nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2009‒01‒03
eighteen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Self-Regulation through Goal Setting By Koch, Alexander K.; Nafziger, Julia
  2. On the Economics and Biology of Trust By Fehr, Ernst
  3. Social Norms, Information, and Trust among Strangers By John Duffy; Huan Xie; Yong-Ju Lee
  4. Status Quo Bias, Multiple Priors and Uncertainty Aversion By Ortoleva, Pietro
  5. Contracts as Reference Points: Experimental Evidence By Fehr, Ernst; Hart, Oliver; Zehnder, Christian
  6. The importance of foregone options By Ana Espinola-Arredondo; Felix Munoz-Garcia
  7. A Behavioral Account of the Labor Market: The Role of Fairness Concerns By Fehr, Ernst; Goette, Lorenz; Zehnder, Christian
  8. Effort and Comparison Income: Experimental and Survey Evidence By Andrew E. Clark; David Masclet; Marie-Claire Villeval
  9. Price Discrimination and Customer Behaviour: Empirical Evidence from Marseille By Alan Kirman; Sonia Moulet; Rainer Schulz
  10. The dos and don'ts of leadership in sequential public goods experiments By Maria Fernanda Rivas; Matthias Sutter
  11. Participation costs for responders can reduce rejection rates in ultimatum bargaining By Philipp C. Wichardt; Daniel Schunk; Patrick W. Schmitz
  12. Gender pairing and bargaining – Beware the same sex! By Matthias Sutter; Ronald Bosman; Martin Kocher; Frans van Winden
  13. Charitable Giving for Overseas Development: UK Trends over a Quarter Century By Atkinson, Anthony B.; Backus, Peter G.; Micklewright, John; Pharoah, Cathy; Schnepf, Sylke V.
  14. Some Common Confusions about Hyperbolic Discounting By Eric Rasmusen
  15. Identity and Autonomy in a Human Complex System By Magali Orillard
  18. Post Keynesian economics - how to move forward By Engelbert Stockhammer; Paul Ramskogler

  1. By: Koch, Alexander K. (University of Aarhus); Nafziger, Julia (University of Aarhus)
    Abstract: Goals are an important source of motivation. But little is known about why and how people set them. We address these questions in a model based on two stylized facts from psychology and behavioral economics: i) Goals serve as reference points for performance. ii) Present-biased preferences create self-control problems. We show how goals permit self-regulation, but also that they are painful self-disciplining devices. Greater self-control problems therefore lead to stronger self-regulation through goals only up to a certain point. For severely present-biased preferences, the required goal for self-regulation is too painful and the individual rather gives up.
    Keywords: goals, self-control, motivation, time inconsistency, psychology
    JEL: A12 C70 D91
    Date: 2008–12
  2. By: Fehr, Ernst (University of Zurich)
    Abstract: In recent years, many social scientists have claimed that trust plays an important role in economic and social transactions. Despite its proposed importance, the measurement and the definition of trust seem to be not fully settled, and the identification of the exact role of trust in economic interactions has proven to be elusive. It is still not clear whether trust is just an epiphenomenon of good institutions or whether it plays an independent causal role capable of shaping important aggregate economic outcomes. In this paper, I rely on a behavioral definition of trust that enables us to relate it to economic primitives such as preferences and beliefs. I review strong biological and behavioral evidence indicating that trusting is not just a special case of risk-taking, but based on important forms of social preferences such as betrayal aversion. Behaviorally defined trust also opens the door for understanding national and ethnic trust differences in terms of differences in preferences and beliefs, and it suggests ways to examine and interpret a causal role of trust.
    Keywords: trust, preferences, beliefs, biological basis
    JEL: C7 D00 D2 D7 D8
    Date: 2008–12
  3. By: John Duffy (University of Pittsburgh); Huan Xie (Concordia University); Yong-Ju Lee (Samsung Research Institute of Finance)
    Abstract: How do norms of trust and reciprocity arise? We investigate this question by examining behavior in an experiment where subjects play a series of indefinitely repeated trust games. Players are randomly and anonymously matched each period. The parameters of the game are chosen to support trust and reciprocity as a sequential equilibrium when no reputational information is available. The main question addressed is whether a social norm of trust and reciprocity emerges under the most extreme information restriction (community-wide enforcement) or whether trust and reciprocity require additional, individual-specific information about a player's past history of play. In the absence of such reputational information, we find that a social norm of trust and reciprocity is difficult to sustain. The provision of reputational information on past individual decisions significantly increases trust and reciprocity when subjects have experienced the absence of such a mechanism. Importantly, we find that making reputational information available at a small cost may also lead to a significant improvement in trust and reciprocity, despite the fact that most subjects do not choose to purchase this information.
    Keywords: Social Norms, Trust Game, Random Matching, Trust and Reciprocity, Information, Reputational Information
    JEL: C72 C91 C92
    Date: 2008–10
  4. By: Ortoleva, Pietro
    Abstract: Motivated by the extensive evidence about the relevance of status quo bias both in experiments and in real markets, we study this phenomenon from a decision-theoretic prospective, focusing on the case of preferences under uncertainty. We develop an axiomatic framework that takes as a primitive the preferences of the agent for each possible status quo option, and provide a characterization according to which the agent prefers her status quo act if nothing better is feasible for a given set of possible priors. We then show that, in this framework, the very presence of a status quo induces the agent to be more uncertainty averse than she would be without a status quo option. Finally, we apply the model to a financial choice problem and show that the presence of status quo bias as modeled here might induce the presence of a risk premium even with risk neutral agents.
    Keywords: Status quo bias; Ambiguity Aversion; Endowment Effect; Risk Premium
    JEL: D11 D81
    Date: 2008–09
  5. By: Fehr, Ernst (University of Zurich); Hart, Oliver (Harvard University); Zehnder, Christian (University of Lausanne)
    Abstract: In a recent paper, Hart and Moore (2008) introduce new behavioral assumptions that can explain long term contracts and important aspects of the employment relation. However, so far there exists no direct evidence that supports these assumptions and, in particular, Hart and Moore's notion that contracts provide reference points. In this paper, we examine experimentally the behavioral forces stipulated in their theory. The evidence confirms the model's prediction that there is a tradeoff between rigidity and flexibility in a trading environment with incomplete contracts and ex ante uncertainty about the state of nature. Flexible contracts – which would dominate rigid contracts under standard assumptions –cause a significant amount of shading on ex post performance while under rigid contracts much less shading occurs. Thus, although rigid contracts rule out trading in some states of the world, parties frequently implement them. While our results are broadly consistent with established behavioral concepts, they cannot easily be explained by existing theories. The experiment appears to reveal a new behavioral force: ex ante competition legitimizes the terms of a contract, and aggrievement and shading occur mainly about outcomes within the contract.
    Keywords: contracts, reference points, experiment
    JEL: C7 D00 D2 D8 K00
    Date: 2008–12
  6. By: Ana Espinola-Arredondo; Felix Munoz-Garcia (School of Economic Sciences, Washington State University)
    Abstract: Recent experimental evidence supports the in?uence of a player?s unchosen alternatives in other agent?s actions. This paper examines a tractable theoretical model of reference-dependent preferences in which individuals compare other players?chosen action with respect to their un- chosen alternatives. We analyze the equilibrium prediction in complete information sequential- move games, and compare it with that of standard games where players are not concerned about unchosen alternatives. We show that, without relying on interpersonal payo¤ comparisons (i.e., with strictly individualistic agents), our model predicts higher cooperation among the players than standard game-theoretic models. In addition, our framework embodies certain behavioral models from the literature on social status acquisition and intentions-based reciprocity as spe- cial cases. Finally, we con?rm our results in three economic applications: the labor market gift exchange game, the ultimatum bargaining game, and the sequential public good game.
    Keywords: Unchosen alternatives, Sequential-move games, Relative comparisons, Kindness, Reciprocity.
    JEL: C72 C78 C91
    Date: 2008–08
  7. By: Fehr, Ernst (University of Zurich); Goette, Lorenz (University of Geneva); Zehnder, Christian (University of Lausanne)
    Abstract: In this paper, we argue that important labor market phenomena can be better understood if one takes (i) the inherent incompleteness and relational nature of most employment contracts and (ii) the existence of reference-dependent fairness concerns among a substantial share of the population into account. Theory shows and experiments confirm, that even if fairness concerns were only to exert weak effects in one-shot interactions, repeated interactions greatly magnify the relevance of such concerns on economic outcomes. We also review evidence from laboratory and field experiments examining the role of wages and fairness on effort, derive predictions from our approach for entry-level wages and incumbent workers' wages, confront these predictions with the evidence, and show that reference-dependent fairness concerns may have important consequences for the effects of economic policies such as minimum wage laws.
    Keywords: fairness, contracts, wages, effort, experiments
    JEL: C7 D00 D2 D8 J2 L2
    Date: 2008–12
  8. By: Andrew E. Clark; David Masclet; Marie-Claire Villeval
    Abstract: This paper considers the effect of status or relative income on work effort, combining experimental evidencefrom a gift-exchange game with the analysis of multi-country ISSP survey data. We find a consistent negativeeffect of others' incomes on individual effort in both datasets. The individual's rank in the income distribution isa stronger determinant of effort than is others' average income, suggesting that comparisons are more ordinalthan cardinal. In the experiment, effort is also affected by comparisons over time: those who received higherincome offers or enjoyed higher income rank in the past exert lower levels of effort for a given current incomeand rank.
    Keywords: Effort, comparison income, rank, peak-end, experiments
    JEL: M54 J33 A13 C92 D63
    Date: 2008–08
  9. By: Alan Kirman (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Sonia Moulet (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Rainer Schulz (Business School Aberdeen - Aberdeen University)
    Abstract: We analyse the interaction between a seller and customers in a shop on the fruits and vegetables wholesale market in Marseille using an unique data set. We find that customers' bargaining activity is correlated with the kind and location of the business. To determine how the interactions between the seller and the customers influence prices, we compare the price each customer pays for a given good with the daily average price. We find that a customer of the shop is more likely to pay a price higher than other customers for the same good if---ceteris paribus---the customer is unknown to the shop assistants, buys only a small quantity, or buys goods sold on commission. If the customer is known to the shop assistants, then loyalty and bargaining make it more likely that the customer gets better than average price.
    Keywords: Face-to-face bargaining ; customer loyalty
    Date: 2008–12–22
  10. By: Maria Fernanda Rivas; Matthias Sutter
    Abstract: We study the effects of leadership in the provision of public goods by examining (i) the relative importance of reward and punishment as leadership devices, (ii) whether endogenous leadership is more efficient than exogenously enforced leadership, and (iii) whether leaders contributing last, instead of first, also increase contributions. The experimental results are: (i) Reward options yield lower contributions than punishment through exclusion. (ii) Endogenous leadership is much more efficient than exogenously imposed leadership. (iii) Sequentiality itself is not beneficial for contributions since groups where the leader contributes as the last member do not contribute more than groups without a leader.
    Keywords: Public goods experiment, Leadership, Exclusion power, Reward, Endogeneity
    JEL: C72 C92 H41
    Date: 2008–12
  11. By: Philipp C. Wichardt; Daniel Schunk; Patrick W. Schmitz
    Abstract: This paper reports data from an ultimatum mini-game in which responders first had to choose whether or not to participate. Participation was costly, but the participation cost was smaller than the minimum payoff that a responder could guarantee himself in the ultimatum game. Compared to a standard treatment, we find that the rejection rate of unfavorable offers is significantly reduced when participation is costly. A possible explanation based on cognitive dissonance is offered.
    Keywords: Cognitive dissonance; Participation costs; Sunk costs; Ultimatum game
    JEL: C91 D63
    Date: 2008–12
  12. By: Matthias Sutter; Ronald Bosman; Martin Kocher; Frans van Winden
    Abstract: We study the influence of gender and gender pairing on economic decision making in an experimental two-person bargaining game where the other party’s gender is known to both actors. We find that (1) gender per se has no significant effect on behavior, whereas (2) gender pairing systematically affects behavior. In particular, we observe much more competition and retaliation and, thus, lower efficiency when the bargaining partners have the same gender than when they have the opposite gender. These findings are consistent with predictions from psychology. Implications of our results for real-world organizations are discussed.
    Keywords: gender pairing, bargaining, psychology, experiment
    JEL: C72 C91 C92
    Date: 2008–12
  13. By: Atkinson, Anthony B. (Nuffield College, Oxford); Backus, Peter G. (University of Warwick); Micklewright, John (University of Southampton); Pharoah, Cathy (City University London); Schnepf, Sylke V. (University of Southampton)
    Abstract: Charitable giving for overseas development and emergency relief is important in the UK, being about a quarter of the size of government development aid. There has been a strong growth over time, reflecting the activities of development charities and the public response to a series of humanitarian emergencies. This paper examines how individual overseas giving has changed over the quarter century since 1978, using a newly constructed panel data set on donations to individual UK charities. When did the increase take place? Did the public respond to events such as Live Aid? Or has there been a steady upward trend as our society became more globalised? What form did the increase in giving take? Which charities have grown fastest? Have new charities displaced old? How do changes in giving for overseas compare with changes in giving for other causes such as cancer relief or animal welfare? What, if any, is the relation with Official Development Assistance?
    Keywords: charitable giving, overseas development, philanthropy, UK
    JEL: D12 D64 F35 L31
    Date: 2008–12
  14. By: Eric Rasmusen (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: There is much confusion over what "hyperbolic discounting" means. I argue that what matters is the use of relativistic instead of objective time, not the shape of the discount function.
    Keywords: time inconsistency, hyperbolic discounting
    Date: 2008–03
  15. By: Magali Orillard (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579)
    Abstract: The work presented here is centred on the notions of language, of code as well as the interactions that allow to take into account the complex relations between different types of entities, actors, ... corresponding to the embedded cognitive networks . At this level, questions about the identity and the heterogeneity of actors particularly important to the globalisation phenomena can be examined through the negotiation mechanisms and collective decisions. The multiplicity of cognitive shortcuts used, related to the autonomy of actors and institutions or to their interactions, makes it possible to take into account the complexity of human systems.
    Keywords: autonomy; cognitive shortcut; complex mediation; embeddeness; identity
    Date: 2008–12–28
  16. By: Widad Guechtouli (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579)
    Abstract: Knowledge diffusion is a complex process. Knowledge is intangible and therefore is not easy to capitalize within an organization, or share between a set of individuals. The aim of this paper is to study the impact of two different structures of communication on both processes of knowledge transfer and individual learning, in the context of a community of practice. We will specifically compare two types of communication structures (through face-to-face interactions and through a forum) by using agent-based models. Results show that each structure has a different impact on individual learning and knowledge transfer. Though, communication through face-to-face interactions seems to make individuals learn slower than on a web forum. Conclusions are widely discussed.
    Keywords: knowledge; communication structure; communities of practice; agent-based models
    Date: 2008–12–22
  17. By: Ricardo Pinheiro Alves (Gabinete de Estratégia e Estudos, Ministério da Economia e da Inovação)
    Abstract: The paper presents a behavioural economics approach to foreign direct investment. Starting from behavioural finance theory, it uses content analysis from interviews made to Portuguese managers with investments abroad. The study presents evidence of herding, anchoring, overconfidence, mental accounting and other behaviour rules in firms’ location decisions that originate a set of determinants of FDI flows and complement the neoclassical paradigm. Moreover, it confirms the Heiner model (1983, 1985, 1989) by showing that the higher the uncertainty faced by decision makers the more frequent will be the use of behavioural rules. The central role of uncertainty helps explain why FDI flows occur more frequently among developed countries.
    Keywords: Foreign Direct Investment, Behavioural economics, Uncertainty.
    JEL: D21 F21
    Date: 2008–12
  18. By: Engelbert Stockhammer (Department of Economics, Vienna University of Economics & B.A.); Paul Ramskogler (Department of Economics, Vienna University of Economics & B.A.)
    Abstract: Post Keynesian Economics (PKE) is at a cross road. The academic climate at universities has become more hostile to survival and the mainstream has become more diverse internally. Moreover, a heterodox camp of diverse groups of non-mainstream economists is forming. The debate on the future of PKE has so far focussed on the relation to the mainstream. This paper argues that this is not an important issue for the future of PKE. The debate has overlooked the dialectics between academic hegemony and economic (and social) stability. The important question is, whether PKE offers useful explanations of the ongoing socio-economic transformation. PKE has generated valuable insights but it offers little on important real world phenomena such as supply-side phenomena like the increasing use of ICT and the globalisation of production, social issues like precarisation and the polarization of income distribution or ecological challenges like climate change. It is these issues that will decide the future of PKE.
    JEL: B20 B50 B59 E12
    Date: 2008–12

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