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on Cognitive and Behavioural Economics |
| By: | Lovric, M.; Kaymak, U.; Spronk, J. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | Based on a survey of behavioral finance literature, this paper presents a descriptive model of individual investor behavior in which investment decisions are seen as an iterative process of interactions between the investor and the investment environment. This investment process is influenced by a number of interdependent variables and driven by dual mental systems, the interplay of which contributes to boundedly rational behavior where investors use various heuristics and may exhibit behavioral biases. In the modeling tradition of cognitive science and intelligent systems, the investor is seen as a learning, adapting, and evolving entity that perceives the environment, processes information, acts upon it, and updates his or her internal states. This conceptual model can be used to build stylized representations of (classes of) individual investors, and further studied using the paradigm of agent-based artificial financial markets. By allowing us to implement individual investor behavior, to choose various market mechanisms, and to analyze the obtained asset prices, agent-based models can bridge the gap between the micro level of individual investor behavior and the macro level of aggregate market phenomena. It has been recognized, yet not fully explored, that these models could be used as a tool to generate or test various behavioral hypothesis. |
| Keywords: | investor behavior;financial decision making;behavioral finance;cognitive modeling;agent-based artificial financial markets |
| Date: | 2008–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:1765012468&r=cbe |
| By: | Frans van Winden (University of Amsterdam, CEPR, CESifo); Michal Krawczyk (University of Amsterdam); Astrid Hopfensitz (TSE (GREMAQ), University of Toulouse) |
| Abstract: | This experimental study is concerned with the impact of the timing of the resolution of risk on people’s willingness to take risks, with a special focus on the role of affect. While the importance of anticipatory emotions has so far been only inferred from decisions regarding hypothetical choice problems, we had participants put their own money at risk in a real investment task. Moreover, emotions were explicitly measured, including anticipatory emotions experienced during the waiting period under delayed resolution (which involved two days). Affective traits and risk attitudes were measured through a web-based questionnaire before the experiment and participants’ preferences for resolution timing, risk, and time were incentive compatibly measured during the experiment. Main findings are that delayed resolution can affect investment, that the effect depends on the risk involved, and that (among all the measures considered) only emotions can explain our results, albeit in ways that are not captured by existing models. |
| Keywords: | Investment decision; delayed resolution of risk; emotions; experiment |
| JEL: | C91 D81 G11 |
| Date: | 2008–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20080047&r=cbe |
| By: | Luigi Mittone; Matteo Ploner |
| Abstract: | We experimentally investigate social effects in a principal-agent setting with incomplete contracts. The strategic interaction scheme is based on the Investment Game (Berg et al., 1995). In our setting four trustees and one trustor are interacting and the access to choices of peers in the group of trustees is experimentally manipulated. We find that when the trust- worthiness of some participants is made available to peers, the high levels of trustworthiness displayed by those being observed tend to negatively impact on the trustworthiness of those observing them. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpce:0805&r=cbe |
| By: | Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group, Jena, Germany); Matteo Ploner (Max Planck Institute of Economics, Strategic Interaction Group, Jena, Germany); Tobias Regner (Friedrich Schiller University, Jena, Germany) |
| Abstract: | In-group favoritism in social dilemma situations is one of the main findings of studies in Social Identity Theory. We investigate what causes the in-group bias: is it due to mere group affiliation or, alternatively, is guilt-aversion a possible explanation? We induce group membership in a minimal group setting, observe in-/out-group transfers and elicit re- spective beliefs. We ?nd that mere group affiliation affects beliefs and explains a substantial part of the bias, but we also ?nd evidence in favor of guilt-aversion as a source of motivation. |
| Keywords: | social preferences, experiments, social dilemma, group identity, guilt aversion |
| JEL: | C72 D01 C91 C92 D84 |
| Date: | 2008–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2008-046&r=cbe |
| By: | Carlsson, Fredrik (Department of Economics, School of Business, Economics and Law, Göteborg University); Daruvala, Dinky (Department of Economics, Karlstad University); Jaldell, Henrik (Department of Economics, Karlstad University) |
| Abstract: | We design a donations vs. own money choice experiment comparing three different treatments. In two of the treatments the pay-offs are hypothetical. In the first of these, a short cheap talk script was used, and subjects were required to state their own preferences in this scenario. In the second, subjects were asked to state how they believed an average student would respond to the choices. In the third treatment the pay-offs were real, allowing us to use the results to compare the validity of the two hypothetical treatments. We find a strong hypothetical bias in both hypothetical treatments where the marginal willingness to pay for donations are higher when subjects state their own preferences but lower when subjects state what they believe are other students preferences. The explanation is probably a self-image effect in both cases. We find that it is mainly women who are prone to hypothetical bias in this study.<p> |
| Keywords: | Stated preferences; cheap talk; hypothetical bias; third person approach; choice experiment |
| JEL: | C91 D64 Q51 |
| Date: | 2008–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0309&r=cbe |
| By: | Karolina Safarzynska; Jeroen C.J.M. van den Bergh |
| Abstract: | In this paper we present an overview of methods and components of formal economic models employing evolutionary approaches. This compromises two levels: (1) techniques of evolutionary modelling, including multi-agent modelling, evolutionary algorithms and evolutionary game theory; (2) building blocks or components of formal models classified into core processes and features of evolutionary systems - diversity, innovation and selection - and additional elements, such as bounded rationality, diffusion, path dependency and lock-in, co-evolutionary dynamics, multilevel and group selection, and evolutionary growth. We focus our attention on the characteristics of models and techniques and their underlying assumptions. |
| Keywords: | bounded rationality, evolutionary algorithms, evolutionary game theory, evolutionary growth, innovation, multilevel evolution, neo-Schumpeterian models Length 51 pages |
| JEL: | B52 C60 C73 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:esi:evopap:2008-06&r=cbe |
| By: | Hommes, C.H. (Universiteit van Amsterdam); Wagener, F.O.O. (Universiteit van Amsterdam) |
| Abstract: | Traditional finance is built on the rationality paradigm. This chapter discusses simple models from an alternative approach in which financial markets are viewed as complex evolutionary systems. Agents are boundedly rational and base their investment decisions upon market forecasting heuristics. Prices and beliefs about future prices co-evolve over time with mutual feedback. Strategy choice is driven by evolutionary selection, so that agents tend to adopt strategies that were successful in the past. Calibration of "simple complexity models" with heterogeneous expectations to real financial market data and laboratory experiments with human subjects are also discussed. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ams:ndfwpp:08-05&r=cbe |
| By: | Hirshleifer, David; Teoh, Siew Hong |
| Abstract: | Prevailing models of capital markets capture a limited form of social influence and information transmission, in which the beliefs and behavior of an investor affects others only through market price, information transmission and processing is simple (without thoughts and feelings), and there is no localization in the influence of an investor on others. In reality, individuals often process verbal arguments obtained in conversation or from media presentations, and observe the behavior of others. We review here evidence concerning how these activities cause beliefs and behaviors to spread, affect financial decisions, and affect market prices; and theoretical models of social influence and its effects on capital markets. Social influence is central to how information and investor sentiment are transmitted, so thought and behavior contagion should be incorporated into the theory of capital markets. |
| Keywords: | capital markets; thought contagion; behavioral contagion; herd behavior; information cascades; social learning; investor psychology; accounting regulation; disclosure policy; behavioral finance; market efficiency; popular models; memes |
| JEL: | M41 D83 Z13 G0 D85 |
| Date: | 2008–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9142&r=cbe |
| By: | Fontana Magda |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:uto:cesmep:200801&r=cbe |
| By: | Armstrong, J. Scott; Green, Kesten C.; Jones, Randall J.; Wright, Malcolm |
| Abstract: | Prior research found that people’s assessments of relative competence predicted the outcome of Senate and Congressional races. We hypothesized that snap judgments of "facial competence" would provide useful forecasts of the popular vote in presidential primaries before the candidates become well known to the voters. We obtained facial competence ratings of 11 potential candidates for the Democratic Party nomination and of 13 for the Republican Party nomination for the 2008 U.S. Presidential election. To ensure that raters did not recognize the candidates, we relied heavily on young subjects from Australia and New Zealand. We obtained between 139 and 348 usable ratings per candidate between May and August 2007. The top-rated candidates were Clinton and Obama for the Democrats and McCain, Hunter, and Hagel for the Republicans; Giuliani was 9th and Thompson was 10th. At the time, the leading candidates in the Democratic polls were Clinton at 38% and Obama at 20%, while Giuliani was first among the Republicans at 28% followed by Thompson at 22%. McCain trailed at 15%. Voters had already linked Hillary Clinton’s competent appearance with her name, so her high standing in the polls met our expectations. As voters learned the appearance of the other candidates, poll rankings moved towards facial competence rankings. At the time that Obama clinched the nomination, Clinton was ahead in the popular vote in the primaries and McCain had secured the Republican nomination with a popular vote that was twice that of Romney, the next highest vote-getter. |
| Keywords: | accuracy; appearance; forecasting methods; snap judgments |
| JEL: | C53 D81 D72 C42 |
| Date: | 2008–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9150&r=cbe |
| By: | Andriy Zapechelnyuk; Ro'i Zultan |
| Date: | 2008–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:122247000000002199&r=cbe |
| By: | Xavier Vilà |
| Abstract: | We study the properties of the well known Replicator Dynamics when applied to a finitely repeated version of the Prisoners' Dilemma game. We characterize the behavior of such dynamics under strongly simplifying assumptions (i.e. only 3 strategies are available) and show that the basin of attraction of defection shrinks as the number of repetitions increases. After discussing the difficulties involved in trying to relax the 'strongly simplifying assumptions' above, we approach the same model by means of simulations based on genetic algorithms. The resulting simulations describe a behavior of the system very close to the one predicted by the replicator dynamics without imposing any of the assumptions of the analytical model. Our main conclusion is that analytical and computational models are good complements for research in social sciences. Indeed, while on the one hand computational models are extremely useful to extend the scope of the analysis to complex scenar |
| Keywords: | Agent-Based Computational Economics, Evolutionary Game Theory, Replicator Dynamics, Model-to-Model Analysis, Repeated Prisoners' Dilemma |
| JEL: | C63 C72 D82 |
| Date: | 2008–06–11 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:747.08&r=cbe |
| By: | Edward Cartwright; Amrish Patel |
| Abstract: | An individual’s contribution to a public good may be seen by others as a signal of attributes such as generosity or wealth. An individual may, therefore, choose their contribution so as to send an appropriate signal to others. In this paper we question how the inferences made by others will influence the amount contributed to the public good. Evidence suggests that individuals are naive and biased towards taking things at "face value". We contrast, therefore, contributions made to a public good if others are expected to make rational inferences versus contributions if others are expected to make naive inferences. |
| Keywords: | signalling; naive beliefs; public goods |
| JEL: | D8 H41 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:0807&r=cbe |