nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2009‒05‒23
twelve papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. A Satisficing Alternative to Prospect Theory By David B. Brown; Enrico G. De Giorgi; Melvyn Sim
  2. Mental Accounting in the Housing Market By Almenberg, Johan; Karapetyan, Artashes
  3. Foundations of ambiguity and economic modeling By Sujoy Mukerji
  4. Biased Probability Judgment: Evidence of Incidence and Relationship to Economic Outcomes from a Representative Sample By Dohmen, Thomas; Falk, Armin; Huffman, David; Marklein, Felix; Sunde, Uwe
  5. The St. Petersburg Paradox despite risk-seeking preferences: An experimental study By Eike B. Kroll; Bodo Vogt
  6. Fact or Artifact Does the compromise effect occur when subjects face real consequences of their choices? By Holgar Müller; Eike Benjamin Kroll; Bodo Vogt
  7. Decentralized Organizational Learning: An Experimental Investigation By Andreas Blume; John Duffy; April Mitchell Franco
  8. Social Preferences? Google Answers! By Tobias Regner
  9. Free riders and strong reciprocators coexist in public goods experiments: evolutionary foundations By Angelo Antoci; Paolo Russu; Luca Zarri
  10. Free Riders and Cooperators in Public Goods Experiments: Can Evolutionary Dynamics Explain their Coexistence? By Angelo Antoci; Paolo Russu; Luca Zarri
  11. Game or frame? Incentives in modified Dictator Games By Timo Heinrich; Thomas Riechmann; Joachim Weimann
  12. Family Ties and Political Participation By Alesina, Alberto; Giuliano, Paola

  1. By: David B. Brown; Enrico G. De Giorgi; Melvyn Sim
    Abstract: In this paper, we axiomatize a target-based model of choice that allows decision makers to be both risk averse and risk seeking, depending on the payoff's position relative to a prespecified target. The approach can be viewed as a hybrid model, capturing in spirit two celebrated ideas: first, the satisficing concept of Simon (1955); second, the switch between risk aversion and risk seeking popularized by the prospect theory of Kahneman and Tversky (1979). Our axioms are simple and intuitive; in order to be implemented in practice, our approach requires only the specification of an aspiration level. We show that this approach is dual to a known approach using risk measures, thereby allowing us to connect to existing theory. Though our approach is intended to be normative, we also show that it resolves the classical paradoxes of Allais (1953) and Ellsberg (1961), neither of which can be explained by expected utility theory.
    Keywords: satisficing; aspiration levels; targets; prospect theory; reflection effect; risk measures; coherent risk measures; convex risk measures; portfolio optimization
    JEL: D81 G11
    Date: 2009–05
  2. By: Almenberg, Johan (Dept. of Economic Statistics, Stockholm School of Economics); Karapetyan, Artashes (Empirical Institute of Economics and SFI, University of Zürich)
    Abstract: We use a survey to identify a consumer bias with regard to different sources of debt-financing. Less salient debt may generate psychological benefits. This should be weighed against the possible economic costs of a sub-optimal capital structure, but low levels of financial literacy make it unlikely that all households perceive the full economic costs. As a result there is a bias in favour of less salient debt. In a market with limited scope for arbitrage this consumer bias is likely to generate inefficiencies. We examine such a market in both theory and practice. The predictions of our model are given strong support by market data.
    Keywords: household finance; mental accounting; co-op; capital structure
    JEL: D12 G14 G21 G32
    Date: 2009–05–10
  3. By: Sujoy Mukerji
    Abstract: Are foundations of models of ambiguity-sensitive preferences too flawed to be usefully applied to economic models? Al-Najjar and Weinstein (2009) say such is indeed the case. In this paper, first, we point out that many of the key arguments by Al-Najjar and Weinstein do not apply to quite a few of the ambiguity preference models of more recent vintage, and therefore to that extent do not undermine the foundational aspects or applicability of ambiguity models in general. Second, we argue the focus in that paper on Ellsberg examples is an overly narrow concern; the Ellsberg examples have their uses but they are not the best context to understand why reasonable real-world agents may find acting with ambiguity-sensitive preferences normatively or prescriptively appealing. Finally, normative considerations aside, we submit that Al-Najjar and Weinstein are unduly dismissive of the power of such preferences to provide illuminating positive analyses of economic phenomena.
    Keywords: Ambiguity, Uncertainty, Knightian uncertainty, Ambiguity aversion, Uncertainty aversion, Ellsberg paradox, Dynamic decision making, Dynamic Programming under ambiguity, Smooth ambiguity, Consequentialism, Sunk cost fallacy, Multiple priors, Rationality
    JEL: D80 D81
    Date: 2009
  4. By: Dohmen, Thomas (ROA, Maastricht University); Falk, Armin (University of Bonn); Huffman, David (Swarthmore College); Marklein, Felix (Federal Ministry of Finance); Sunde, Uwe (University of St. Gallen)
    Abstract: Many economic decisions involve a substantial amount of uncertainty, and therefore crucially depend on how individuals process probabilistic information. In this paper, we investigate the capability for probability judgment in a representative sample of the German population. Our results show that almost a third of the respondents exhibits systematically biased perceptions of probability. The findings also indicate that the observed biases are related to individual economic outcomes, which suggests potential policy relevance of our findings.
    Keywords: long-term unemployment, representative design, hot hand fallacy, gambler's fallacy, probability judgment, bounded rationality, financial decision making
    JEL: C90 D00 D10 D80 D81 H00
    Date: 2009–05
  5. By: Eike B. Kroll (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Bodo Vogt (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: The St. Petersburg is one of the oldest violations of expected utility theory. Thus far, explanations of the paradox aim at small probabili- ties being perceived as zero and the boundedness of utility. This paper provides experimental results showing that neither risk attitudes nor perception of small probabilities explain the paradox. We nd that even in situations where subjects are risk-seeking, the St. Petersburg Paradox exists. This indicates that the paradox lies at the very core of human decision-making processes and cannot be explained by the parameters discussed in previous research so far.
    Date: 2009–01
  6. By: Holgar Müller (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Eike Benjamin Kroll (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Bodo Vogt (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: This study investigates context effects in general and the compromise effect in particular. It is argued that earlier research in this area lacks realism which is a major drawback to research conclusions and stated management implications. The importance of this issue is stressed by previous research showing that behavioral anomalies found in hypothetical experimental settings tend to be significantly reduced when real payoff mechanisms are introduced. Therefore, to validate the compromise effect, an enhanced experimental design is presented with participants making choices in the laboratory that are binding. We find that the compromise effect holds for real purchase decisions, and therefore is validated and not an artificial effect in surveys on hypothetical buying decisions. While conclusions and implications for marketing managers derived in previous work assume that context effects hold for real market decisions, the results created by this enhanced design close this gap in marketing literature.
    Keywords: choice in context, compromise effect, irrelevant alternatives, hypothetical bias, experimental design
    Date: 2009–03
  7. By: Andreas Blume; John Duffy; April Mitchell Franco
    Abstract: . . .
    Date: 2008–06
  8. By: Tobias Regner (Max Planck Institute of Economics, Jena)
    Abstract: We analyse pricing, effort and tipping decisions in the online service "Google Answers" While users set a price for the answer to their question ex ante, they can additionally give a tip to the researcher ex post. In line with the related experimental literature we find evidence that tipping is motivated by reciprocity, but also by reputation concerns among frequent users. Moreover, researchers seem to adjust their effort based on the user's previous tipping behaviour. An efficient sorting takes place when enough tip history is available. Users known for tipping in the past receive higher effort answers, while users with an established reputation for non-tipping tend to get low effort answers. In addition, we analyse how tipping is adopted when the behavioural default is not to tip and estimate minimum levels for the fraction of genuine reciprocator and imitator types.
    Keywords: social preferences, reciprocity, moral hazard, reputation, Internet, psychological game theory
    JEL: C24 C70 C93 D82 L86
    Date: 2009–05–11
  9. By: Angelo Antoci; Paolo Russu; Luca Zarri
    Abstract: Experimental evidence indicates that free riders and strongly reciprocal papers coexist in the public goods game framework. By means of an evolutionary analysis, we provide an endogenization of this behavioral regularity.
    Keywords: Free Riding, Cooperation, Strong Reciprocity, Public Goods Game, Evolutionary Game Theory.
    JEL: B41 C73 D74 Z13
    Date: 2009–05
  10. By: Angelo Antoci; Paolo Russu; Luca Zarri
    Abstract: An oft-cited and robust result from Public Goods Game experiments is that, when subjects start playing, the aggregate level of contributions is significantly different from zero. At the same time, a sizeable proportion of players free ride from the outset. Behavioural economics has persuasively shown that these laboratory findings are compatible with the presence of motivationally heterogeneous agents, displaying both standard, self-centred preferences and non-standard, interdependent preferences. However, at the theoretical level, economists would prefer to account for motivational heterogeneity endogenously, instead of simply assuming it from the outset. Our work provides such endogenisation, by assuming that social evolution is driven by material payoffs only. By separately focusing on different types of ‘experimentally salient’ pro-social players (such as Reciprocators, Strong Reciprocators and Altruists), we are able to shed light – to our knowledge, for the first time, within the public good framework – on the evolutionary stability of two-type populations consisting of positive proportions of both ‘nice’ and ‘mean’ guys.
    Keywords: Free Riding; Strong Reciprocity; Altruism; Nonstrategic Punishment; Public Goods Game; Evolutionary Game Theory.
    JEL: C7 D6 H8 Z1
    Date: 2009–05
  11. By: Timo Heinrich; Thomas Riechmann; Joachim Weimann (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: We use modified dictator games in which the productivity of taking or giving is varied. Subjects have to decide which of the different games will be payoff relevant in the end. We can show that the behavior of dictators does not depend on the productivity of their gifts, but that their behavior is strongly influenced by the right to choose the relevant game. If the recipients have the right to choose, the dictators become more generous.
    Date: 2009–03
  12. By: Alesina, Alberto (Harvard University); Giuliano, Paola (University of California, Los Angeles)
    Abstract: We establish an inverse relationship between family ties, generalized trust and political participation. The more individuals rely on the family as a provider of services, insurance, transfer of resources, the lower is civic engagement and political participation. The latter, together with trust, are part of what is known as social capital, therefore in this paper we contribute to the investigation of the origin and evolution of social capital over time. We establish these results using within country evidence and looking at the behavior of immigrants from various countries in 32 different destination places.
    Keywords: family ties, trust, culture
    JEL: Z10 Z13
    Date: 2009–04

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