nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2009‒06‒03
fifteen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Rewards and Punishments in Bargaining By Svetlana Pevnitskaya; Dmitry Ryvkin
  2. On the Conjunction Fallacy in Probability Judgment: New Experimental Evidence Regarding Linda By Edi Karni
  3. Behavioral Assumptions and Management Ability: A Tentative Test By Benito Arruñada; Xosé H. Vázquez
  4. Patience or Fairness? Analyzing Social Preferences in Repeated Games By John Duffy; Felix Munoz-Garcia
  5. Incentivising trust By Pamela Lenton; Paul Mosley
  6. A Novel Computerized Real Effort Task Based on Sliders By David Gill; Victoria Prowse
  7. Rational addiction theory – a survey of opinions By Melberg, Hans Olav
  8. Volatility under Bounded Rationality By Nhat Le
  9. Selfish Bakers, Caring Nurses? A Model of Work Motivation By Nyborg, Karine; Brekke, Kjell Arne
  10. Social Incentives in the Workplace By Bandiera, Oriana; Barankay, Iwan; Rasul, Imran
  11. Antagonistic Managers, Careless Workers and Extraverted Salespeople: An Examination of Personality in Occupational Choice By Ham, Roger; Junankar, Pramod N. (Raja); Wells, Robert
  12. An experimental investigation of imprecision attitude and its relation with risk attitude and impatience By Michèle Cohen; Jean-Marc Tallon; Jean-Christophe Vergnaud
  13. Present-Biased Preferences and Credit Card Borrowing By Meier, Stephan; Sprenger, Charles
  14. Risk Attitude, Beliefs Updating and the Information Content of Trades: An Experiment By BISIÈRE, Christophe; DÉCAMPS, Jean-Paul; LOVO, Stefano
  15. Betting on Machina's reflection example: an experiment on ambiguity By L’Haridon, Olivier; Placido, Lætitia

  1. By: Svetlana Pevnitskaya (Department of Economics, Florida State University); Dmitry Ryvkin (Department of Economics, Florida State University)
    Abstract: Bargaining fails when participants do not reach an agreement despite an opportunity for Pareto improvement. Numerous experimental studies found that in asymmetric bargaining, where one party proposes the terms and the other can accept or reject the proposal, low offers are typically rejected. We conduct an experiment where upon acceptance the responding party can apply costly rewards and/or punishments, and find that the likelihood of acceptance increases. The least generous offers have the highest chance to be accepted in the presence of punishment alone. Proposers are most generous when responders can both reward and punish, and offer least (even compared to the baseline) when responders can only reward. The optimal scheme of rewards and punishments varies with the population of proposers, indicating that the appropriate scheme can potentially compensate for a mismatch between proposers' and responders' social norms.
    Keywords: bargaining, rewards and punishments, experimental economics, ultimatum
    JEL: C78 C90
    Date: 2009–04
  2. By: Edi Karni
    Abstract: This paper reports the results of a series of experiments designed to test whether and to what extent individuals succumb to the conjunction fallacy. Using an experimental design of Kahneman and Tversky (1983), it finds that given mild incentives, the proportion of individuals who violate the conjunction principle is significantly lower than that reported by Kahneman and Tversky. Moreover, when subjects are allowed to consult with other subjects, these proportions fall dramatically, particularly when the size of the group rises from two to three. These findings cast serious doubts about the importance and robustness of such violations for the understanding of real-life economic decisions.
    Date: 2009–05
  3. By: Benito Arruñada; Xosé H. Vázquez
    Abstract: The paper explores the consequences that relying on different behavioral assumptions in training managers may have on their future performance. We argue that training with an emphasis on the standard assumptions used in economics (rationality and self-interest) leads future managers to rely excessively on rational and explicit safeguarding, crowding out instinctive contractual heuristics and signaling a ‘bad’ type to potential partners. In contrast, human assumptions used in management theories, because of their diverse, implicit and even contradictory nature, do not conflict with the innate set of cooperative tools and may provide a good training ground for such tools. We present tentative confirmatory evidence by examining how the weight given to behavioral assumptions in the core courses of the top 100 business schools influences the average salaries of their MBA graduates. Controlling for the average quality of their students and some other schools’ characteristics, average salaries are significantly greater for those schools whose core MBA courses contain a higher proportion of management courses as opposed to courses based on economics or technical disciplines.
    Keywords: Evolutionary psychology, economics, management, contractual heuristics, rationality, self-interest
    JEL: A23 B41 D01 D87 M12 M51
    Date: 2009–06
  4. By: John Duffy; Felix Munoz-Garcia
    Abstract: This paper investigates how the introduction of social preferences affects players` equilibrium behavior in both one-shot and infinitely repeated versions of the Prisoner`s Dilemma game. We first show that defection survives as the unique equilibrium of the stage game if at least one player is not too concerned about inequity aversion. Second, we demonstrate that in the infinitely repeated version of the game, fairness concerns operate as a `substitute` for time discounting, as fairness helps sustain cooperation for lower discount factors. We then extend our results to more general simultaneous-move games, and more general preferences. Finally, we point out the implications of our findings for the design and analysis of experiments involving repeated games. In particular, repeated game equilibria which are thought to be supported by sufficiently large discount factors, may in fact be sustained by a combination of discounting and social preference parameters, an observation that may help rationalize recent experimental findings.
    JEL: C72 C73 H43 D91
    Date: 2009–05
  5. By: Pamela Lenton (Department of Economics, The University of Sheffield); Paul Mosley (Department of Economics, The University of Sheffield)
    Abstract: We argue that trust can be incentivised by measures which increase the ability of trusters to protect themselves against risk. We work within the framework originally established by Berg, Dickhaut and McCabe (1995) in which trust is measured experimentally as the ability to generate reciprocity in response to an initial offer of money within a two-person game. An incentive is conveyed both by means of variations in the multiplier applied to the first player’s initial offer and by giving the first player the opportunity to insure themselves against the possibility that the second player will fail to reciprocate their initial offer. Measured trust is strongly responsive to both these incentives. Thus third parties have the ability to influence the outcome of the game, not only, as in the analysis of Charness et al (2008), by punishing failure to reciprocate and rewarding ‘good’ initial offers, but also by offering protection which strengthens the first player’s risk efficacy, or ratio of assets to risk.
    Keywords: Experimental economics; Game theory; Risk; Reciprocity
    JEL: A13 C70 C73 D81
    Date: 2009–03
  6. By: David Gill; Victoria Prowse
    Abstract: In this note, we present a novel computerized real effort task based on moving sliders across a screen which overcomes many of the drawbacks of existing real effort tasks. The task was first developed and used by us in Gill and Prowse (2009). We outline the design of our “slider task”, describe its advantages compared to existing real effort tasks and provide a statistical analysis of the behavior of subjects undertaking the task. We believe that the task will prove valuable to researchers in designing future real effort experiments.
    Keywords: Real effort task, Slider task, Design of laboratory experiments, Learning and time effects, Individual heterogeneity
    JEL: C90 C91
    Date: 2009
  7. By: Melberg, Hans Olav (Institute of Health Management and Health Economics)
    Abstract: This paper reports briefly on some of the results from a survey of academics who have written about the theory of rational addiction. The topic is important in itself because if the literature is viewed by its participants as an intellectual game, then policy makers should be aware of this so as not to derive actual policy from toy models. More generally, the answers shed light on the nature of economics and how many economists think about model building, evidence requirements and the policy relevance of their work. A majority of the respondents believe the literature is a success story that demonstrates the power of economic reasoning. At the same time they also believe the empirical evidence to be weak, and they disagree both on the type of evidence that would validate the theory and the policy implications. Taken together this points to an interesting gap. On the one hand most of the respondents claim that the theory has valuable real-world implications. On the other hand they do not believe the theory has received empirical support.
    Keywords: Rational addiction theory; survey of opinions of economists; disagreement on evidence criteria and interpretation of evidence
    JEL: I10
    Date: 2009–06–02
  8. By: Nhat Le (Nhat Le, Ph.D, lecturer at Faculty of Economics, Vietnam National University, HCM city, Vietnam)
    Abstract: The ARCH model shares with the related literature on risk and return one common thing: the rational-expectation paradigm. In particularly, market prices should reflect investors' rational forecasts, based on the best available information. When new information arrives, the market's expectations change. Therefore, prices fluctuate. Thus, price volatility is due to information arrivals and hence, volatility can be forecast, based on the up-to-date information. However, when the available information is too complex, the rational expectation may no longer hold. Bounded rationality should be added into our frame work to study risk and return, so that, we can gain a better understanding of market volatility.
    Keywords: Bounded rationality, Market's expectations, Volatility.
    JEL: C22 C53
    Date: 2009–03
  9. By: Nyborg, Karine (Department of Economics); Brekke, Kjell Arne (Department of Economics)
    Abstract: Work contributes to people’s self-image in important ways. We propose a model in which individuals have a preference for being important to others. This leads to the following predictions: 1) In fully competitive markets with performance pay, behavior coincides with the standard model (bakers). 2) In jobs where e¤ort is not rewarded according to its social marginal value, behavior is more socially bene…cial than predicted by the standard model (nurses). 3) Even if unemployment bene…ts provide full income compensation, many workers’ utility strictly decreases when losing their job. 4) Similarly, many workers will prefer to work rather than to live o¤ welfare, even with full income compensation. 5) To keep shirkers out of the public sector, nurses’wages must be strictly lower than private sector income. At this wage level, however, the public sector will be too small. 6) It is possible to attract motivated workers to the public sector, without simultaneously attracting shirkers, through capital input improving nurses’opportunity to do a good job.
    Keywords: Homo Oeconomicus; Work Motivation; Labour Market
    JEL: I00 J00
    Date: 2009–06–02
  10. By: Bandiera, Oriana (London School of Economics); Barankay, Iwan (University of Pennsylvania); Rasul, Imran (University College London)
    Abstract: We present evidence on social incentives in the workplace, namely on whether workers’ behavior is affected by the presence of those they are socially tied to, even in settings where there are no externalities among workers due to either the production technology or the compensation scheme in place. To do so we combine data on individual worker productivity from a firm’s personnel records with information on each worker’s social network of friends in the firm. We find that compared to when she has no social ties with her co-workers, a given worker’s productivity is significantly higher when she works alongside friends who are more able than her, and significantly lower when she works with friends who are less able than her. As workers are paid piece rates based on individual productivity, social incentives can be quantified in monetary terms and are such that (i) workers who are more able than their friends are willing to exert less effort and forgo 10% of their earnings; (ii) workers who have at least one friend who is more able than themselves are willing to increase their effort and hence productivity by 10%. The distribution of worker ability is such that the net effect of social incentives on the firm’s aggregate performance is positive. The results suggest that firms can exploit social incentives as an alternative to monetary incentives to motivate workers.
    Keywords: conformism, social incentives, social networks
    JEL: L2 M5
    Date: 2009–05
  11. By: Ham, Roger (University of Western Sydney); Junankar, Pramod N. (Raja) (University of Western Sydney); Wells, Robert (University of Western Sydney)
    Abstract: This paper is an econometric investigation of the choice of individuals between a number of occupation groupings utilising an extensive array of conditioning variables measuring a variety of aspects of individual heterogeneity. Whilst the model contains the main theory of occupational choice, human capital theory, it also tests dynasty hysteresis through parental status variables. The focus is an examination of the relationship between choice and personality with the inclusion of psychometrically derived personality variables. Occupational choice is modelled using multinomial logit estimation using the Household Income and Labour Dynamics in Australia (HILDA) survey data. Human capital variables are found to exhibit strong credentialism effects. Parental status has a small and limited effect on occupation outcomes indicative of only some small dynasty hysteresis. On the other hand, personality effects are found to be significant, relatively large and persistent across all occupations. Further, the strength of these personality effects are such that they can in many instances rival that of various education credentials. These personality effects include but are not limited to: managers being less agreeable and more antagonistic; labourers being less conscientiousness; and sales people being more extraverted.
    Keywords: occupational choice, personality traits, credentialism, dynasty hysteresis
    JEL: J24 J62 C25
    Date: 2009–05
  12. By: Michèle Cohen (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Jean-Marc Tallon (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Jean-Christophe Vergnaud (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: We report in this paper the result of three experiments on risk, ambiguity and time attitude. The first two differed by the population considered (students vs general population) while the third one used a different protocol and concerned students and portfolio managers. We find quite a lot of heterogeneity at the individual level. Of principal interest was the elicitation of risk, time and ambiguity attitudes and the relationship among these (model free) measures. We find that on the student population, there is essentially no correlation. A non negligible fraction of the population behaves in an extremely cautions manner in the risk and ambiguity domain. When we drop this population from the sample, the correlation between our measures is also non significant. We also raise three questions linked to measurement of ambiguity attitudes that come out from our data sets.
    Keywords: Experiments, risk aversion, impatience, imprecision aversion.
    Date: 2009–03
  13. By: Meier, Stephan (Columbia University); Sprenger, Charles (University of California, San Diego)
    Abstract: Some individuals borrow extensively on their credit cards. This paper tests whether present-biased time preferences correlate with credit card borrowing. In a field study, we elicit individual time preferences with incentivized choice experiments, and match resulting time preference measures to individual credit reports and annual tax returns. The results indicate that present-biased individuals are more likely to have credit card debt, and have significantly higher amounts of credit card debt, controlling for disposable income, other socio-demographics, and credit constraints.
    Keywords: time preferences, dynamic inconsistency, credit card borrowing, field experiment
    JEL: D12 D14 D91 C93
    Date: 2009–05
  14. By: BISIÈRE, Christophe; DÉCAMPS, Jean-Paul; LOVO, Stefano
    JEL: G14 D82
    Date: 2009–05
  15. By: L’Haridon, Olivier; Placido, Lætitia
    Abstract: In a recent paper, Machina (2008) suggested choice problems in the spirit of Ellsberg (1961) which challenge tail-separability, an implication of Choquet Expected Utility (CEU) to a similar extent as the Ellsberg paradox challenged the sure-thing principle implied by Subjective Expected Utility (SEU). We have tested choice behavior for bets on one of Machina’s choice problems, the reflection example. Our results indicate that tail-separability is violated by a large majority of subjects (over 70% of the sample). These empirical findings complement the theoretical analysis of Machina (2008) and, together, they confirm the need for new approaches in the analysis of ambiguity for decision making.
    Keywords: ambiguity; Choquet expected utility; experimental economics
    JEL: C90 D81
    Date: 2008–10–01

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