nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2009‒08‒22
thirteen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Growing Up in a Recession: Beliefs and the Macroeconomy By Giuliano, Paola; Spilimbergo, Antonio
  2. Learning to Fail? Evidence from Frequent IPO Investors By Chiang, Yao-Min; Hirshleifer, David; Qian, Yiming; Sherman, Ann
  3. The New Keynesian Microfoundations of Macroeconomics By Heinz-Peter Spahn
  4. Temptation at Work: A Field Experiment on Willpower and Productivity By Alessandro Bucciol; Daniel Houser; Marco Piovesan
  5. Goal-Based Investing with Cumulative Prospect Theory and Satisficing Behavior By Enrico G. De Giorgi
  6. Trustworthiness and economic performance By Breuer, Janice Boucher; McDermott, John
  7. Beyond Procedural Equity and Reciprocity By Nadine Chlaß; Werner Güth; Topi Miettinen
  8. Bimodal Bidding in Experimental All-Pay Auctions By Christiane Ernst; Christian Thöni
  9. Easy come, easy go - The role of windfall money in lab and field experiments By Carlsson, Fredrik; He, Haoran; Martinsson, Peter
  10. Caste and Punishment: The Legacy of Caste Culture in Norm Enforcement By Hoff, Karla; Kshetramade, Mayuresh; Fehr, Ernst
  11. On the Relevance and Composition of Gifts within the Firm: Evidence from Field Experiments By Bellemare, Charles; Shearer, Bruce S.
  12. Measuring Cognitive Competencies By Ulrich Trautwein
  13. "How Well Do Individuals Predict the Selling Prices of Their Homes?" By Hugo Benitez-Silva; Selcuk Eren; Frank Heiland; Sergi Jimenez-Martín

  1. By: Giuliano, Paola (University of California, Los Angeles); Spilimbergo, Antonio (International Monetary Fund)
    Abstract: Do generations growing up during recessions have different socio-economic beliefs than generations growing up in good times? We study the relationship between recessions and beliefs by matching macroeconomic shocks during early adulthood with self-reported answers from the General Social Survey. Using time and regional variations in macroeconomic conditions to identify the effect of recessions on beliefs, we show that individuals growing up during recessions tend to believe that success in life depends more on luck than on effort, support more government redistribution, but are less confident in public institutions. Moreover, we find that recessions have a long-lasting effect on individuals' beliefs.
    Keywords: beliefs formation, macroeconomic shocks
    JEL: P16 E60 Z13
    Date: 2009–08
  2. By: Chiang, Yao-Min; Hirshleifer, David; Qian, Yiming; Sherman, Ann
    Abstract: We examine the effects of bidding experience on two groups of investors – individuals and institutions – in terms of their decisions to bid again and their bidding returns. Bidding histories are tracked for all 31,376 individual investors and 1,232 institutional investors across all 84 IPO auctions during 1995-2000 in Taiwan. For individual bidders: (1) high initial returns in IPO auctions increases the likelihood of participating in future auctions; (2) bidder returns steadily decrease as they participate in more auctions; (3) auction selection ability does not improve (and may get worse) with experience; and (4) greater experience is associated with more aggressive bid prices. These findings are consistent with naïve reinforcement learning wherein individuals become unduly optimistic after receiving good returns. In sharp contrast, there is little sign that institutional investors exhibit such behavior.
    Keywords: IPO; auction; investor behavior; learning; reinforcement learning; institutional investor; individual investor; experience.
    JEL: G15 G32 G24
    Date: 2009–08
  3. By: Heinz-Peter Spahn
    Abstract: New Keynesian Macroeconomics (NKM) obeys to the new dogma that macroeconomics should be firmly grounded in First Principles of micro theory. Households are assumed to run an intertemporal optimization calculus with respect to leisure and consumption by making use of perfect financial markets. The supply side is organized so that full employment prevails. Macroeconomic coordination problems between saving and investment are absent. In order to make model predictions more compatible with empirical facts, NKM chooses "ad hoc" microfoundations: utility functions and market structures are designed arbitrarily to allow for persistence of macro variables. NKM's reduced hybrid macro model, with lags and expectational leads, is a useful "work horse", compatible with various micro reasoning. However, NKM's insistence on the representative agent obstructs an understanding of heterogeneous beliefs and learning.
    Keywords: Representative Agent, Ramsey Saving, Calvo Pricing, Sticky Information, Rational Expectations, Heterogeneous Beliefs
    JEL: B22 E12 E2 E3 E44
    Date: 2009–08
  4. By: Alessandro Bucciol (Department of General Economics, University of Amsterdam, Netspar, and Department of Economics, University of Verona); Daniel Houser (Interdisciplinary Center for Economic Science (ICES), George Mason University); Marco Piovesan (Department of Economics, University of Copenhagen)
    Abstract: Temptations are a largely unavoidable part of life. Resisting them is usually seen as a virtuous behavior. Recent research in social psychology, however, suggests that using willpower to delay gratification can detrimentally impact performance on immediately subsequent tasks. Using standard economic theory, we develop a model connecting willpower to productivity. When delaying gratification is difficult, the model predicts exposure to a tempting good detrimentally impacts productivity, while when delaying gratification is easy, exposure to temptation can lead to productivity gains. We then report data from a field experiment with children of different ages. Since the research in child development has established that younger children have difficulty delaying gratification, while after age 10 children become skilled at doing so, we exploited this exogenous variation to test the predictions of our model. Our results suggest that a prohibited temptation affects work productivity in a way consistent with theory: it is negative for the youngest children (aged under 8) and positive for the oldest (aged above 10). We also observe a significantly different impact by gender. It thus seems that prohibiting a temptation needs not eliminate its impact on productivity, a result of importance to anyone interested in designing policies to promote efficiency.
    Keywords: willpower; children; temptation; productivity; field experiment
    JEL: C93 J13
    Date: 2009–08
  5. By: Enrico G. De Giorgi
    Abstract: This paper presents a time-continuous goal-based portfolio selection model with cumulative prospect theory preferences and satisficing behavior, where investors optimally split their wealth among several investment goals at different horizons. The paper extends the model of Berkelaar, Kouwenberg and Post (2004) to account for multiple-goals. We show that when the discounted values of all target wealths is not too high relative to the initial wealth (i.e., goals are not too ambitious), investors mainly invest to reach short-term investment goals and adopt safe investment strategies for this purpose. However, when goals are very ambitious, they put a high proportion of their wealth in long-term goals and adopt aggressive investment strategies with high leverage to reach short-term goals and the overall investment strategy also displays high leverage. High incentives to reach ambitious shortterm goals (high target returns) and the consequent excessive leverage have been identified as causes for the global financial crisis erupted in 2008.
    Keywords: behavioral finance, portfolio selection, mental accounting, narrow framing, cumulative prospect theory, satisficing, loss aversion, goal-based approach
    JEL: D10 G11
    Date: 2009–08
  6. By: Breuer, Janice Boucher; McDermott, John
    Abstract: Intrinsically trustworthy agents never cheat. A society's willingness to trust and the quality of its institutions have their origins in the intrinsic trustworthiness of its citizens. Trustworthiness is the basis for maximizing output in economic exchange and in explaining differences in standards of living around the world. We measure intrinsic trustworthiness with a question from the World Values Survey and estimate its effect using a sample of 60 countries. We find that trustworthiness is important for output per capita and that the effect of trust is likely to come from trustworthiness.
    Keywords: trustworthiness; trust; institutions; output per capita
    JEL: O43 Z13
    Date: 2009–03
  7. By: Nadine Chlaß (Friedrich Schiller University Jena, Germany); Werner Güth (Max Planck Institute of Economics, Jena, Germany); Topi Miettinen (SITE Stockholm School of Economics, Sweden.)
    Abstract: Most research in economics models agents somehow motivated by outcomes. Here, we model agents motivated by procedures instead, where procedures are defined independently of an outcome. To that end, we design procedures which yield the same expected outcomes or carry the same information on other's intentions while they have different outcome-invariant properties. Agents are experimentally confirmed to exhibit preferences over these which link to psychological attributes of their moral judgment.
    Keywords: procedural preferences, experiment, procedural fairness
    JEL: C78 D63 Z13
    Date: 2009–08–12
  8. By: Christiane Ernst; Christian Thöni
    Abstract: We report results from experimental first-price, sealed-bid, all-pay auctions for a good with a common and known value. We observe bidding strategies in groups of two and three bidders and under two extreme information conditions. As predicted by the Nash equilibrium, subjects use mixed strategies. In contrast to the prediction under standard assumptions bids are drawn from a bimodal distribution: very high and very low bids are much more frequent than intermediate bids. Standard risk preferences cannot account for our results. However, bidding behavior is consistent with the predictions of a model with reference dependent preferences as proposed by the prospect theory.
    Keywords: All-pay Auction; Prospect Theory, Experiment
    JEL: D44 D72 D80 C91
    Date: 2009–08
  9. By: Carlsson, Fredrik (Department of Economics, School of Business, Economics and Law, Göteborg University); He, Haoran (Department of Economics, School of Business, Economics and Law, Göteborg University); Martinsson, Peter (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: A growing number of experimental studies focus on the differences between the lab and the field. Important in this issue is the role of windfall money. By conducting a dictator game, where the recipient is a charity organization, in exactly the same way in the laboratory and in the field, we investigate the influence of windfall and earned endowment on behavior. We find a strong effect on donation amounts of earned endowment in the lab and the field. Subjects donate more if the endowment is a windfall gain. Thus, windfall money is important not only in a lab environment. However, even for earned endowment, there is a significant difference in behavior between the lab and the field.<p>
    Keywords: Charitable giving; Dictator game; Laboratory experiment; Field experiment; Windfall money
    JEL: C91 C93 D64
    Date: 2009–08–11
  10. By: Hoff, Karla (World Bank); Kshetramade, Mayuresh (affiliation not available); Fehr, Ernst (University of Zurich)
    Abstract: Well-functioning groups enforce social norms that restrain opportunism, but the social structure of a society may encourage or inhibit norm enforcement. Here we study how the exogenous assignment to different positions in an extreme social hierarchy – the caste system – affects individuals' willingness to punish violations of a cooperation norm. Although we control for individual wealth, education, and political participation, low caste individuals exhibit a much lower willingness to punish norm violations that hurt members of their own caste, suggesting a cultural difference across caste status in the concern for members of one's own community. The lower willingness to punish may inhibit the low caste's ability to sustain collective action and so may contribute to its economic vulnerability.
    Keywords: social norms, informal sanctions, third party punishment, endogenous social preferences, social exclusion, collective action, caste
    JEL: D02 D64
    Date: 2009–08
  11. By: Bellemare, Charles (Université Laval); Shearer, Bruce S. (Université Laval)
    Abstract: We investigate the economic relevance and the composition of gifts within a firm where output is contractible. We develop a structural econometric model that identifies workers' optimal reaction to monetary gifts received from their employer. We estimate the model using data from two separate field experiments, both conducted within a tree-planting firm. We use the estimated structural parameters to generalize beyond the experiment, simulating how workers would react to different gifts on the part of the firm, within different labour-market settings. We find that gifts have a role to play within this firm, increasing in importance when the workers' outside alternatives deteriorate. Profit-maximizing gifts would increase profits within slack labour markets by up to 10% on average and by up to 17% for certain types of workers. These gifts represent significant increases in worker earnings; the average gift paid to workers attains 22% of average expected earnings in the absence of gifts. We find that gifts should be given by setting piece-rates above the market-clearing level rather than through fixed wages.
    Keywords: gift giving, structural models, field experiments
    JEL: J33 M52 C93
    Date: 2009–08
  12. By: Ulrich Trautwein
    Abstract: The systematic of key cognitive competencies is of high scientific and societal relevance, as is the availability of high-quality data on cognitive competencies. In order to make well-informed decisions, politicians and educational authorities need high-quality data about the effectiveness of formal and non-formal educational environments. Similarly, researchers need strong data to test complex theoretical models about how individual biographies are shaped by the interplay between individual and institutional affordances and constraints. Innumerable data sets offer some form of information on competencies such as respondents’ years at school and their school grades. Such data are relatively easy to collect. When it comes to making informed political and educational decisions, however, there are increasing calls for a more systematic use of standardized competence tests. The production, storage, and use of standardized test data on competencies in specific domains is expensive, complex, and time-consuming, however. This chapter argues that there is a paucity of adequate data on cognitive competencies in important domains, especially of longitudinal data from standardized competence tests, and that for many important questions there are no good alternatives to high-quality standardized tests of cognitive competencies. Furthermore, it outlines some challenges in the construction and application of standardized competence tests and makes several recommendations.
    Keywords: cognitive competencies, assessment, intelligence, school grades
    Date: 2009
  13. By: Hugo Benitez-Silva; Selcuk Eren; Frank Heiland; Sergi Jimenez-Martín
    Abstract: Self-reported home values are widely used as a measure of housing wealth by researchers; the accuracy of this measure, however, is an open empirical question, and requires some type of market assessment of the values reported. In this study, the authors examine the predictive power of self-reported housing wealth when estimating housing prices, utilizing the portion of the University of Michigan's Health and Retirement Study covering 1992-2006. They find that homeowners, on average, overestimate the value of their properties by 5–10 percent. More importantly, the authors establish a strong correlation between accuracy and the economic conditions at the time of the property's purchase. While most individuals overestimate the value of their property, those who buy during more difficult economic times tend to be more accurate; in some cases, they even underestimate the property's value. The authors find a surprisingly strong, likely permanent, and in many cases long-lived effect of the initial conditions surrounding the purchase of properties, and on how individuals value them. This cyclicality of the overestimation of house prices provides some explanation for the difficulties currently faced by many homeowners, who were expecting large appreciations in home value to rescue them in case of interest rate increases--which could jeopardize their ability to live up to their financial commitments.
    Date: 2009–08

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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