nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2009‒07‒11
seventeen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Elections and Deceptions: Theory and Experimental Evidence By Luca Corazzini; Sebastian Kube; Michel André Maréchal; Antonio Nicoló
  2. Faces of Politicians: Babyfacedness Predicts Inferred Competence but Not Electoral Success By Berggren, Niclas; Jordahl, Henrik; Poutvaara, Panu
  3. Policy Bundling to Overcome Loss Aversion: A Method for Improving Legislative Outcomes By Katherine L. Milkman; Mary Carol Mazza; Lisa L. Shu; Chia-Jung Tsay; Max H. Bazerman
  4. Correcting Mistakes: Cognitive Dissonance and Political Attitudes in Sweden and the United States. By Elinder, Mikael
  5. Punishment – and beyond By Bruno S. Frey
  6. Are Social Preferences Skin Deep? Dictators under Cognitive Load By Hauge, Karen Evelyn; Brekke, Kjell Arne; Johansson, Lars-Olof; Johansson-Stenman, Olof; Svedsäter, Henrik
  7. Does training on behavioral finance influence fund managers' perception and behavior? By Nikiforow, Marina
  8. Cognition and Economic Outcomes in the Health and Retirement Survey By McArdle, John J.; Smith, James P.; Willis, Robert
  9. Women, Children and Patience: Experimental Evidence from Indian Villages By Bauer, Michal; Chytilová, Julie
  10. Lottery pricing under time pressure By Pavlo R. Blavatskyy; Wolfgang R. Köhler
  11. An Algorithm for the Simulation of Bounded Rational Agents By Schuster, Stephan
  12. Experimental evidence from intensified placement efforts among unemployed in Sweden By Hägglund, Pathric
  13. The Crowding-Out of Work Ethics By Grepperud, Sverre; Pedersen, Pål Andreas
  14. The Height Premium in Earnings: The Role of Physical Capacity and Cognitive and Non-Cognitive Skills By Lundborg, Petter; Nystedt, Paul; Rooth, Dan-Olof
  15. Secret Santa: Anonymity, Signaling, and Conditional Cooperation By David Hugh-Jones; David Reinstein
  16. Social Norms, Information and Trust among Strangers: Theory and Evidence By John Duffy; Huan Xie; Yong-Ju Lee
  17. Gift Exchange and Workers' Fairness Concerns: When Equality Is Unfair By Abeler, Johannes; Altmann, Steffen; Kube, Sebastian; Wibral, Matthias

  1. By: Luca Corazzini; Sebastian Kube; Michel André Maréchal; Antonio Nicoló
    Abstract: The virtue of democratic elections has traditionally been seen in their role as a means of screening and sanctioning shirking public officials. This paper proposes a novel rationale for elections and political campaigns by considering heterogeneity in candidates' aversion to lying. We analyze theoretically and experimentally how democratic elections and campaigns influence the behavior of voters and their representatives. Our main insight is that candidates behave more benevolently when democratically elected than when exogenously appointed. Moreover, the results show that candidates feel more obliged to serve the public interest the higher their approval ratings are. Together, our results suggest that electoral competition and campaigns confer benefits beyond their function as a screening and sanctioning device.
    Keywords: Costs of Lying, Electoral Competition, Laboratory Experiment
    JEL: D72 C92
    Date: 2009–07
  2. By: Berggren, Niclas (Ratio); Jordahl, Henrik (Research Institute of Industrial Economics (IFN)); Poutvaara, Panu (University of Helsinki)
    Abstract: Recent research has documented that competent-looking political candidates do better in U.S. elections and that babyfaced individuals are generally perceived to be less competent than maturefaced individuals. Taken together, this suggests that babyfaced political candidates are perceived as less competent and therefore fare worse in elections. We test this hypothesis, making use of photograph-based judgments by 2,772 respondents of the facial appearance of 1,785 Finnish political candidates. Our results confirm that babyfacedness is negatively related to inferred competence in politics. Despite this, babyfacedness is either unrelated or positively related to electoral success, depending on the sample of candidates.
    Keywords: Babyfacedness; Competence; Beauty; Trustworthiness; Elections
    JEL: D72 J45 J70
    Date: 2009–06–26
  3. By: Katherine L. Milkman (The University of Pennsylvania); Mary Carol Mazza (Harvard Business School, Negotiation, Organizations and Markets Unit); Lisa L. Shu (Harvard Business School, Organizational Behavior Unit); Chia-Jung Tsay (Harvard Business School, Negotiation, Organizations and Markets Unit); Max H. Bazerman (Harvard Business School, Negotiation, Organizations and Markets Unit)
    Abstract: Policies that would create net benefits for society but would also involve costs frequently lack the necessary support to be enacted because losses loom larger than gains psychologically. To reduce this harmful consequence of loss aversion, we propose a new type of policy bundling technique in which related bills that have both costs and benefits are combined. Using a laboratory study, we confirm across a set of four legislative domains that this bundling technique increases support for bills that have both costs and benefits. We also demonstrate that this effect is due to changes in the psychology of decision making, rather than voters' willingness to compromise and support a bill they weakly oppose when that bill is bundled with one they strongly support.
    Date: 2009–06
  4. By: Elinder, Mikael (Department of Economics)
    Abstract: Cognitive dissonance theory predicts that the act of voting makes people more positive toward the party or candidate they have voted for. Following Mullainathan and Washington (2009), I test this prediction by using exogenous variation in turnout provided by the voting age restriction. I improve on previous studies by investigating political attitudes, measured just before elections, when they are highly predictive of voting. In contrast to earlier studies I find no effect of voting on political attitudes. This result holds for a variety of political attitudes and for both Sweden and the United States.
    Keywords: Cognitive dissonance; Voting; Elections; Political Attitudes
    JEL: B59 C21 D72
    Date: 2009–07–01
  5. By: Bruno S. Frey
    Abstract: This paper argues that the “Economics of Crime” concentrates too much on punishment as a policy to fight crime, which is unwise for several reasons. There are important instances in which punishment simply cannot reduce crime. Several feasible alternatives to punishment exist, such as offering positive incentives or handing out awards for law abiding behavior. These alternative approaches tend to create a positive sum environment. When people appreciate living in a society that is to a large extent law abiding, they are more motivated to observe the law.
    Keywords: Crime, Punishment, Incentives, Motivation, Framing, Broken Window Theory
    JEL: K42 O31
    Date: 2009–06
  6. By: Hauge, Karen Evelyn (Department of Economics, Oslo University); Brekke, Kjell Arne (Department of Economics, Oslo University); Johansson, Lars-Olof (Department of Psychology, University of Gothenburg); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University); Svedsäter, Henrik (Organisational Behaviour, London Business School)
    Abstract: We study the impact of cognitive load in dictator games to test two conflicting views of moral behavior. Are social preferences skindeep in the sense that they are the result of humans’ cognitive reasoning while the natural instinct is selfish, or is rather the natural instinct to share fairly while our cognitive capacities are able to adjust moral principles in a selfserving manner? Some previous studies in more complex settings give conflicting answers, and to disentangle different possible mechanisms we use simple games. We study both charitable giving and the behavior of dictators under high and low cognitive load, where high cognitive load is assumed to reduce the impact of cognitive processes on behavior. In the dictator game we use both a give frame, where the dictator is given an amount and may share some or all of it to a partner, and a take frame, where dictators may take from an amount initially allocated to the partner. The results from four different studies indicate that the effect of cognitive load is small if at all existing.<p>
    Keywords: Social Preferences; experiments; dictator game; cognitive load
    JEL: C91
    Date: 2009–07–03
  7. By: Nikiforow, Marina
    Abstract: This paper provides survey evidence on the influence of training on behavioral finance on professional fund managers' perception and investment behavior. In particular, it examines whether "trained" fund managers differ from the "untrained" ones in their perception of markets and themselves as well as in their choice of information sources and investment strategies. Additionally, the influence of integration of behavioral finance approaches into investment processes is also considered. The results reveal that training on behavioral finance basically intensifies the perception of biases in the behavior of others, i.e. the reflection effect and the home bias. Training also reduces the affinity to conformity, leading to less reliance on colleagues and other market participants as information sources. However, pure training is insufficient to significantly affect fund managers' investment behavior, but behavioral finance approaches need to be integrated into investment processes.
    Keywords: behavioral finance, fund managers, biases, training, integration
    JEL: G10 D83
    Date: 2009–06
  8. By: McArdle, John J. (University of Southern California); Smith, James P. (RAND); Willis, Robert (University of Michigan)
    Abstract: Dimensions of cognitive skills are potentially important but often neglected determinants of the central economic outcomes that shape overall well-being over the life course. There exists enormous variation among households in their rates of wealth accumulation, their holdings of financial assets, and the relative risk in their chosen asset portfolios that have proven difficult to explain by conventional demographic factors, the amount of bequests they receive or anticipating giving, and the level of economic resources of the household. These may be cognitively demanding decisions at any age but especially so at older ages. This research examines the association of cognitive skills with wealth, wealth growth, and wealth composition for people in their pre and post-retirement years.
    Keywords: cognition, financial outcomes
    JEL: G10
    Date: 2009–06
  9. By: Bauer, Michal (Charles University, Prague); Chytilová, Julie (Charles University, Prague)
    Abstract: In this paper we study the link between women's responsibility for children and their preferences. We use a large random sample of individuals living in rural India, incentive compatible measures of patience and risk aversion, and detailed survey data. We find more patient choices among women who have a higher number of children. The age of children matters: The link with patience is specific for children below 18 years old, and the highest level of patience is associated with having three children. We do not observe this link among men. Taken together, we find significant gender differences in patience that are predicted by a higher number of children. The results are robust to controlling for age, education, income constraints, and individual and location characteristics. These findings suggest an important context when the spending preferences of spouses diverge, and support the view that empowering women in developing countries should lead to more future-oriented choices of households.
    Keywords: time discounting, gender, children, experiment, India
    JEL: C93 D13 D91
    Date: 2009–06
  10. By: Pavlo R. Blavatskyy; Wolfgang R. Köhler
    Abstract: This paper investigates how subjects determine minimum selling prices for lotteries. We design an experiment where subjects have at every moment an incentive to state their minimum selling price and to adjust the price if they believe that the price that they stated initially was not optimal. We observe frequent and sizeable price adjustments. We find that random pricing models can not explain the observed price patterns. We show that earlier prices contain information about future price adjustments. We propose a model of Stochastic Pricing that offers an intuitive explanation for these price adjustment patterns.
    Keywords: Time pressure, certainty equivalent, experiment, stochastic, Becker-DeGroot- Marschak (BDM) method
    JEL: C91 D81
    Date: 2009–07
  11. By: Schuster, Stephan
    Abstract: Non-classical models of economic behaviour, usually summarised under the notion of 'Bounded Rationality' criticise the assumptions of the standard economic model - hyperrationality, perfect and costless information, and unlimited mental processing capabilities. However, alternative approaches have either remained very simple or purely descriptive. Here, a computational approach is presented based on Simon's concept of bounded rationality and satisficing as a compromise between the oversimplification of analytical and the descriptiveness of rich cognitive models.
    Keywords: agent based modelling; bounded rationality; reinforcement learning; rule extraction
    JEL: C63 D83
    Date: 2009–06–27
  12. By: Hägglund, Pathric (Swedish Institute for Social Research, Stockholm University)
    Abstract: This paper uses experimental data to study the effects of participation in intensified placement efforts on subsequent job chances and earnings. Five small-scale experiments were performed in four different regions of Sweden in 2004 and the control groups were offered the PES regular services. Due to small samples, many of the impact estimates were imprecise and insignificant. However, the services generally reduced unemployment among the treated. I find significantly enhanced exits to either jobs or other activities (or both) in four of the experiments. Three of the experiments also report positive effects on employment probability and earnings in the years following the programme. Finally, combining job-search assistance and monitoring of job search generated significantly better results than monitoring alone in one of the experiment locations.
    Keywords: Active labour market policy evaluation; randomised social experiment; placement efforts
    JEL: C93 J64
    Date: 2009–06–15
  13. By: Grepperud, Sverre (Institute of Health Management and Health Economics); Pedersen, Pål Andreas (Bodø Graduate School of Business)
    Abstract: This paper analyses optimal contracts in a principal-agent model where the agent is intrinsically motivated at the outset and there is an endogenous relationship between the structure of incentive payments and intrinsic motivation (crowding effects). The analysis shows that crowding effects have implications for the optimal contract and that under some conditions the principal can do better without implementing any economic incentives. Furthermore, it is shown that when high-powered incentives diminish intrinsic motivation (crowding-out) the first-best solution in a principal-agent framework is unattainable.
    Keywords: Agency theory; intrinsic motivation; crowding effects
    JEL: J01
    Date: 2009–06–30
  14. By: Lundborg, Petter (VU University Amsterdam); Nystedt, Paul (Linköping University); Rooth, Dan-Olof (Kalmar University)
    Abstract: The association between stature and favorable labor market outcomes has been extensively documented. Recent studies have attributed this height premium to cognitive and social skills. We offer an alternative explanation, where the premium mainly arises from the positive association between height and physical capacity. Accounting for the latter reduces the height premium by about 80 percent. By also accounting for cognitive and non-cognitive skills, we are able to explain the entire height premium. Our estimates are based on data from the military enlistment register that has been linked to earnings for the entire population of Swedish males aged 28-38 in 2003.
    Keywords: earnings, height premium, cognitive and non-cognitive skills, physical capacity
    JEL: J10 J70
    Date: 2009–06
  15. By: David Hugh-Jones (Max Planck Institute for Economics, Jena); David Reinstein (Department of Economics, Essex University)
    Abstract: Costly signaling of commitment to a group has been proposed as an explanation for participation in religion and ritual. But if the signal's cost is too small, freeriders will send the signal and behave selflshly later. Effective signaling may then be prohibitively costly. If the average level of signaling in a group is observable, but individual effort is not, then freeriders can behave selflshly without being detected, and group members will learn about the average level of commitment among the group. We develop a formal model, and give examples of institutions that enable anonymous signaling, including ritual, religion, music and dance, voting, charitable donations, and military institutions. We explore the value of anonymity in the laboratory with a repeated two-stage public goods game with exclusion. When first-stage contributions are anonymous, subjects are better at predicting second-stage behavior, and maintain a substantially higher level of cooperation.
    Keywords: signaling, anonymity, public goods
    JEL: H41
    Date: 2009–07–02
  16. By: John Duffy; Huan Xie; Yong-Ju Lee
    Abstract: How do norms of trust and reciprocity arise? We investigate this question by examining behavior in an experiment where subjects play a series of indefinitely repeated trust games. Players are randomly and anonymously matched each period. The parameters of the game are chosen so as to support trust and reciprocity as a sequential equilibrium when no reputational information is available. The main questions addressed are whether a social norm of trust and reciprocity emerges under the most extreme information restriction (community-wide enforcement) or whether trust and reciprocity require additional, individual-specific information about a player’s past history of play and how long that history must be. In the absence of such reputational information, we find that a social norm of trust and reciprocity is difficult to sustain. The provision of reputational information on past individual decisions significantly increases trust and reciprocity, with longer histories yielding the best outcomes. Importantly, we find that making reputational information available at a small cost may also lead to a significant improvement in trust and reciprocity, despite the fact that most subjects do not choose to purchase this information.
    JEL: C72 C91 C92
    Date: 2009–07
  17. By: Abeler, Johannes (University of Nottingham); Altmann, Steffen (IZA); Kube, Sebastian (Max Planck Institute for Research on Collective Goods); Wibral, Matthias (University of Bonn)
    Abstract: We study how different payment modes influence the effectiveness of gift exchange as a contract enforcement device. In particular, we analyze how horizontal fairness concerns affect performance and efficiency in an environment characterized by contractual incompleteness. In our experiment, one principal is matched with two agents. The principal pays equal wages in one treatment and can set individual wages in the other. We find that the use of equal wages elicits substantially lower efforts. This is not caused by monetary incentives per se since under both wage schemes it is profit-maximizing for agents to exert high efforts. The treatment difference instead seems to be driven by the fact that the norm of equity is violated far more frequently in the equal wage treatment. After having suffered from violations of the equity principle, agents withdraw effort. These findings hold even after controlling for the role of intentions, as we show in a third treatment. Our results suggest that adherence to the norm of equity is a necessary prerequisite for successful establishment of gift-exchange relations.
    Keywords: reciprocity, gift exchange, equity, wage equality, wage setting, incomplete contracts
    JEL: J33 D63 M52 C92 J41
    Date: 2009–06

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