nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2008‒05‒31
ten papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. Cognitive Abilities and Behavioral Biases By Oechssler, Jörg; Roider, Andreas; Schmitz, Patrick W.
  2. Cooling-Off in Negotiations - Does It Work? By Joerg Oechssler; Andreas Roider; Patrick W. Schmitz
  3. A Note on ‘Neglect Defaulting’ By Howard Margolis
  4. How important is pro-social behaviour in the delivery of public services? By Paul Gregg; Paul A. Grout; Anita Ratcliffe; Sarah Smith; Frank Windmeijer
  5. Cognitive dissonance, risk aversion and the pretrial negotiation impasse By Langlais, Eric
  6. In Quest of Truth: The War of Methods in Economics By Pillai N., Vijayamohanan
  7. Past Experience, Cognitive Frames, and Entrepreneurship: Some Econometric Evidence from the Indian Pharmaceutical Industry By S. Bhaduri; H. Worch
  8. The Entrepreneurial Culture: Guiding Principles of the Self-Employed By Florian Noseleit
  9. On Shakespeare and Reasonable Doubt By Howard Margolis
  10. Cognitive ability and continuous measures of relative hand-skill. a note By Kevin Denny

  1. By: Oechssler, Jörg (University of Heidelberg); Roider, Andreas (University of Heidelberg); Schmitz, Patrick W. (University of Cologne)
    Abstract: We use a simple, three-item test for cognitive abilities to investigate whether established behavioral biases that play a prominent role in behavioral economics and finance are related to cognitive abilities. We find that higher test scores on the Cognitive Reflection Test of Frederick (2005) indeed are correlated with lower incidences of the conjunction fallacy, conservatism in updating probabilities, and overconfidence. Test scores are also significantly related to subjects’ time and risk preferences. We find no influence on anchoring. However, even if biases are lower for people with higher cognitive abilities, they still remain substantial.
    Keywords: behavioral finance, biases, cognitive abilities, cognitive reflection test
    JEL: C91 D80 D90 J24
    Date: 2008–05
  2. By: Joerg Oechssler (University of Heidelberg, Department of Economics); Andreas Roider (University of Heidelberg, Department of Economics); Patrick W. Schmitz (University of Cologne, Department of Economics)
    Abstract: Negotiations frequently end in conflict after one party rejects a final offer. In a large-scale internet experiment, we investigate whether a 24-hour coolingoff period leads to fewer rejections in ultimatum bargaining. We conduct a standard cash treatment and a lottery treatment, where subjects receive lottery tickets for several large prizes - emulating a high-stakes environment. In the lottery treatment, unfair offers are less frequently rejected, and cooling-off significantly reduces the rejection rate further. In the cash treatment, rejections are more frequent and remain so after cooling-off. This treatment difference is particularly pronounced for subjects with lower cognitive abilities.
    Keywords: negotiations, ultimatum game, emotions, cooling-off, cognitive abilities, behavioral biases, internet experiment
    JEL: C78 C99 D8
    Date: 2008–04
  3. By: Howard Margolis
    Abstract: I introduce the notion of "neglect defaulting", which labels the propensity to neglect possibilities which are ordinarily sensibly neglected. In familiar contexts we are well-tuned to recognize when to override the default. But outside the range of familiar experience – here in the artificial context of puzzles – these ordinarily benign defaults can make it difficult for even sophisticated subjects, such as readers of this note, to avoid responses which on reflection will be seen as obviously mistaken. A detail of particular importance is that although subjects are easily prompted to take one step in the direction of reaching a sound response, the tendency to then neglect to consider that another step may be needed is remarkably strong. In each of the five examples the needed but usually neglected second step is quite trivial. Concluding remarks point to consequences for larger questions in politics and other contexts out of scale with everyday experience.
    Keywords: decision making, judgment
    Date: 2008–04
  4. By: Paul Gregg; Paul A. Grout; Anita Ratcliffe; Sarah Smith; Frank Windmeijer
    Abstract: A number of papers have posited that there is a relationship between institutional structure and pro-social behaviour, in particular donated labour, in the delivery of public services, such as health, social care and education. However, there has been very little empirical research that attempts to measure whether such a relationship exists in practice. This is the aim of this paper. Including a robust set of individual and job-specific controls, we find that individuals in the non-profit sector are significantly more likely to donate their labour, measured by unpaid overtime, than those in the for-profit sector. We can reject that this difference is simply due to implicit contracts or social norms. We find some evidence that individuals differentially select into the non-profit and for-profit sectors according to whether they donate their labour.
    Keywords: pro-social behaviour; public services; donated labour; motivation
    JEL: H11 J32 J45 L31 L32
    Date: 2008–05
  5. By: Langlais, Eric
    Abstract: There exist evidence that asymmetrical information do exist between litigants: not in a way supporting Bebchuk (1984)'s assumption that defendants' degree of fault is a private information, but more likely, as a result of parties' predictive power of the outcome at trial (Osborne, 1999). In this paper, we suggest an explanation which allows to reconcilie different results obtained in experimental economics. We assume that litigants assess their estimates on the plaintiff's prevailing rate at trial using a two-stage process. First, they manipulate the available information in a way consistent with the self-serving bias. Then, these priors are weighted according to the individual's attitude towards risk. The existence of these two different cognitive biases are well documented in the experimental literature. Within this framework, we study their influence in a model of litigation where the self-serving bias of one party is private information. We show that the influence of the former is consistent with the predictions of the "optimistic approach" of trials. However, we show that the existence of risk aversion and more generally non neutrality to risk, is more dramatic in the sense that it has more unpredictable effects.
    Keywords: litigation; pretrial bargaining; cognitive dissonance and self-serving bias; risk aversion.
    JEL: D81 K41
    Date: 2008–03
  6. By: Pillai N., Vijayamohanan
    Abstract: The present paper discusses the ‘battle of methods’ in economics in its epistemic pursuit in the framework of a dialectics between science and art. The traditional distinction between deduction and induction has come to be characterized as a ‘theory-data confrontation’; while the former a priori approach has flourished in terms of mathematical economics, the inductive approach has fulfilled its mission through econometrics and experimental economics. The paper outlines the recent trends in econometrics and experimental economics in the context of empirical pursuit. We conclude the study, reiterating the contemporary consensus on the complementary roles of the two approaches: a theory-data confluence, not in a static, but in a dialectical framework.
    Keywords: Economic Methodology; Deduction; Induction; Dialectics; Mathematics; Econometrics
    JEL: B23 B16 B00 B41
    Date: 2008–05–25
  7. By: S. Bhaduri; H. Worch
    Abstract: The theoretical literature identifies three important entrepreneurial dimensions, namely discovering new opportunities, responsiveness to uncertainty, and coordination of a firm. In the empirical literature, past experience has been identified as having an important influence on organizational behavior. This literature, however, focuses predominantly on the impact of experience on new opportunities using a resource-based view and human capital perspective. In contrast, we draw upon the cognitive science literature to argue that past experience shapes an entrepreneur’s cognitive frame, and, hence, influences entrepreneurship in a more holistic manner. We provide econometric evidence of the impact of past experience on all three entrepreneurial dimensions from the small scale Indian pharmaceutical enterprises.
    Keywords: Entrepreneurship, Past experience, Cognition, Informatione and knowledge, India pharmaceutical industry Length 42 pages
    JEL: D83 L26 M10
    Date: 2008–05
  8. By: Florian Noseleit (Friedrich Schiller University Jena, School of Economics and Business Administration)
    Abstract: What makes entrepreneurs different? Using a cross-country dataset, this paper explores essential parts of the value system of entrepreneurs in Western European countries by comparing value items of the self-employed to that of the non-self-employed. The self- employed rate values higher that aim toward openness to change and self-enhancement. In turn, values related to conservation are considered less important.
    Keywords: Entrepreneurship, self-employment, values, culture, motivations, psychology
    JEL: L26 M13 Z1
    Date: 2008–05–02
  9. By: Howard Margolis
    Abstract: A "Declaration of Reasonable Doubt" (Guardian, 9 September) is the latest reminder of the persistence of controversy over who wrote Shakespeare. But the skeptics' case depends on a logical slip. The starting point is always some close variant of the claim that while Shakspere (a common spelling outside theatrical contexts) was alive no one identified him as the author. "A great mystery lies before you," reads the Declaration. "How could William 'Shakspere' of Stratford have been the author William Shakespeare and leave no definitive evidence of it that dates from his lifetime?" And indeed, while Shakspere lived no one explicitly identified him as the author. But no one explicitly doubted it either. So perhaps, as the skeptics argue, no one thought Shakspere was Shakespeare, so no one was moved to say he was. On the other hand, perhaps no one explicitly said he was because no one doubted he was. And it is not hard to see which side of this disjunction must be right.
    Keywords: Shakespeare, decision making
    Date: 2008–04
  10. By: Kevin Denny (School of Economics & Geary Institute, University College Dublin)
    Abstract: This note re-examines a finding by Crow et al. (1998) that equal skill of right and left hands is associated with deficits in cognitive ability. This is consistent with the idea that failure to develop dominance of one hemisphere is associated with various pathologies such as learning difficulties. Using the same data source but utilising additional data, evidence is found of a more complex relationship between cognitive ability and relative hand skill.
    Date: 2008–02–04

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