nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2009‒08‒08
seventeen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Beauty Contested. How much of Keynes’ remains in Behavioural Economics Beauty Contests? By Alessandro Lanteri; Anna Carabelli
  2. Explaining personality pay gaps in the UK By Nicoletti C; Nandi A
  3. Carl Menger and Friedrich von Wieser on the role of knowledge and beliefs By Agnès Festré
  4. Myopic, Naive, Resolute or Sophisticated? A study of how people take dynamic decisions By John Hey; Luca Panaccione;
  5. Inequality-Seeking Punishment By Daniel Houser; Erte Xiao
  6. Inferring Social Preferences over Income Distributions through Axioms By John Hey; Carmen Pasca;
  7. Conditional Cooperation and Social Group - Experimental results from Colombia By Martinsson, Peter; Villegas-Palacio, Clara; Wollbrant, Conny
  8. Punishment with Uncertain Outcomes in the Prisoner’s Dilemma By Peter Duersch; Maroš Servátka
  9. Voluntary contributions with risky and uncertain marginal returns: the importance of the minimal value By M. Vittoria Levati; Andrea Morone
  10. On the Truly Noncooperative Game of Life on Earth: In Search of the Unity of Nature & Evolutionary Stable Strategy By Funk, Matt
  12. On Mental Transformations By Kontek, Krzysztof
  13. The Resolution Game - A Multiple Selves Perspective By Dimitri Migrow; Matthias Uhl
  14. A sociological perspective on measuring social norms by means of strategy method experiments By Heiko Rauhut; Fabian Winter
  16. The Good, the Bad, and the Talented: Entrepreneurial Talent and Other-Regarding Behavior By Utz Weitzel; Diemo Urbig; Sameeksha Desai; Zoltan Acs; Mark Sanders
  17. The evolution of ideology, fairness and redistribution By Alberto Alesina; Guido Cozzi; Noemi Mantovan

  1. By: Alessandro Lanteri; Anna Carabelli
    Abstract: In one of the most famous passages of economic literature, John Maynard Keynes (1936, p.156) likens the stock market to a beauty contest in which the winners are those who anticipate the average opinion. Recently there have been attempts at investigating the BC experimentally (Nagel 1995, Duffy & Nagel 1997, Ho et al. 1998, Bosch-Domenech et al. 2002, Güth et al. 2002). In Experimental Beauty Contests, participants choose a real number from a closed interval, e.g. I [0,100]. Whoever picks the number closest to p times the average (usuallywith p = 2/3) is the winner of a monetary reward. An experiment like this is dominance solvable: the process of iterated elimination of dominated strategies leads to the unique and stable equilibrium at which every player chooses zero, and every player wins. Keynes’ metaphor, on the other hand, referred to a situation in which not all participants can win, so that the goal of individual investors and speculators must be “to outwit the crowd” (p. 152). Despite the differences, the Keynesian theory of decision under uncertainty tallies with the behaviour observed in Experimental Beauty Contests.
    Keywords: Beauty Contest, Behavioural Economics, Keynes, Reasoning.
    JEL: B31 C9 D81
    Date: 2008–06
  2. By: Nicoletti C (Institute for Social and Economic Research); Nandi A (Institute for Social and Economic Research)
    Abstract: Using the British Household Panel Survey we examine how the Big Five personality traits – openness to experience, conscientiousness, extroversion, agreeableness, and neuroticism – affect wages. We estimate mean and quantile pay gaps between people with low and high levels of each of the Big Five, and decompose these pay gaps in the part explained by differences in workers’ characteristics and in the residual unexplained part. We find that openness to experience is the most relevant personality trait followed by neuroticism, agreeableness and extroversion. Openness and extroversion are rewarded while agreeableness and neuroticism are penalized.
    Date: 2009–08–04
  3. By: Agnès Festré (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR6227 - Université de Nice Sophia-Antipolis)
    Abstract: ?
    Keywords: Knowledge ; philosophical roots of knowledge ; economic traditions
    Date: 2009
  4. By: John Hey; Luca Panaccione;
    Abstract: Potentially dynamically-inconsistent individuals create particular problems for economics, as their behaviour depends upon whether and how they attempt to resolve their potential inconsistency. This paper reports on the results of a new experiment designed to help us distinguish between the different types that may exist. We classify people into four types: myopic, naive, resolute and sophisticated. We implement a new and simple experimental design in which subjects are asked to take two sequential decisions (interspersed by a random move by Nature) concerning the allocation of a given sum of money. The resulting data enables us to classify the subjects. We find that the majority are resolute, a significant minority are sophisticated and rather few are naive or myopic.
    Keywords: dynamic inconsistency, sequential choice, myopic, naive, resolute, sophisticated
    JEL: D90 D81
  5. By: Daniel Houser (Interdsciplinary Center for Economic Science, George Mason University); Erte Xiao (Department of Social and Decision Science,Carnegie Mellon University)
    Abstract: Inequality aversion is a key motive for punishment, with many prominent studies suggesting people use punishment to reduce or eliminate inequality. Punishment in laboratory games, however, is nearly always designed to promote equality (e.g., rejections in standard ultimatum games) and the marginal cost of punishment is typically non-trivially positive. As a consequence, individual preferences over punishment outcomes remain largely uninformed. We here report data from a laboratory experiment using dictator games. We find that when people are treated unfairly they systematically prefer to use punishment to create advantageous inequality. Our results shed new light on human preferences over punishment outcomes, and have important implications for the design of mechanisms to deter misconduct.
  6. By: John Hey; Carmen Pasca;
    Abstract: Numerous prior experimental studies have attempted to elicit people’s preferences over income distributions through appropriately incentivated questions asking subjects to choose between distributions. Instead, we follow the theoretical literature and start with the principles underlying these preferences. Such principles include, for example, the Rawlsian principle and the Lorenz principle. We implement possibly the first incentivated experiment concentrating solely and directly on these underlying principles. In essence, the experiment asks subjects to state their preferred principles, with the appropriate incentive being provided by the experimenter using the stated axioms to choose a preferred distribution from a randomly generated set, and this preferred distribution then being implemented on the participants in the experiment. Thus one of the subjects becomes the Social Planner. (We have two treatments, one in which the Social Planner is part of society and the second in which the Social Planner is outside society.) We solve problems implied when the chosen set of principle is either mutually contradictory or incomplete (by allowing sequential choice). We observe that the implied social preferences are different from those inferred indirectly through choice over distributions as in the earlier experimental studies, and that elicited preferences are different between the two treatments, suggesting that the disinterested Social Planner is more Equality-preferring than the Social Planner with self-interest.
    Keywords: principles, social preferences, axioms, experimental methods, social planner, direct versus indirect inferences.
    JEL: I3 D6
  7. By: Martinsson, Peter (Department of Economics, School of Business, Economics and Law, Göteborg University); Villegas-Palacio, Clara (Department of Economics, School of Business, Economics and Law, Göteborg University); Wollbrant, Conny (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: In contrast to previous studies on cross-group comparisons of conditional cooperation, this study keeps cross- and within-country dimensions constant. The results reveal significantly different cooperation behavior between social groups in the same location.<p>
    Keywords: Conditional cooperation; experiment; public goods; social group
    JEL: C91 H41
    Date: 2009–08–05
  8. By: Peter Duersch; Maroš Servátka (University of Canterbury)
    Abstract: This paper experimentally investigates whether risk-averse individuals punish less if the outcome of punishment is uncertain than when it is certain. Our design includes three treatments: Baseline in which the one-shot prisoner’s dilemma game is played; Certain Punishment in which the prisoner’s dilemma game is followed by a punishment stage allowing subjects to decrease the other player’s payoff by 2 Euros; and Uncertain Punishment in which subjects could decrease the other player’s payoff with a 50% probability by 1 Euro and with a 50% probability by 3 Euros. We find that in all cases the risk-averse subjects are equally likely to cooperate in the prisoner’s dilemma and equally likely to punish in the second stage in either of the two punishment treatments.
    Keywords: Experimental economics; prisoner’s dilemma; punishment; risk aversion; uncertainty
    JEL: C70 C91
    Date: 2009–07–25
  9. By: M. Vittoria Levati (Max Planck Institute of Economics, Jena); Andrea Morone (Department of Economics and Mathematics, University of Bari)
    Abstract: Previous research indicates that risky and uncertain marginal returns from the public good significantly lower contributions. This paper presents experimental results illustrating that the effects of risk and uncertainty depend on the employed parameterization. Speci?cally, if the value of the marginal per capita return under the worst state of nature allows for some efficiency gains, the presence of risk and uncertainty about the public good's value is not detrimental to cooperation. This ?nding casts doubt on the hypothesis that risk and uncertainty, per se, weaken people's willingness to contribute.
    Keywords: Public goods experiments, Voluntary contributions, Risk, Uncertainty
    JEL: C72 C92 D81 H41
    Date: 2009–08–06
  10. By: Funk, Matt
    Abstract: The theory presented here was developed to address the problem of the long-term survival of the human species. This paper tables axioms which fruitfully model The Problem of Sustainable Economic Development, a theoretical framework which, reductio ad absurdum, falsifies many widely-held economic, evolutionary, and ecological principles, including the central thesis of ‘ecological economics’. This brief communiqué lays the foundation for an evolutionary stable, sustainable economic development strategy, and, thus, fosters national security, international cooperation, global threat mitigation, and, ultimately, survival of the human species.
    Keywords: Human survival; sustainable economic development; noncooperative games; problem of induction; natural selection; astrophysical and planetary phænomena; global threat mitigation; evolutionary stable strategy
    JEL: Q50 C20 Z10
    Date: 2009–07–04
  11. By: Timothy N. Cason; Vai-Lam Mui
    Abstract: This paper presents a laboratory collective resistance (CR) game to study how different forms of non-binding communication among responders can help coordinate their collective resistance against a leader who transgresses against them. Contrary to the predictions of analysis based on purely self-regarding preferences, we find that non-binding communication about intended resistance increases the incidence of no transgression even in the one-shot laboratory CR game. In particular, we find that the incidence of no transgression increases from 7 percent with no communication up to 25-37 percent depending on whether communication occurs before or after the leader’s transgression decision. Responders’ messages are different when the leaders can observe them, and the leaders use the observed messages to target specific responders for transgression.
    Keywords: Communication, Cheap Talk, Collective Resistance, Laboratory Experiment, Social Preferences
    JEL: C92 D74
    Date: 2009–08
  12. By: Kontek, Krzysztof
    Abstract: The paper presents an alternative interpretation of the experimental data published by Kahneman and Tversky in their 1992 study "Advances in Prospect Theory”, which describes the Cumulative version of their Prospect Theory from 1979. It was assumed that, apart from the operations made during the initial stage of problem resolution, which Prospect Theory defines as Editing (here generalized as Mental Adaptation), other mental transformations such as Prospect Scaling (resulting from Focused Attention) and Logarithmic Perception of Financial Stimuli should be considered when analyzing the experimental data. This led to the design of an explicit, simple and symmetric solution without the use of the probability weighting function. The double S-type function obtained (the aspiration function) resembles the utility curve specified by the Markowitz hypothesis (1952) and substitutes the fourfold pattern of risk attitudes introduced by Cumulative Prospect Theory. The results presented constitute a basis for negating Prospect Theory as a theory which correctly describes how decisions are made under conditions of risk and may signal a return to a description of people’s behavior that only relies on the utility-like function.
    Keywords: Prospect/Cumulative Prospect Theory; Markowitz Utility Hypothesis; Utility & Aspiration Functions; Mental Processes; Adaptation & Attention Focus
    JEL: D81 D01 C91
    Date: 2009–03–25
  13. By: Dimitri Migrow (University of Regensburg, Economics Department, Chair for International and Monetary Economics); Matthias Uhl (Max Planck Institute of Economics, International Max Planck Research School on Adapting Behavior in a Fundamentally Uncertain World, Jena)
    Abstract: The notion of choice inconsistency is widely spread in the literature on behavioral economics. Several approaches were used to account for the observation that people reverse their choices over time. This paper aims to explain the formation of resolutions regarded as internal self-binding devices. It moves away from anthropocentric neoclassicism and embraces a more atomistic notion of a player by defining intrapersonal agents as strategic actors. The magnitude of state-dependency is seen as a key driver of intrapersonal conflict modelled by the incongruity of the preferences of two opposing agents. The sequential conceptualisation basically allows for experimental testing.
    Keywords: Multiple Selves, Agency, Intrapersonal Conflict, Resolutions, Self-Binding, Self-Control, Commitment
    JEL: C72 D01
    Date: 2009–08–06
  14. By: Heiko Rauhut (ETH Zurich, Swiss Federal Institute of Technology); Fabian Winter (Max Planck Institute of Economics)
    Abstract: The measurement of social norms plays a pivotal role in many social sciences. While economists predominantly conduct experiments, sociologists rather employ (factorial) surveys. Both methods, however, suffer from distinct weaknesses. Experiments, on the one hand, often fall short in the measurement of more complex elements, such as the conditionality or the level of consensus of social norms. Surveys, on the other, lack the ability to measure actual behavior. This paper argues that the so-called "strategy method" compensates for these weaknesses by combining the observational characteristic of experiments with the conditionality of factorial surveys. We can demonstrate the applicability of the strategy method for the measure- ment of conditional bargaining norms in the case of ultimatum games. To substantiate our claim, we conduct a methodological experiment in which we compare results for the strategy ultimatum game with those from a "conventional" ultimatum game. The strategy method yields higher levels of normative compliance in terms of rejecting "unfair" offers. We conclude that the strategy method rather measures normative expectations whereas the "conventional" ultimatum game the willingness to sacrifice own profits to adhere to these expectations. Our results are consistent with previous comparative research between factorial surveys and observational data.
    Keywords: Social norms, measurement, ultimatum game, strategy method, factorial surveys
    JEL: Z13 D63 C91
    Date: 2009–08–06
  15. By: Andres Reeson; John Tisdell
    Abstract: There are many factors which can motivate people to contribute to public goods. These range from intrinsic motivations such as altruism, through social motivations such as concerns for fairness and approval, to extrinsic incentives which include sanctions and payments. Institutions help determine how these motivations are applied and expressed. Psychological studies indicate that extrinsic incentives can crowd out the intrinsic motivations which prompt voluntary contributions to public goods. We applied experimental economics techniques to examine how people in a public good dilemma respond to changing institutions. Our results showed that the introduction of formal institutions (a regulation and competitive tender) crowded out voluntary contributions, with the supply of public good increasing less than anticipated, and in some circumstances actually decreasing. In particular, the introduction of the competitive tender triggered a ‘market instinct’, with participants who previously had been expressing social preferences now seeking to maximise profits. The effects of crowding out persisted even after an institution was removed, suggesting that it may be difficult to reverse. We conclude that policy makers should tread carefully when considering formal institutions to promote public good provision, particularly where desired actions are already occurring voluntarily to some extent.
    Date: 2009–08
  16. By: Utz Weitzel (Utrecht University); Diemo Urbig (Max Planck Institute of Economics); Sameeksha Desai (University of Missouri Kansas City); Zoltan Acs (George Mason University); Mark Sanders (Utrecht University)
    Abstract: Talent allocation models assume that entrepreneurial talent is selfish and thus allocates into unproductive or even destructive activities if these offer the highest private returns. This paper experimentally analyzes other-regarding preferences of entrepreneurial talent. We find that making a distinction between creative talent and business talent explains systematic differences in other-regarding behavior. Generally, business talent is less willing, and creative talent more willing, to forego private payoffs to avoid losses to others. A moderator analysis reveals that uncreative business talent is significantly less other-regarding than creative business talent, a finding applicable to both certain and risky payoffs with and without negative externalities. The paper makes a contribution to entrepreneurship research by qualifying the implications of talent allocation models and discovering the importance of distinguishing between the two types of entrepreneurial talent. We also add to the field of experimental economics by advancing research on social preferences under risk and with negative externalities.
    Keywords: Social preference, entrepreneurship, experiment
    JEL: C91 D62 D64 L26
    Date: 2009–08–06
  17. By: Alberto Alesina; Guido Cozzi; Noemi Mantovan
    Abstract: Ideas about what is "fair" above and beyond the individuals' position in the income ladder determine preferences for redistribution. We study the dynamic evolution of different economies in which redistributive policies, perception of fairness, inequality and growth are jointly determined. We show how including fairness explains various observed relationship between inequality, redistribution and growth. We also show how different beliefs about fairness can keep two otherwise identical countries in different development paths for a very long time.
    Keywords: Inequality, Fairness, Redistribution, Ideology.
    JEL: D31 E62 H2 P16
    Date: 2009–07

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