nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2009‒01‒10
nine papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Explaining Focal Points: Cognitive Hierarchy Theory versus Team Reasoning By Nicholas Bardsley; Judith Mehta; Chris Starmer; Robert Sugden
  2. Theories of the evolution of cooperative behaviour: A critical survey plus some new results By Rowthorn, Robert E.; Guzmán, Ricardo Andrés; Rodríguez-Sickert, Carlos
  3. Skill, Luck, Overconfidence, and Risk Taking By Natalia Karelaia; Robin Hogarth
  4. Illusory correlation in the remuneration of chief executive officers: It pays to play golf, and well By Gueorgui I. Kolev; Robin Hogarth
  5. Reciprocity, culture, and human cooperation: Previous insights and a new cross-cultural experiment By Simon Gaechter; Benedikt Herrmann
  6. Behavioral Macroeconomics and the New Keynesian Model By Jan-Oliver Menz
  7. Bargaining and Trust: The Effects of 36hr Total Sleep Deprivation on Socially Interactive Decisions By Clare Anderson; David L. Dickinson
  8. What determines adult cognitive skills?: Impacts of preschooling, schooling, and post-schooling experiences in Guatemala By Behrman, Jere R.; Hoddinott, John; Maluccio, John A.; Soler-Hampejsek, Erica; Behrman, Emily L.; Martorell, Reynaldo; Ramírez-Zea, Manuel; Stein, Aryeh D.
  9. Why Current Publication May Distort Science By Neal S Young

  1. By: Nicholas Bardsley (National Centre for Research Methods, University of Southampton); Judith Mehta (School of Economics, University of East Anglia); Chris Starmer (CeDEx, University of Nottingham); Robert Sugden (School of Economics, University of East Anglia)
    Abstract: This paper reports experimental tests of two alternative explanations of how players use focal points to select equilibria in one-shot coordination games. Cognitive hierarchy theory explains coordination as the result of common beliefs about players’ pre-reflective inclinations towards the relevant strategies; the theory of team reasoning explains it as the result of the players’ using a non-standard form of reasoning. We report two experiments. One finds strong support for team reasoning; the other supports cognitive hierarchy theory. In the light of additional questionnaire evidence, we conclude that players’ reasoning is sensitive to the decision context.
    Keywords: salience, focal point, cognitive hierarchy, team reasoning
    JEL: C72 C92
    Date: 2008–12
  2. By: Rowthorn, Robert E.; Guzmán, Ricardo Andrés; Rodríguez-Sickert, Carlos
    Abstract: Gratuitous cooperation (in favour of non-relatives and without repeated interaction) eludes traditional evolutionary explanations. In this paper we survey the various theories of cooperative behaviour, and we describe our own effort to integrate these theories into a self-contained framework. Our main conclusions are as follows. First: altruistic punishment, conformism and gratuitous cooperation co-evolve, and group selection is a necessary ingredient for the co-evolution to take place. Second: people do not cooperate by mistake, as most theories imply; on the contrary, people knowingly sacrifice themselves for others. Third: in cooperative dilemmas conformism is an expression of preference, not a learning rule. Fourth, group-mutations (e.g., the rare emergence of a charismatic leader that brings order to the group) are necessary to sustain cooperation in the long run.
    Keywords: Cooperation; altruism; altruistic punishment; conformism; group-selection
    JEL: H41 Z13
    Date: 2009–01–04
  3. By: Natalia Karelaia; Robin Hogarth
    Abstract: In most naturally occurring situations, success depends on both skill and chance. We compare experimental market entry decisions where payoffs depend on skill alone and combinations of skill and luck. We find more risk taking with skill and luck as opposed to skill alone, particularly for males, and little overconfidence. Our data support an explanation based on differential attitudes toward luck by those whose self-assessed skills are low and high. Making luck more important induces greater optimism for the former, while the latter maintain a belief that high levels of skill are sufficient to overcome the vagaries of chance.
    Keywords: Skill, luck, overconfidence, optimism, competition, gender differences, risk taking
    JEL: C91 D81
    Date: 2008–12
  4. By: Gueorgui I. Kolev; Robin Hogarth
    Abstract: Illusory correlation refers to the use of information in decisions that is uncorrelated with the relevant criterion. We document illusory correlation in CEO compensation decisions by demonstrating that information, that is uncorrelated with corporate performance, is related to CEO compensation. We use publicly available data from the USA for the years 1998, 2000, 2002, and 2004 to examine the relations between golf handicaps of CEOs and corporate performance, on the one hand, and CEO compensation and golf handicaps, on the other hand. Although we find no relation between handicap and corporate performance, we do find a relation between handicap and CEO compensation. In short, golfers earn more than non-golfers and pay increases with golfing ability. We relate these findings to the difficulties of judging compensation for CEOs. To overcome this – and possibly other illusory correlations – in these kinds of decisions, we recommend the use of explicit, mechanical decision rules.
    Keywords: Illusory correlation; executive compensation; golf handicaps; decision rules
    JEL: D81 J33
    Date: 2008–12
  5. By: Simon Gaechter (Centre of Decision Research and Experimental Economics, School of Economics, University of Nottingham); Benedikt Herrmann (Centre of Decision Research and Experimental Economics, School of Economics, University of Nottingham)
    Abstract: Understanding the proximate and ultimate sources of human cooperation is a fundamental issue in all behavioural sciences. In this article we review the experimental evidence on how people solve cooperation problems. Existing studies show without doubt that direct and indirect reciprocity are important determinants of successful cooperation. We also discuss the insights from a large literature on the role of peer punishment in sustaining cooperation. The experiments demonstrate that many people are “strong reciprocators” who are willing to cooperate and punish others even if there are no gains from future cooperation or any other reputational gains. We document this in new one-shot experiments which we conducted in four cities in Russia and Switzerland. Our crosscultural approach allows us furthermore to investigate how the cultural background influences strong reciprocity. Our results show that culture has a strong influence on positive and in especially negative strong reciprocity. In particular, we find large crosscultural differences in “antisocial punishment” of pro-social co-operators. Further crosscultural research and experiments involving different socio-demographic groups document that antisocial punishment is much more widespread than previously assumed. Understanding antisocial punishment is an important task for future research because antisocial punishment is a strong inhibitor of cooperation.
    Keywords: human cooperation; strong reciprocity; public goods experiments; culture; antisocial punishment
    Date: 2008–12
  6. By: Jan-Oliver Menz (Department for Economics and Politics, University of Hamburg)
    Abstract: The contribution of this paper is twofold. First, a thorough presentation of the state of the art of the New Keynesian Macroeconomic model is provided. A discussion of its empirical caveats follows and some recent extensions of the standard model are evaluated in more detail. Second, a key insight of Behavioral Economics, hyperbolic discounting, is used for the derivation of the IS Curve. It is argued that this approach is more appropriate than the usual praxis of allowing for a rule-of-thumb agent in an otherwise standard optimization framework.
    Keywords: Behavioral Economics, New Keynesian Model, Rule-of-Thumbs,Hyperbolic Discounting
    JEL: D91 E21 D8
    Date: 2008–12
  7. By: Clare Anderson; David L. Dickinson
    Abstract: Though it is well known that sleep loss results in poor judgment and decisions, little is known about the influence of social context in these processes. Sixteen healthy young adults underwent three games involving bargaining (‘Ultimatum’ and ‘Dictator’) and trust, following total sleep deprivation (TSD) and during rested wakefulness (RW), in a repeated measures, counterbalanced design. To control for repeatability, a second group (n=16) was tested twice under RW conditions. Paired anonymously with another individual, participants made their simple social interaction decisions facing real monetary incentives. For bargaining, following TSD participants were more likely to reject unequal-split offers made by their partner, despite the rejection resulting in a zero monetary payoff for both participants. For the trust game, participants were less likely to place full trust in their anonymous partner, again affecting final payoff. Overall, we provide novel evidence that following TSD, the conflict between personal financial gain and payoff equality is focused on unfavourable inequality. This results in the rejection of unfair offers, at personal monetary cost, and the lack of full trust, which would expose one to being exploited in the interaction. As such, we suggest that within a social domain a rational decision may not prevail over more emotional options following TSD, which has fundamental consequence for real-world decision making involving social exchange. Key Words: Sleep loss, trust, bargaining, social preference, interaction
    Date: 2009
  8. By: Behrman, Jere R.; Hoddinott, John; Maluccio, John A.; Soler-Hampejsek, Erica; Behrman, Emily L.; Martorell, Reynaldo; Ramírez-Zea, Manuel; Stein, Aryeh D.
    Abstract: "Most investigations into the importance and determinants of adult cognitive skills assume that (1) they are produced primarily by schooling, and (2) schooling is statistically predetermined or exogenous. This study uses longitudinal data collected in Guatemala over 35 years to investigate production functions for adult cognitive skills—that is, reading-comprehension skills and nonverbal cognitive skills—as being dependent on behaviorally determined preschooling, schooling, and post-schooling experiences. We use an indicator of whether the child was stunted (child height-for-age Z-score < –2) as our representation of preschooling experiences, and we use tenure in skilled occupations as our representation of post-schooling experiences. The results indicate that assumptions (1) and (2) lead to a substantial overemphasis on schooling and an underemphasis on pre- and post-schooling experiences. The magnitudes of the effects of these pre- and post-schooling experiences are large. For example, the impact on reading-comprehension scores of not being stunted at age 6 is equivalent to the impact of four grades of schooling. These findings also have other important implications. For example, they (1) reinforce the importance of early life investments; (2) point to limitations in using adult schooling to represent human capital in the cross-country growth literature; (3) support the importance of childhood nutrition and work complexity in explaining the “Flynn effect,” or the substantial increases in measured cognitive skills over time; and (4) lead to doubts about the interpretations of studies that report productivity impacts of cognitive skills without controlling for skill endogeneity." from authors' abstract
    Keywords: Human capital, cognitive skills, Stunting, work experience, Development, Education, Gender, Health and nutrition,
    Date: 2008
  9. By: Neal S Young
    Abstract: The current system of publication in biomedical research provides a distorted view of the reality of scientific data that are generated in the laboratory and clinic. This system can be studied by applying principles from the field of economics.
    Keywords: scientific data, resources, medical, oligopoly, biological, sciences, publication, research, laboratory, clinic, biomedical, economics, winner's curse,
    Date: 2008

This nep-cbe issue is ©2009 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.
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