nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2009‒03‒22
fourteen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Does Volatility matter? Expectations of price return and variability in an asset pricing experiment By Giulio Bottazzi; Giovanna Devetag; Francesca Pancotto
  2. Choice by Lexicographic Semiorders By Manzini, Paola; Mariotti, Marco
  3. Experts and Decision Making: First Steps Towards a Unifying Theory of Decision Making in Novices, Intermediates and Experts By Britta Herbig; Andreas Glöckner
  4. On Inequity Aversion A Reply to Binmore and Shaked By Ernst Fehr; Klaus M. Schmidt
  5. Does aversion to the sucker's payoff matter in public goods games? By Douadia Bougherara; Sandrine Costa; Gilles Grolleau; Lisette Ibanez
  6. Cooperation and Competition in Intergenerational Experiments in By Gary Charness; MARIE-CLAIRE VILLEVAL
  7. Self-Signaling Versus Social-Signaling in Giving By Zachary Grossman
  8. Intercultural trust. An experiment in Austria and Japan By Robert Jiro Netzer; Matthias Sutter
  9. A Shock Therapy Against the “Endowment Effect” By Dirk Engelmann; Guillaume Hollard
  10. The Psychological Attraction Approach to Accounting and Disclosure Policy By Hirshleifer, David; Teoh, Siew Hong
  11. An experimental investigation of why individuals conform By Basit Zafar
  12. Rational behaviour, Risk aversion, High stakes for society By André De Palma
  13. The Financial Crisis and the Systemic Failure of Academic Economics By David Colander; Hans Föllmer; Armin Haas; Michael Goldberg; Katarina Juselius; Alan Kirman; Thomas Lux; Birgitte Sloth
  14. Incentives to Exercise By Gary Charness; Uri Gneezy

  1. By: Giulio Bottazzi; Giovanna Devetag; Francesca Pancotto
    Abstract: We present results of an experiment on expectation formation in an asset market. Participants to our experiment must provide forecasts of the stock future return to computerized utility-maximizing investors, and are rewarded according to how well their forecasts perform in the market. In the Baseline treatment participants must forecast the stock return one period ahead; in the Volatility treatment, we also elicit subjective confidence intervals of forecasts, which we take as a measure of perceived volatility. The realized asset price is derived from a Walrasian market equilibrium equation with non-linear feedback from individual forecasts. Our experimental markets exhibit high volatility, fat tails and other properties typical of real financial data. Eliciting confidence intervals for predictions has the effect of reducing price fluctuations and increasing subjects' coordination on a common prediction strategy.
    Keywords: Experimental economics; Expectations; Coordination; Volatility; Asset pricing
    JEL: C91 C92 D84 G12 G14
    Date: 2009–03–12
  2. By: Manzini, Paola (University of London); Mariotti, Marco (Queen Mary, University of London)
    Abstract: We propose an extension of Tversky's lexicographic semiorder to a model of boundedly rational choice. We explore the connection with sequential rationalisability of choice, and we provide axiomatic characterisations of both models in terms of observable choice data.
    Keywords: lexicographic semiorders, bounded rationality, revealed preference, choice
    JEL: D0
    Date: 2009–02
  3. By: Britta Herbig (Institute and Outpatient Clinic for Occupational, Social and Environmental Medicine, Ludwig-Maximilians-University of Munich); Andreas Glöckner (Max Planck Institute for Research on Collective Goods)
    Abstract: Expertise research shows quite ambiguous results on the abilities of experts in judgment and decision making (JDM) classic models cannot account for. This problem becomes even more accentuated if different levels of expertise are considered. We argue that parallel constraint satisfaction models (PCS) might be a useful base to understand the processes underlying expert JDM and the hitherto existing, differentiated results from expertise research. It is outlined how expertise might influence model parameters and mental representations according to PCS. It is discussed how this differential impact of expertise on model parameters relates to empirical results showing quite different courses in the development of expertise; allowing, for example, to predict under which conditions intermediates might outperform experts. Methodological requirements for testing the proposed unifying theory under complex real-world conditions are discussed.
    Keywords: Judgment and Decision Making, Expertise, Intermediate Effects, Parallel Constraint Satisfaction, Mental Representation
    Date: 2009–01
  4. By: Ernst Fehr; Klaus M. Schmidt (Institute for Empirical Research in Economics, University of Zurich, Bluemlisalpstrasse 10, CH-8006 Zurich, Switzerland; Department of Economics, University of Munich, Ludwigstrasse 28, D-80539 Munich, Germany)
    Abstract: In this paper we reply to Binmore and Shaked’s criticism of the Fehr-Schmidt model of inequity aversion. We put the theory and their arguments into perspective and show that their criticism is not substantiated. Finally, we briefly comment on the main challenges for future research on social preferences.
    Keywords: Experiments, other-regarding preferences, inequity aversion
    JEL: B41 C90
    Date: 2009–02
  5. By: Douadia Bougherara; Sandrine Costa; Gilles Grolleau; Lisette Ibanez
    Abstract: A usual explanation to low levels of contribution to public goods is the fear of getting the sucker’s payoff (cooperation by the participant and defection by the other players). In order to disentangle the effect of this fear from other motives, we design a public good game where people have an assurance against getting the sucker’s payoff. We show that contributions to the public good under this ‘protective’ design are significantly higher and interact with expectations on other individuals' contribution to the public good. Some policy implications and extensions are suggested.
    Keywords: Experiments, Public good, Sucker’s payoff, Assurance
    JEL: C72 C91 H41
    Date: 2009
  6. By: Gary Charness (University of California, Santa Barbara); MARIE-CLAIRE VILLEVAL (CNRS, University of Lyon, IZA)
    Abstract: There is economic pressure towards the postponement of the retirement age, but employers are still reluctant to employ older workers. We investigate the comparative behavior of juniors and seniors in experiments conducted both onsite with the employees of two large firms and in a conventional aboratory environment with students and retirees. We show that seniors are no more risk averse than juniors and are typically more cooperative; both juniors and working seniors respond strongly to competition. The implication is that it may be beneficial to define additional incentives near the end of the career to motivate and retain older workers.
    Keywords: Age, performance, diversity, stereotypes, cooperation,
    Date: 2008–06–22
  7. By: Zachary Grossman
    Abstract: Part of why people give is because doing so sends a positive signal about the giver. The intended audience may be another person or the giver herself, yet the relative importance of social-signaling versus self-signaling is unclear. Using the predictions of a model of a preference-signaling decision-maker, I separately test for social-signaling and self-signaling in an experimental dictator game in which, with some probability, the outcome is determined by chance. Lowering the probability that the dictator's choice will count while holding constant the recipient's information has little impact on behavior, but holding constant this probability while increasing the noisiness of the recipient's signal significantly reduces giving. This provides evidence of social-signaling, but not self-signaling and suggests that giving is largely tied to what it says to others, as opposed to the self.
    Keywords: charitable giving, altruism, dictator game, self-image, self-signaling, signaling, beliefsdependent preferences,
    Date: 2009–02–02
  8. By: Robert Jiro Netzer; Matthias Sutter
    Abstract: We show that the level of trust and reciprocity in an intercultural trust game experiment between Austrian and Japanese subjects differs from the results of an intracultural experiment run in the respective countries among compatriots. Austrian subjects show significantly higher levels of trust towards Japanese subjects than towards fellow countrymen. Japanese do not differentiate between Austrian or Japanese subjects. Japanese subjects are found to be less reciprocal than Austrian subjects. A post-experimental survey reveals differences in culture-specific dispositions between the two countries that can explain the country-specific differences.
    Keywords: intercultural experiment, intracultural experiment, trust game, Austria, Japan
    JEL: C91 C71
    Date: 2009–03
  9. By: Dirk Engelmann (Royal Holloway, University of London); Guillaume Hollard (Paris School of Economics)
    Abstract: Simple exchange experiments have identified the fact that participants trade their endowment less frequently than standard demand theory predicts. List (2003) finds, however, that the most experienced dealers acting on a well functioning market are not subject to this “endowment effect”. Thus, it seems that a lot of market experience is needed to overcome the “endowment effect”. In order to understand the effect of market experience, we introduce a distinction between two types of uncertainty, choice uncertainty and trade uncertainty, which could both lead to an “endowment effect”. While List’s own explanation is related to choice uncertainty, we conjecture that trade uncertainty is important for the “endowment effect”. To test this conjecture, we design a simple experiment where the two treatments impact differently on trade uncertainty, while controlling for choice uncertainty. Supporting our conjecture, we find that “forcing” subjects to give away their endowment in a series of exchanges, eliminates the “endowment effect” in a subsequent test. We discuss why markets might not succeed in providing sufficient incentives for learning to overcome the “endowment effect”.
    Keywords: endowment effect; robustness; experimental economics
    JEL: C91 D12
    Date: 2009–02
  10. By: Hirshleifer, David; Teoh, Siew Hong
    Abstract: We offer here the psychological attraction approach to accounting and disclosure rules, regulation, and policy as a program for positive accounting research. We suggest that psychological forces have shaped and continue to shape rules and policies in two different ways. (1) Good Rules for Bad Users: rules and policies that provide information in a form that is useful for users who are subject to bias and cognitive processing constraints. (2) Bad Rules: superfluous or even pernicious rules and policies that result from psychological bias on the part of the ‘designers’ (managers, users, auditors, regulators, politicians, or voters). We offer some initial ideas about psychological sources of the use of historical costs, conservatism, aggregation, and a focus on downside outcomes in risk disclosures. We also suggest that psychological forces cause informal shifts in reporting and disclosure regulation and policy, which can exacerbate boom/bust patterns in financial markets.
    Keywords: Investor psychology; accounting regulation; disclosure policy; salience; omission bias; scapegoating; limited attention; overconfidence; conservatism; loss aversion; accrual; smoothing; mental accounting; historical cost; risk disclosure; value-at-risk.
    JEL: M40 M4 H10 K22 G38 G28 G0
    Date: 2009–03–11
  11. By: Basit Zafar
    Abstract: Social interdependence is believed to play an important role in how people make individual choices. This paper presents a simple model constructed on the premise that people are motivated by their own payoff as well as by how their actions compare with those of other people in their reference group. I show that conformity of actions may arise either from learning about the norm (social learning), or from adhering to the norm because of image-related concerns (social influence). To disentangle the two empirically, I use the fact that image-related concerns can be present only if actions are publicly observable. The model predictions are tested in a "charitable contribution" experiment in which the actions and identities of the subjects are unmasked in a controlled and systematic way. Both social learning and social influence seem to play an important role in the subjects' choices. In addition, individuals gain utility simply by making the same choice as the reference group (social comparison) and change their contributions in the direction of the social norm even when their identities are hidden. Once the identities and contribution distributions of group members are revealed, individuals conform to the modal choice of the group. Moreover, I find that social ties (defined as subjects knowing one another from outside the experimental environment) affect the role of social influence. In particular, a low-contribution norm evolves that causes individuals to contribute less in the presence of people they know.
    Keywords: Human behavior ; Social choice
    Date: 2009
  12. By: André De Palma (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, ENS Cachan - Ecole Normale Supérieure de Cachan - Ecole Normale Supérieure de Cachan)
    Abstract: Certain areas related to the topics under discussion here lie outside my field; for instance the evaluation of risk assessment and security deficiencies in the transport sector. What has convinced me of the importance of this subject are a few very general conclusions, indeed I would say, impressions, that I have drawn from the truly remarkable development of our powers to analyse the risk decision-making process over some years now.
    Keywords: Risk, uncertainty, home security, expected utility, non-expected utility, OECD
    Date: 2008–10
  13. By: David Colander (Department of Economics, Middlebury College); Hans Föllmer (Department of Mathematics, Humboldt University Berlin); Armin Haas (Potsdam Institute for Climate Impact Research); Michael Goldberg (Whittemore School of Business & Economics, University of New Hampshire); Katarina Juselius (Department of Economics, University of Copenhagen); Alan Kirman (GREQAM, Université d’Aix-Marseille lll); Thomas Lux (Department of Economics, University of Kiel); Birgitte Sloth (Department of Business and Economics, University of Southern Denmark, Odense)
    Abstract: The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s focus on models that, by design, disregard key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.
    Keywords: financial crisis; academic moral hazard; ethic responsibility of researchers
    Date: 2009–03
  14. By: Gary Charness (University of California, Santa Barbara); Uri Gneezy (UCSD)
    Abstract: Can incentives be effective when trying to encourage the development of good habits? We investigate the effect of paying people a non-trivial amount of money to attend an exercise facility a number of times during a one-month period. In two separate studies, we find that doing so leads to a large and significant increase in the average post-intervention attendance level relative to the control group. This result is entirely driven by the impact on people who did not previously attend the gym on a regular basis, as the average attendance rates for people who had already been using the gym regularly are either unchanged or diminished. In our second study, we also obtain biometric evidence that this intervention improves important health indicators such as weight, waist size, and pulse rate. Thus, even though personal incentives to exercise are already in place, it appears that providing financial incentive to attend the gym regularly for a month serves as a catalyst to get some people past the threshold of actually getting started with an exercise regimen. We argue that there is scope for financial intervention in habit formation, particularly in the area of health.
    Keywords: Exercise, Field experiment, Habit formation, Incentives,
    Date: 2008–08–22

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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