nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2008‒06‒13
ten papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. Strategic Use of Trust By Maroš Servátka; Steven Tucker; Radovan Vadovic
  2. The family under the microscope: an experiment testing economic models of household choice. By Munro, Alistair; Bateman, Ian J.; McNally, Tara
  3. Ontological issues in evolutionary economics: The debate between Generalized Darwinism and the Continuity Hypothesis By Jack Vromen
  4. Cognitive Constraints and Reversibility of International Economic Institutions. The Case of the European Monetary System By Maurizio Mistri
  5. Laboratory for Simulation Develpment - LSD By Marco Valente
  6. An Agent Based Simulation Of Smart Metering Technology Adoption By Zhang, T.; Nuttall, W.J.
  7. Competition and Relational Contracts: The Role of Unemployment as a Disciplinary Device By Brown, Martin; Falk, Armin; Fehr, Ernst
  9. Peer Effects and Peer Avoidance: Epidemic Diffusion in Coevolving Networks By Constanza Fosca; Matteo Marsili; Fernando Vega-Redondo
  10. Heterodox Economics and Dissemination of Research through the Internet: the Experience of RePEc and NEP By Marco Novarese; Christian Zimmermann

  1. By: Maroš Servátka (University of Canterbury); Steven Tucker (University of Canterbury); Radovan Vadovic
    Abstract: While most of the previous literature interprets trust as an action, we adopt a view that trust is represented by a belief that the other party will return a fair share. The agent’s action is then a commitment device that signals this belief. In this paper we propose and test a conjecture that economic agents use trust strategically. That is, the agents have incentives to inflate the perceived level of trust (the signal) in order to induce a more favorable outcome for themselves. In the experiment we study the behavior of subjects in a modified investment game which is played sequentially and simultaneously. While the sequential treatment allows for strategic use of trust, in the simultaneous treatment the first mover’s action is not observed and hence does not signal her belief. In line with our prediction we find that first movers send significantly more in the sequential treatment than in simultaneous. Moreover, second movers reward trusting action, but only if it is maximal. We also find that signaling with trust enhances welfare.
    Keywords: Experimental Economics; Trust; Beliefs
    JEL: C70 C91
    Date: 2008–05–15
  2. By: Munro, Alistair; Bateman, Ian J.; McNally, Tara
    Abstract: We devise and execute three experiments to test key features of models of household decision-making. Using established couples (married and unmarried) we test income pooling, unanimity and Pareto efficiency. Subjects make choices individually and jointly and are asked to make predictions about their partner’s choices. Unanimity is rejected. Income pooling is not rejected in joint choice but has less explanatory power in individual choice. In direct tests both sexes do not pool income completely, but in econometric tests across all tasks, women place an equal weight on payoffs but men discount their partner’s payoffs by between 15 and 20%. We find that transparency has little impact on deviations from income pooling or indeed on behaviour generally. Many joint choices deviate from the Pareto principle in a systematic manner suggesting that choices made as a couple are more risk averse than individual decisions.
    Keywords: experiment; household; unitary; income pooling; Pareto; family
    JEL: C78 C92 J12 C93 D1
    Date: 2008–06–02
  3. By: Jack Vromen
    Abstract: Hodgson and Knudsen’s Generalized Darwinism (GD) and the Continuity Hypothesis (CH) put forward by Witt are currently vying for hegemony in the ontology of evolutionary economics. GD and the CH allegedly advance rivaling Darwinian foundations for the development of full-fledged causal evolutionary economic theories. Yet upon closer inspection it is not clear that GD and the CH are mutually exclusive rivals. For one thing, GD and the CH address different sorts of issues. Whereas GD aims at identifying general features that evolutionary processes in different domains (notably the biological and economic domain) have in common, the CH takes as its starting point the causal relations that obtain between antecedent biological evolution and ongoing economic evolution. It seems the one does not exclude the other. This impression is strengthened by the fact that Hodgson endorses rather than opposes something similar to the CH. The paper argues that the critical issue in settling whether or not GD and the CH are mutually exclusive is how much substantive content is given to GD and the CH respectively. Pushed by the critique of Witt (and some of his Evolutionary Economics Group members, Cordes and Buenstorf) that GD has not fully shaken off features that are specific for the biological domain, Hodgson and Knudsen seem to take recourse to a version of GD that is so abstract and general that it is rendered virtually vacuous. As such GD can not contribute much to the development of a full-fledged domain-specific causal economic theory of processes of economic change. It seems the CH fares better in this respect. The CH does offer building blocks for evolutionary theories of consumption and of production. But the problem with the GD is that it is unclear what constructive role (if any) Darwinian evolutionary theory has played in specifying the building blocks. The paper concludes with suggesting two other ways in which Darwinian evolutionary theory might be useful for studying economic evolution.
    Keywords: Length 29 pages
    Date: 2008–06
  4. By: Maurizio Mistri (University of Padua)
    Abstract: This paper builds on the case study of the birth and death of the fixed exchange rate system in Western Europe, prior to the launch of the Euro. The analysis of this case aims to highlight how "new" international economic institutions may suffer the processes of "preference reversals" and thereby implode. De facto, the paper focuses on the cognitive factors that are deemed to have played an important role in determining the originating decision-making processes in favour of a system of fixed exchange rates and, then, in determining the abandonment of that system. After briefly explaining events such as the "currency snake" and the "European Monetary System" (EMS), the paper highlights how processes of this nature are conditional on the extent of the limits of rationality of the decision-making agents, with the consequence of producing cognitive imbalances. These imbalances are determined by the "fuzziness" with which agents evaluate not only opposing objectives, in particular those of employment and the balance of payments, but especially objectives achievable in an intertemporal dimension (Walliser, 2008: ch. 4). In fact, we illustrate how the actual inflationary differentials between the countries concerned determine the imbalances in the balances of payments. We also highlight how the policies to bring inflation under control can determine changes in the electorate in the preferences defined in the area of economic policies. The collapse of the monetary snake and the European Monetary System is representative of such a change in preferences. The conceptual framework of analysis used is that of temporary equilibria.
    Date: 2008–05
  5. By: Marco Valente
    Abstract: LSD is one of many programming languages designed to develop agent-based models. LSD implements time-driven models expressed in formats equivalent to discrete systems of equations, where each equation computes the value of a generic instance of a variable at a generic time step. LSD models are therefore extremely parsimonious in terms of details that users must provide to the system. When a model has been described, the system automatically generates a working program implementing the model, endowed with a complete set of interfaces for any possible operation on the model. The major feature of is that users can rely on an automatic scheduling system and on automatic retrieval of data required for the equations. Such features are particularly attractive in complex, multi-herarchical models. They permit even non- expert programmers to develop even relatively complex models with minimal training. The systems interfaces guarantee the complete control of the model at building, at run-time and at post-simulation analysis, facilitating debugging, revisions and detailed analysis of model results, which are useful properties especially when developing large models for ambitious projects. The design of LSD is based on an "open architecture", so that LSD can be used to implement any type of model, including even-driven models and models based on customized data structures. The intrinsic modularity of LSD models make them easily scalable facilitating the development of highly complex models by demanding users. The underlining layer of C++, accessible by the users, allows the inclusions of external libraries or of complex data structures, besides an extreme speed and dimensions of the model. This work reports on the major features of the design of LSD outlining its most prominent advantages for users of simulation models in research, particularly for agent- based simulations.
    Keywords: Simulations models, programming languages
    Date: 2008–06–03
  6. By: Zhang, T.; Nuttall, W.J.
    Abstract: Based on the classic behavioural theory “the Theory of Planned Behaviour”, we develop an agent-based model to simulate the diffusion of smart metering technology in the electricity market. We simulate the emergent adoption of smart metering technology under different management strategies and economic regulations. Our research results show that in terms of boosting the take-off of smart meters in the electricity market, choosing the initial users on a random and geographically dispersed basis and encouraging meter competition between energy suppliers can be two very effective strategies. We also observe an “S-curve” diffusion of smart metering technology and a “lock-in” effect in the model. The research results provide us with insights as to effective policies and strategies for the roll-out of smart metering technology in the electricity market.
    Keywords: Agent-based simulation, smart metering technology, the Theory of Planned Behaviour, technology diffusion.
    JEL: C63 C73 D78 O33
    Date: 2007–09
  7. By: Brown, Martin (Swiss National Bank); Falk, Armin (University of Bonn); Fehr, Ernst (University of Zurich)
    Abstract: When unemployment prevails, relations with a particular firm are valuable for workers. As a consequence, a worker may adhere to an implicit agreement to provide high effort, even when performance is no third-party enforceable. But can implicit agreements - or relational contracts - also motivate high worker performance when the labor market is tight? We examine this question by implementing an experimental market in which there is an excess demand for labor and the performance of workers is not third-party enforceable. We show that relational contracts emerge in which firms reward performing workers with wages that exceed the going market rate. This motivates workers to provide high effort, even though they could shirk and switch firms. Our results thus suggest that unemployment is not a necessary device to motivate workers. We also discuss how market conditions affect relational contracting by comparing identical labor markets with excess supply and excess demand for labor. Long-term relationships turn out to be less frequent when there is excess demand for labor compared to a market characterized by unemployment. Surprisingly though, this does not compromise market performance.
    Keywords: Relational Contracts; Involuntary Unemployment
    JEL: C90 D82 E24 J30 J41
    Date: 2008–02–01
    Abstract: Does entrepreneurial optimism affect business performance? Using a unique data set based on repeated survey design, we investigate this relationship empirically. Our measures of ‘optimism’ and ‘realism’ are derived from comparing the turnover growth expectations of 133 owners-managers with the actual outcomes one year later. Our results indicate that entrepreneurial optimists perform significantly better in terms of profits than pessimists. Moreover, it is the optimist-realist combination that performs best. We interpret our results using regulatory focus theory.
    Keywords: Entrepreneurship, Optimism, Venture Growth, Regulatory Focus Theory, Latvia
    JEL: D21 L21 L26 M13
    Date: 2008–02–01
  9. By: Constanza Fosca; Matteo Marsili; Fernando Vega-Redondo
    Abstract: We study the long-run-emergency of behavioral patterns in dynamic complex networks. Individuals display two kinds of behavior: G("good") or B ("bad"). We assume that agents have an innate tendency towards G, but can also be led towards B though the influence of peer bad behavior. We model the implications of those peer effects as an epidemic process in the standard SIS (Susceptible-Infected-Susceptible) framework. The key novelty of our model is that, unlike in received epidemic literature, the network is taken to change over time within the same time scale as behavior. Specifically, we posit that links connecting two G agents last longer, reflecting the idea that B agents tend to be avoided. The main concern of the paper is to understand the extent to which such biased network turnover may play a significant role in supporting G behavior in a social system. And indeed we find that network coevolution has nontrivial and interesting effects on long-run behavior. This yields fresh insights on the role of (endogenous) peer pressure on the diffusion of (a)social behavior as well as on the traditional study of disease epidemics.
    Keywords: Coevolutionary networks, diffusion of behavior, social dilemma, epidemics
    JEL: C71 D83 D85
    Date: 2008
  10. By: Marco Novarese (Universita del Piemonte Orientale); Christian Zimmermann (University of Connecticut)
    Abstract: We study how the democratization of the diffusion of research through the Internet could have helped non traditional fields of research. The specific case we approach is Heterodox Economics as its pre-prints are disseminated through NEP, the email alert service of RePEc. Comparing heterodox and mainstream papers, we find that heterodox ones are quite systematically more downloaded, and particularly so when considering downloads per subscriber. We conclude that the Internet definitely helps heterodox research, also because other researcher get exposed to it. But there is still room for more participation by heterodox researchers.
    Keywords: NEP, RePEc, heterodox economics, diffusion of research
    JEL: B50 A14
    Date: 2008–05

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.