nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2008‒07‒30
ten papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. Rationalization and Cognitive Dissonance: Do Choices Affect or Reflect Preferences? By M. Keith Chen
  2. Epistemic Conditions and Social Preferences in Trust Games By Gillies, Anthony S; Rigdon, Mary L
  3. Some differences in revealed behaviour under different inquiry methods By Ortona, Guido; Ottone, Stefania; Ponzano, Ferruccio; Scacciati, Francesco
  4. Boundary and interior equilibria: what drives convergence in a ‘beauty contest’? By Andrea, Morone; Piergiuseppe, Morone
  5. (The Evolution of) Post-Secondary Education: A Computational Model and Experiments By Andreas Ortmann; Sergey Slobodyan
  6. The Currency of Reciprocity - Gift-Exchange in the Workplace By Sebastian Kube; Michel André Maréchal; Clemens Puppe
  7. Repeated Relationships with Limits on Information Processing By Andrew Postlewaite; Olivier Compte
  8. How “Point Blindness” Dilutes the Value of Stock Market Reports By Lupia, Arthur; Krupnikov, Yanna; Levine, Adam Seth; Grafstrom, Cassandra; MacMillan, William; McGovern, Erin
  9. Revealed Conflicting Preferences By Attila Ambrus; Kareen Rozen
  10. Are the Treasures of Game Theory Ambiguous? By Jürgen Eichberger; David Kelsey

  1. By: M. Keith Chen (Yale University)
    Abstract: Cognitive dissonance is one of the most influential theories in psychology, and its oldest experiential realization is choice-induced dissonance. In contrast to the economic approach of assuming a person's choices reveal their preferences, psychologists have claimed since 1956 that people alter their preferences to rationalize past choices by devaluing rejected alternatives and upgrading chosen ones. Here, I show that every study which has tested this preference-spreading effect has overlooked the potential that choices may reflect individual preferences. Specifically, these studies have implicitly assumed that subject's preferences can be measured perfectly, i.e., with infinite precision. Absent this, their methods, even with control groups, will mistakenly identify cognitive dissonance when there is none. Correctly interpreted, several prominent studies actually reject the presence of choice-induced dissonance. This suggests that mere choice may not always induce rationalization, a reversal that may significantly change the way we think about cognitive dissonance as a whole.
    Keywords: Cognitive dissonance, Revealed preference
    JEL: A12 C91 D01
    Date: 2008–07
  2. By: Gillies, Anthony S; Rigdon, Mary L
    Abstract: It is well-known that subjects in bilateral bargaining experiments often exhibit choice behavior suggesting there are strong reciprocators in the population. But it is controversial whether explaining this data requires a social preference model that invokes genuine strong reciprocity or whether some social preference model built on other-regarding preferences as a surrogate can explain it. Since the data precedes theory here, all the social preference models agree on most of it — making direct tests more difficult. We report results from a laboratory experiment using a novel method for testing between the classes of social preference models in the trust game that manipulates the distribution of payoff information in the game. We find evidence supporting the strong reciprocity hypothesis.
    Keywords: social preferences; trust game; reciprocity; strong reciprocators
    JEL: C70 C91
    Date: 2008–07–13
  3. By: Ortona, Guido; Ottone, Stefania; Ponzano, Ferruccio; Scacciati, Francesco
    Abstract: The experiment presented in this paper has two aims, both methodological. First, we want to check for the role of what we may call (after Carpenter et al., 2006) the they came to play effect. Second, we want to test whether the lab outcomes are confirmed by a questionnaire on a hypothetical similar scenario. In order to pursue our aims, we design an experiment made of four treatments: a lab-experiment with strategy method, a lab-experiment without strategy method, a questionnaire with strategy method and a questionnaire without strategy method. We may conclude that the lab results are definitively more reliable than the questionnaire ones only if you manage, in one way or the other, to get rid of the bias induced by the they came to play effect: a post-experiment questionnaire, containing explicit questions on the matter, may be a device.
    Keywords: Experiments, questionnaire, come to play effect, strategy method
    JEL: B41 C91 C92 H21
    Date: 2008–07
  4. By: Andrea, Morone; Piergiuseppe, Morone
    Abstract: We present an experimental game in the p-beauty framework. Building on the definitions of boundary and interior equilibria, we distinguish between ‘speed of convergence towards the game-theoretic equilibrium’ and ‘deviations of the guesses from the game-theoretic equilibrium’. In contrast to earlier findings (Güth et al., 2002), we show, under a different game parameterisation, that (i) interior equilibria initially produce smaller deviation of the guesses from the game-theoretic equilibrium compared to boundary equilibria; (ii) interior and boundary equilibria do not differ in the timeframe needed for convergence; (iii) the speed of convergence is higher in the boundary equilibrium.
    Keywords: Guessing game; p-beauty contest; individual behaviour
    JEL: C72 C91
    Date: 2008
  5. By: Andreas Ortmann; Sergey Slobodyan
    Abstract: We propose a computational model to study (the evolution of) post-secondary education. “Consumers” who differ in quality shop around for desirable colleges or universities. “Firms” that differ in quality signal the availability of their services to desirable students. As long as they have capacity, colleges and universities make offers to students, who apply and qualify. Our model generalizes an earlier literature (namely, Vriend 1995) in an important dimension: quality, the model confirms key predictions of an analytical model that we also supply, and the model allows us to systematically explore the emergence of macro regularities and the consequences of various strategies that sellers might try. We supply three such exercises. In our baseline treatment we establish the dynamics and asymptotics of our generalized matching model. In the second treatment we study the consequences of opportunistic behavior of firms and thus demonstrate the usefulness of our computational laboratory for the analysis of this or similar questions (e.g., the problem of early admission). In the third treatment we equip some firms with economies of scale. This variant of our matching model is motivated by the entry of for-profit providers into low-quality segments of post-secondary education in the USA and by empirical evidence that, while traditional nonprofit or state-supported providers of higher education do not have significant economies of scale, the new breed of for-profit providers seems to capture economies in core functions such as curricular design, advertising, informational infrastructure, and regulatory compliance. Our computational results suggest that this new breed of providers is likely to continue to move up the quality ladder, albeit not necessarily all the way up to the top.
    Keywords: Post-secondary education, for-profit higher education providers, computational simulations.
    JEL: C63 D21 D83 I21 L15
    Date: 2008–06
  6. By: Sebastian Kube; Michel André Maréchal; Clemens Puppe
    Abstract: What determines reciprocity in employment relations? We conducted a controlled field experiment and tested the extent to which cash and non-monetary gifts affect workers' productivity. Our main finding is that the nature of the gift, not its monetary value, determines the prevalence of reciprocal reactions. A gift in-kind results in a significant and substantial increase in workers' productivity. An equivalent cash gift, on the other hand, is largely ineffective - even though an additional experiment showed that workers would strongly favor the gift's cash equivalent.
    Keywords: Field experiment, reciprocity, gift exchange, fringe benefits, perks, compensation.
    JEL: C93 J30
    Date: 2008–07
  7. By: Andrew Postlewaite (Department of Economics); Olivier Compte (Paris School of Economics)
    Abstract: Many important strategic problems are characterized by repeated interactions among agents. There is a large literature in game theory and economics illustrating how considerations of future interactions can provide incentives for cooperation that would not be possible in one-shot interactions. Much of the work in repeated games assumes public monitoring: players observe precisely the same thing at each stage of the game. It is well-understood that even slight deviations from public monitoring increase dramatically the difficulty the problems players face in coordinating their actions. Repeated games with private monitoring incorporate differences in what players observe at each stage. Equilibria in repeated games with private monitoring, however, often seem unrealistic; the equilibrium strategies may be highly complex and very sensitive to the fine details of the stochastic relationship between players’ actions and observations. Furthermore, there is no realistic story about how players might arrive at their equilibrium strategies. We propose an alternative approach to understanding how people cooperate. Each player is endowed with a mental system that processes information: a mental system consists of a number of psychological states and a transition function between states that depends on observations made. In this world, a strategy is just a function from states to actions. Our framework has the following desirable properties: (i) players restrict attention to a relatively small set of simple strategies. (ii) the number of strategies that players compare is small enough that players might ultimately learn which perform well. We find that some mental systems allow agents to cooperate under a broad set of parameters, while others are not conducive to cooperation.
    Keywords: Repeated Games, Private Monitoring, Mental States
    JEL: D01 D70
    Date: 2007–10–01
  8. By: Lupia, Arthur; Krupnikov, Yanna; Levine, Adam Seth; Grafstrom, Cassandra; MacMillan, William; McGovern, Erin
    Abstract: The stock index “point” is a focal component of financial news reports. While much attention is paid to changes in stock index point totals, few people realize that the value of a stock index “point” varies (and has recently declined). We call this perceptual phenomenon “point blindness” and explain its threat to investors. Simple changes in media presentations of stock index information can counter point blindness. These changes are easy to implement and can help audiences make better financial decisions. An experiment on over 2000 participants shows such changes significantly altering their perceptions of the stock market.
    Keywords: personal finance; money illusion; behavioral finance; behavioral economics; communication; currencies
    JEL: G11 C99 D83
    Date: 2008–07–15
  9. By: Attila Ambrus (Harvard University); Kareen Rozen (Cowles Foundation, Yale University)
    Abstract: We model a DM as a collection of utility functions (selves, rationales) and an aggregation rule (a theory of how selves are activated by choice sets). The DM’s choice function is rationalized by a collection of selves and an aggregator if it selects the unique maximizer of aggregate utility. For a general class of aggregators, we show that the number of selves required to rationalize a choice function is at most a linear function of the number of IIA violations exhibited. We provide simple conditions for checking when an aggregator can rationalize all choice functions with enough selves; and provide a minimal set of behaviors that an aggregator can rationalize with a fixed number of selves. We apply the framework to choice over menus and examine the revealed preference implications of IIA violations for the subjec­tive state-space. While consistent with evidence in psychology on multiple selves, our framework also has implications for models of collective house-hold behavior and marketing models of multiattribute goods.
    Keywords: Multiple selves, IIA violations, Context-dependent choice, Rationalizability, Complexity
    JEL: D11 D13 D71
    Date: 2008–07
  10. By: Jürgen Eichberger (University of Heidelberg, Department of Economics); David Kelsey (University of of Exeter, School of Business and Economics)
    Abstract: Goeree & Holt (2001) observe that, for some parameter values, Nash equilibrium provides good predictions for actual behaviour in experiments. For other payoff parameters, however, actual behaviour deviates consistently from that predicted by Nash equilibria. They attribute the robust deviations from Nash equilibrium to actual players’ considering not only marginal gains and losses but also total pay-offs. In this paper, we show that optimistic and pessimistic attitudes towards strategic ambiguity may induce such behaviour.
    Keywords: Ambiguity, coordination games, experiments, traveller’s dilemma, matching pennies, optimism
    JEL: C72 D81
    Date: 2008–07

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