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on Cognitive and Behavioural Economics |
| By: | Hopfensitz, Astrid; Wranik, Tanja |
| Abstract: | Each economic actor is characterized by his own evaluations, traits, and strategies. Although heterogeneity of economic actors is widely acknowledged, little is known about the factors causing it. In this paper, we will examine the behavioral bias known as myopic loss aversion, and the environmental and psychological factors leading to different behavioral reactions. Myopic loss aversion has been used to suggest that fund managers should reveal information only rarely, to lead investors to choose options with (on average) higher returns. Specifically, we experimentally studied the impact of experience, individual differences, and emotions on behavioral responses to feedback frequency in an investment setting. Participants made investment decisions in one of three feedback frequency conditions: (1) they received feedback after each round and had the opportunity to make investment changes each time; (2) they received feedback after each round, but were only given the possibility to make changes every three rounds; and (3) they received aggregated feedback every three rounds, and also had the opportunity to make changes every three rounds. We collected information about personality and individual difference factors before the experiment. Finally, evaluations and emotions were measured every three rounds, immediately after feedback was given. We hypothesized that myopic loss aversion is not a general phenomenon, but that stable individual differences lead to different evaluations and emotional reactions concerning feedback. This implies that myopic loss aversion will only be present for some groups of people under certain conditions. As predicted, we found that myopic loss aversion is not generally observed; rather, we found both an experience effect and a personality effect. In particular, myopic loss aversion was particularly likely: (1) when initial investment rounds lead to negative investment experiences (i.e., losses); and (2) for investors with low self-efficacy concerning the investment situation. ‘Self efficacy’ is related to a personality profile characterized by confidence in decision-making abilities, high optimism, and low anxiety. Our results may help explain which individual and situational factors lead to myopic loss aversion, and should help researchers and practitioners provide optimal feedback to different types of investment clients. |
| Keywords: | myopic loss aversion; risk taking; character traits; self efficacy; emotions; personality |
| JEL: | D53 G11 D81 D14 C91 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9305&r=cbe |
| By: | Xiao, Erte; Bicchieri, Cristina |
| Abstract: | Inequity aversion and reciprocity have been identified as two primary motivations underlying human decision making. However, because income and wealth inequality exist to some degree in all societies, these two key motivations can point to different decisions. In particular, when a beneficiary is less wealthy than a benefactor, a reciprocal action can lead to greater inequality. In this paper we report data from a trust game variant where trustees’ responses to kind intentions generate inequality in favor of investors. In relation to a standard trust game treatment where trustees’ responses reduce inequality, the proportion of non-reciprocal decisions is twice as large when reciprocity promotes inequality. Moreover, we find investors expect that this will be the case. Overall, although both motives clearly play a role, we found strong evidence for inequality aversion. Our results call attention to the potential importance of inequality in principal-agent relationships, and have important implications for designing policies aimed at promoting cooperation. |
| JEL: | D63 C72 C91 |
| Date: | 2008–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9375&r=cbe |
| By: | Alessandro Innocenti; Alessandra Rufa; Jacopo Semmoloni |
| Abstract: | This paper investigates the validity of the model of dual processing by means of eyetracking methods. In this theoretical framework, gaze direction may be a revealing signal of how automatic detection is modified or sustained by controlled search. We performed an experiment by using a stylized decisional framework, i.e. informational cascade, proposed by economists to investigate the rationality of imitative behavior. Our main result is that automatic detection as revealed by gaze direction is driven by mechanisms that are dependent on cognitive biases. In particular, we find significant statistical correlation between subjects’ first fixation and their revealed patterns of choice. Our findings support the hypothesis that the process of automatic detection is not independent on cognitive processes. |
| Keywords: | informational cascades, overconfidence, eye-tracking, information processing, cognitive biases |
| JEL: | C91 D82 D83 D87 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:usi:labsit:022&r=cbe |
| By: | Francesco Farina; Niall O'Higgins; Patrizia Sbriglia |
| Abstract: | The intention to “invest” in the Trust Game in extensive form revealed by a move could conceal different motivations. Whether the motive hidden beneath the manifest behaviour of the first mover is the desire to invest in a relationship of mutual advantage with the trustee or the desire to be good to him independently from his own final payoff, remains an unsettled question. The question then is how to identify the motive which is actually at work, out of the two possible motives embedded in the trust game: 1) an “investment” motive - conditional cooperation is a way to express the expectation of reciprocal behaviour; and/or, 2) an altruistic motive - what may appear as an “investment” actually conceals a social preferences, that is the intention to gratuitously favour the other player. In this paper we attempt to elicit the true motive underlying the behaviour of each of the two players and suggest that the most informative utilization of surveys in this regard goes beyond the simple comparison between answers to a questionnaire and actual behaviour. The statistical treatment of players’ behaviour in the sessions, by means of attitudes as shown by their answers, allows a deeper understanding of the players’ behaviour and a better evaluation of the experimental results. Therefore, the objective of disentangling the strategic motive (the intention of the trustor to elicit benevolence from the trustee, and the trustee interest in reciprocating) from the altruistic motive will be pursued by establishing a correlation between the attitudinal and the behavioural measures of trust and trustworthiness. In this paper, we will then be using the “words” of answers to a questionnaire in order to more deeply understand the motivations behind “actions”. |
| Keywords: | Experimental economics, Surveys, Trust, Reciprocity |
| JEL: | C42 C72 C91 D63 D64 D83 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:usi:labsit:021&r=cbe |
| By: | Maurizio Bovi (ISAE - Institute for Studies and Economic Analyses) |
| Abstract: | Persistent and widespread psychological attitudes distort both the subjective probability of future economic events and their retrospective interpretation. It could lead to a systematic gap between (over critic) judgments and (over confident) expectations - the “survey forecast error”. When it goes bad, then, psychology suggests that people could tend to become particularly optimistic towards future evolutions. It could amplify the survey forecast error. These psychological biases are in sharp contrast with the maintained rational expectations hypothesis (REH) of most macro models. Monthly data over twenty-two years reject the REH across ten European countries, supporting the psychological view on non-Muthian expectations. |
| Keywords: | Cognitive Psychology, Expectations, Measurement Errors, Survey Data. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:isa:wpaper:95&r=cbe |
| By: | Verbeke, W.J.M.I.; Belschak, F.D.; Bakker, A.B.; Dietz, B. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | Using two different samples of salespeople, the authors investigate how a combination of general mental ability (GMA) and specific skills and capabilities (social competence and thinking styles) allows salespeople to reach their sales goals. The study finds evidence for an interaction between GMA and social competence. If combined with high social competence, high GMA leads to highest sales performance; if combined with low social competence, high GMA leads to lowest sales performance. In addition, interaction effects between GMA and a judicial thinking style were found. Salespeople high on GMA have the most potential for attaining high levels of sales performance when combined with specific skills; when lacking these skills they may become the firm’s worst performers. |
| Keywords: | sales;knowledge based marketing;knowledge;general mental ability;thinking styles |
| Date: | 2008–06–18 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:1765012633&r=cbe |
| By: | Dave Colander |
| Abstract: | This paper was first presented at the AEA meetings on complexity. It was later published in a book edited by Massima Alszano and Alan Kirman, Economics: Complex Windows, Springer Publishers. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:mdl:mdlpap:0805&r=cbe |
| By: | Harmsen-van Hout Marjolein J.W.; Dellaert Benedict G.C.; Herings P. Jean-Jacques (METEOR) |
| Abstract: | Network formation constitutes an important part of many social and economic processes, but relatively little is known about how individuals make their linking decisions. This article provides an experimental investigation of behavioral effects in individual decisions of network formation. Our findings demonstrate that individuals systematically simplify more complex components of network payoff in their linking decisions. Specifically, they focus on only part of the normative payoff, namely on their own direct payoff and tend to ignore indirect payoff and payoff for others in the network. Additionally, individuals use descriptive behavioral traits of link choice alternatives to guide their choices. They are sensitive to whether an alternative involves link deletion or creation and whether it concerns an isolated or a central node. Furthermore, we find that complexity of one type can moderate individuals’ dealing with a complex feature of another type. These behavioral effects have important implications for researchers and managers working in areas that involve network formation. |
| Keywords: | Economics (Jel: A) |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2008019&r=cbe |
| By: | Farris, P.W.; Verbeke, W.J.M.I.; Dickson, P.M.; Nierop, E. van (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | The purpose of this paper is to discuss a simulation of marketing budgeting rules that is based on a simplified version of the market share attraction model. The budgeting rules are roughly equivalent to those that may be used in practice. The simulation illustrates the concept of path dependence in dynamic marketing systems and shows how it might result from decision rules potentially applied by marketers and retailers. Path dependence results from positive feedback in dynamic systems that imparts momentum to market choices. Where the potential for path dependence exists, there are implications for defining and measuring long-term effects of marketing decisions in a way that is meaningful to managers and researchers. In the simulations presented we show that limited retails assortment may contribute to path dependence when firms use either percentage-of-revenue rules or "market learning" experiments to set budgets. While other budgeting procedures (e.g., matching competition) may stabilize market share, this stability in the share dimension comes at the cost of instability for budgets and profits. |
| Keywords: | path dependencies;marketing decisions |
| Date: | 2008–06–18 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:1765012634&r=cbe |
| By: | Heike Hennig-Schmidt (Laboratory of Experimental Economics, University of Bonn, Adenauerallee 24-42, 53113 Bonn, Germany, Tel. +49 228 7391-95 (Fax -93), http://www.bonneconlab.uni-bonn.de, hschmidt@uni-bonn.de); Bettina Rockenbach (Lehrstuhl für Mikrooekonomie, Universitaet Erfurt, Postfach 900 221, 99105 Erfurt, Germany, Tel. +49 361 73745-21 (Fax: -29), http://www.uni-erfurt.de/mikrooekonomie, bettina.rockenbach@uni-erfurt.de); Abdolkarim Sadrieh (Faculty of Economics and Management, University of Magdeburg, Postbox 4120, 39016 Magdeburg, Germany, Tel. +49 391 67-18492 (Fax. 11355), http://www.ww.unimagdeburg.de/ebusiness/, sadrieh@ww.uni-magdeburg.de) |
| Abstract: | We present a field experiment to assess the effect of own and peer wage variations on actual work effort of employees with hourly wages. Work effort neither reacts to an increase of the own wage, nor to a positive or negative peer comparison. This result seems at odds with numerous laboratory experiments that show a clear own wage sensitivity on effort. In an additional real-effort laboratory experiment we show that explicit cost and surplus information that enables to exactly calculate employer’s surplus from the work contract is a crucial pre-requisite for a positive wage-effort relation. This demonstrates that employee’s reciprocity requires a clear assessment of the surplus at stake. |
| Keywords: | efficiency wage, reciprocity, fairness, field experiment, real effort |
| JEL: | C91 C92 J41 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:238&r=cbe |
| By: | Shchetinin, Oleg |
| Abstract: | The paper studies the impact of altruism on Agent's motivation in the career concerns model. The main result is that higher altruism can decrease effort though conventional wisdom suggests the opposite should always the case. The key for the result is the distinction between current and anticipated altruism. The current altruism stimulates the Agent because it makes him partially internalize the Principal's benefit from output. More subtle, the anticipated altruism weakens effort because it lessens career concerns. The paper contributes to the literature on interaction between intrinsic and extrinsic motivation. It gives an example when intrinsic motivator (altruism) lessens extrinsic motivation (career concerns). The model has a number of other interesting features. It gives an example of winner's blessing. It shows that if the worker pushes himself too hard trying to pretend more skilled, it can hinder altruistic relationship. Whereas if the worker shirks, his laziness is safe for establishing altruistic relation in the future. The natural interpretation of the model is labor contract between friends, other applications are also discussed. |
| Keywords: | career concern; altruism; labor contract; intrinsic motivation |
| JEL: | D86 D64 M50 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9414&r=cbe |
| By: | Anat Bracha (Eitan Berglas School of Economics, Tel Aviv University); Donald J. Brown (Dept. of Economics, Yale University) |
| Abstract: | We characterize, in the framework for variational preferences, the affective decision making model of choice under risk and uncertainty introduced by Bracha and Brown (2007). This characterization (i) provides a rigorus decision-theoretic foundation for affective decision making, (ii) offers an axiomatic explanation for ambiguity-seeking in the Ellsberg Paradox and (iii) suggests a dual representation of ADM games in terms of the Legendre-Fenchel conjugate. |
| Keywords: | Ellsberg paradox, Schmeidler's axiom, Affective decision making, Variational preferences, Legendre-Fenchel conjugate |
| JEL: | D01 D81 G22 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1667&r=cbe |
| By: | Pavlo R. Blavatskyy |
| Abstract: | Loss aversion is traditionally defined in the context of lotteries over monetary payoffs. This paper extends the notion of loss 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 implications of loss aversion are discussed for expected utility theory and rankdependent utility theory as well as for popular models of probabilistic choice such as the constant error/tremble model and a strong utility model (that includes the Fechner model of random errors and Luce choice model as special cases). |
| Keywords: | Loss aversion, more loss averse than, nonmonetary outcomes, probabilistic choice, rank-dependent utility theory |
| JEL: | D00 D80 D81 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:375&r=cbe |