin); S.C. Noah Uhrig (Institute for Social and Economic Research)
    Abstract: We measure trust and trustworthiness in British society with an experiment using real monetary rewards and a sample of the British population. The study also asks the most typical survey question that aims to measure trust, showing that it does not predict ‘trust’ as measured in the experiment. Overall, about 40% of people were willing to trust a stranger in our experiment, and their trust was rewarded one-half of the time. Analysis of variation in the trust behaviour in our survey suggests that trust is more likely if people are older, their financial situation is ‘comfortable’, they are a homeowner, or they are divorced or separated. Trustworthiness is less likely if a person’s financial situation is perceived by them as ‘just getting by’ or difficult.
    Keywords: social trust
    Date: 2008–01

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