nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2009‒02‒28
six papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Does Coarse Thinking Matter for Option Pricing? Evidence from an Experiment By Siddiqi, Hammad
  2. A Test of Narrow Framing and its Origin By Luigi Guiso
  3. Heterogeneity in Risky Choice Behaviour in a Broad Population By von Gaudecker, Hans-Martin; van Soest, Arthur; Wengström, Erik
  4. Cognitive Dissonance as a Means of Reducing Hypothetical Bias By Alfnes, Frode; Yue, Chengyan; Jensen, Helen H.
  5. The Economics and Psychology of Inequality and Human Development By Cunha, Flavio; Heckman, James J.

  1. By: Siddiqi, Hammad
    Abstract: Mullainathan et al [Quarterly Journal of Economics, May 2008] present a model of coarse thinking or analogy based thinking. The essential idea behind coarse thinking is that people put situations into categories and the values assigned to attributes in a given situation are affected by the values of corresponding attributes in other co-categorized situations. We test this hypothesis in an experiment on financial options against the benchmark of arbitrage-free pricing. Firstly, we test whether a financial option is priced in analogy with its underlying stock (transference). Secondly, we test for whether variations in the analogy between a financial option and its underlying stock matter (framing). We find evidence in support of both transference and framing.
    Keywords: Coarse Thinking; Financial Options; Arbitrage-Free Pricing
    JEL: G14 G12 C91
    Date: 2009–02–19
  2. By: Luigi Guiso
    Abstract: I provide a test of narrow framing to explain why individuals turn down small positive expected value lotteries. Participants in a large survey have been asked whether they would accept a small lottery of winning 180 euros with probability of 1/2 or losing 100 euros with the same probability. To half of the sample, randomly selected, the lottery question was asked at the beginning of the interview; the other half made the decision immediately after they were asked to think about and report their subjective probability distribution of future earnings. Consistent with narrow framing, I find that individuals that were induced to bring their earnings risk to mind before facing the decision are signi.cantly less likely to turn it down. Furthemore, only those who actually say they are uncertain about their incomes are less likely to reject the lottery. I show that attitudes towards regret and reliance on intuition rather than reasoning are likely to drive the tendency to frame choices narrowly.
    Keywords: Narrow framing, loss aversion, intuitive thinking, reasoning, regret
    JEL: D1 D8
    Date: 2009
  3. By: von Gaudecker, Hans-Martin (Free University Amsterdam); van Soest, Arthur (Tilburg University); Wengström, Erik (University of Copenhagen)
    Abstract: We analyse risk preferences using an experiment with real incentives in a representative sample of 1,422 Dutch respondents. Our econometric model incorporates four structural parameters that vary with observed and unobserved characteristics: Utility curvature, loss aversion, preferences towards the timing of uncertainty resolution, and the propensity to choose randomly rather than on the basis of preferences. We find that all four parameters contribute to explaining choice behaviour. The structural parameters are significantly associated with socio-economic variables, but it is essential to incorporate unobserved heterogeneity in each of them to match the rich variety of choice patterns in the data.
    Keywords: risk aversion, loss aversion, uncertainty resolution, field experiments
    JEL: C90 D81
    Date: 2009–02
  4. By: Alfnes, Frode; Yue, Chengyan; Jensen, Helen H.
    Abstract: Hypothetical bias is a persistent problem in stated preference studies. We propose and test a method for reducing hypothetical bias based on the cognitive dissonance literature in social psychology. A central element of this literature is that people prefer not to take inconsistent stands and will change their attitudes and behavior to make them consistent. We find that participants in a stated preference willingness-to-pay study, when told that a nonhypothetical study of similar goods would follow, state significantly lower willingness to pay than participants not so informed. In other words, participants adjust their stated willingness to pay to avoid cognitive dissonance from taking inconsistent stands on their willingness to pay for the good being offered.
    Keywords: apples; cognitive consistency; hypothetical bias; instrument calibration; willingness to pay.
    Date: 2009–02–23
  5. By: Cunha, Flavio (University of Pennsylvania); Heckman, James J. (University of Chicago)
    Abstract: Recent research on the economics of human development deepens understanding of the origins of inequality and excellence. It draws on and contributes to personality psychology and the psychology of human development. Inequalities in family environments and investments in children are substantial. They causally affect the development of capabilities. Both cognitive and noncognitive capabilities determine success in life but to varying degrees for different outcomes. An empirically determined technology of capability formation reveals that capabilities are self-productive and cross-fertilizing and can be enhanced by investment. Investments in capabilities are relatively more productive at some stages of a child's life cycle than others. Optimal child investment strategies differ depending on target outcomes of interest and on the nature of adversity in a child's early years. For some configurations of early disadvantage and for some desired outcomes, it is efficient to invest relatively more in the later years of childhood than in the early years.
    Keywords: inequality, capabilities, noncognitive traits, human development, technology of capability formation, policy targeting
    JEL: A12
    Date: 2009–02
  6. By: Claire M. Kamp Dush (Ohio State University); Kate S. Adkins (Ohio State University)
    Abstract: Using data from years one and three of the Fragile Families and Child Well-being Study, changes in depressive and anxious symptoms are compared for mothers and fathers who: 1) dissolve a cohabitating union versus remain intact; 2) dissolve a marital union versus remain intact; and 3) dissolve a cohabiting as compared to a marital union. In order to take into account potential sources of third variable bias from selection factors that differentiate those who are in cohabitations from those who are in marriages, mothers and fathers were matched on several sociodemographic control variables that research has demonstrated to be related to union formation and mental health outcomes. Results indicated that fathers who dissolve cohabitating or marital unions have greater increases in depressive and anxious symptoms over time than those who remain in their unions. In contrast, mothers increased in depressive and anxious symptoms, regardless of the type or stability of the union. For both mothers and fathers, no differences were found in change in mental health by type of union dissolution. In this lowincome sample of parents, results suggest that the impact of cohabitation and marital dissolution on mental health are similar in magnitude.
    Date: 2009–01

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