nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2009‒09‒19
twelve papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Game Harmony: A Behavioral Approach to Predicting Cooperation in Games By Daniel John Zizzo; Jonathan H.W. Tan
  2. Markets fo Heterogeneous Products: a Boundedly Rational Consumer Model By Marco Valente
  3. Learning backward induction: a neural network agent approach By Leonidas, Spiliopoulos
  4. What is your level of overconfidence? A strictly incentive compatible measurement of absolute and relative overconfidence. By Diemo Urbig; Utz Weitzel; Julia Stauf
  5. A Structural Analysis of Disappointment Aversion in a Real Effort Competition By David Gill; Victoria Prowse
  6. An experimental methodology testing for prudence and third-order preferences By Sebastian Ebert; Daniel Wiesen
  7. Economic Incentives and Social Preferences: A preference-Based Lucas Critique of Public Policy By Samuel Bowles; Sandra Polanía Reyes
  8. Public Goods Games, Altruism, and Evolution By Ingela Alger
  9. Moral Judgments in Social Dilemmas: How Bad is Free Riding? By Robin Cubitt; Michalis Drouvelis; Simon Gaechter; Ruslan Kabalin
  10. Preference for Skew in Lotteries: Evidence from the Laboratory By Santos-Pinto, Luís; Astebro, Thomas; Mata, José
  11. How to Extend a Model of Probabilistic Choice from Binary Choices to Choices among More Than Two Alternatives By Pavlo R. Blavatskyy
  12. A Socio-Psychological Theory of Efficiency Wage Growth By Faria, Joao; Jellal, Mohamed

  1. By: Daniel John Zizzo (University of East Anglia, School of Economics, Norwich, UK); Jonathan H.W. Tan (Nottingham University Business School, UK)
    Abstract: Game harmony describes how harmonious (non-conflictual) or disharmonious (conflictual) the interests of players are in a game, as embodied in the game? raw payoffs. It departs from the traditional game-theoretic approach in that it is a non equilibrium behavioral approach which can be psychologically founded. We experimentally test the predictive power of basic game harmony measures on a variety of well-known 2×2 games and randomly-generated 2×2 and 3×3 generic games. Our findings support its all rounded predictive power. Game harmony provides an alternative tool that is both powerful and parsimonious, as it does not require information on a subject? degree of rationality, social preferences, beliefs and perceptions are required.
    Keywords: games, game harmony, cooperation, behavioral economics.
    Date: 2009–07–13
  2. By: Marco Valente
    Abstract: The paper is based on the acknowledgement that properties of markets stemming from features of demand are too frequently overlooked in the economic literature, and a re-balancing is necessary to properly account for theoretical and empirical phenomena. We sustain that one of the most relevant reasons for the neglect of the role of demand is the lack of an adequate representation of consumers. This claim is particu- larly relevant for evolutionary economics since its critique to the mainstream approach stopped at the representation of firms. The standard utility maximization approach to consumers? theory is even less defensible than the related assumption of producers? rationality, given the lack of competitive pressure on consumers. As a contribution to this theoretical gap, the paper presents a model for consumer based on the assumption of bounded rationality and inspired to the literature on experimental psychology. The proposed model can be applied to multi-dimensional products/services and relies on intuitive and potentially observable parameters, allow- ing for a wide range of theoretical and empirical applications. Moreover, the intrinsic structure of the model provides a clear definition of preferences, meant as ex-ante decisional criteria, distinguished from post-hoc justification of any decisional result. Though structurally simple, the proposed model is very flexible and allows for a clear exploration of the impact of specific demand features on the produced results. Several experiments show that the model can be successfully applied both to generate standard results and to implement complex configurations such as those of generated by large markets with heterogeneous products. Among the results presented, the most relevant concerns the identification of two classes of market segmentation, generated by the identical suppliers and demand?s ex- ogenous factors, but different consumers? decisional mechanisms. The results produced are observationally equivalent, but are shown to have radically different properties, and are proposed as initial elements of a taxonomy for the classification demand classes, likely to explain common properties across different markets.
    Keywords: Evolutionary Economics, Consumer Theory, Bounded Rationality, Marketing and Preferences, Simulation Models, Market Structure
    JEL: C63 D11 D81 L10 L15 M30
    Date: 2009–09–08
  3. By: Leonidas, Spiliopoulos
    Abstract: This paper addresses the question of whether neural networks (NNs), a realistic cognitive model of human information processing, can learn to backward induce in a two-stage game with a unique subgame-perfect Nash equilibrium. The NNs were found to predict the Nash equilibrium approximately 70% of the time in new games. Similarly to humans, the neural network agents are also found to suffer from subgame and truncation inconsistency, supporting the contention that they are appropriate models of general learning in humans. The agents were found to behave in a bounded rational manner as a result of the endogenous emergence of decision heuristics. In particular a very simple heuristic socialmax, that chooses the cell with the highest social payoff explains their behavior approximately 60% of the time, whereas the ownmax heuristic that simply chooses the cell with the maximum payoff for that agent fares worse explaining behavior roughly 38%, albeit still significantly better than chance. These two heuristics were found to be ecologically valid for the backward induction problem as they predicted the Nash equilibrium in 67% and 50% of the games respectively. Compared to various standard classification algorithms, the NNs were found to be only slightly more accurate than standard discriminant analyses. However, the latter do not model the dynamic learning process and have an ad hoc postulated functional form. In contrast, a NN agent’s behavior evolves with experience and is capable of taking on any functional form according to the universal approximation theorem.
    Keywords: Agent based computational economics; Backward induction; Learning models; Behavioral game theory; Simulations; Complex adaptive systems; Artificial intelligence; Neural networks
    JEL: C45 C7 C73
    Date: 2009–09–12
  4. By: Diemo Urbig; Utz Weitzel; Julia Stauf
    Abstract: This study contributes to the ongoing discussion on the appropriate measurement of overconfidence, in particular, its strictly incentive compatible measurement in experiments. Despite a number of significant advances in recent research, several important issues remain to be solved. These relate to the strictness of incentive compatibility, the identification of well-calibrated participants, the trichotomous classification into over- or underconfident and well-calibrated participants, and the generalization to measuring beliefs about the performance relative to other people. This paper develops a measurement of overconfidence that is improved regarding all four of these issues. We theoretically prove that our method is strictly incentive compatible and robust to risk attitudes within the framework of Cumulative Prospect Theory. Furthermore, our method allows the measurement of various levels of overconfidence and the direct comparison of absolute and relative confidence. We tested our method, and the results meet our expectations, replicate recent results, and show that a population can be simultaneously overconfident, well-calibrated, and underconfident. In our specific case, we find that more than ninety-five percent of the population believe to be better than twenty-five percent; about fifty percent believe to be better than fifty percent; and only seven percent believe to be better than seventy-five percent.
    Keywords: Belief elicitation, Overconfidence, Better than average, Incentive compatibility
    JEL: C91 D8 D83 D84
    Date: 2009–08
  5. By: David Gill; Victoria Prowse
    Abstract: We develop a novel computerized real effort task, based on moving sliders across a screen, to test experimentally whether agents are disappointment averse when they compete in a real effort sequential-move tournament. Our theory predicts that a disappointment averse agent, who is loss averse around her endogenous expectations-based reference point, responds negatively to her rival’s effort. We find significant evidence for this discouragement effect, and use the Method of Simulated Moments to estimate the strength of disappointment aversion on average and the heterogeneity in disappointment aversion across the population.
    Keywords: Disappointment aversion, Loss aversion, Reference-dependent preferences, Reference point adjustment, Expectations, Tournament, Real effort experiment, Slider task
    JEL: C91
    Date: 2009
  6. By: Sebastian Ebert; Daniel Wiesen
    Abstract: We propose an experimental method to test individuals for prudence (i.e. downside risk aversion) outside the expected utility framework. Our method relies on a novel representation of compound lotteries which allows for a systematic parameterization that captures the full generality of prudence. Therefore, we develop a general technique for lottery calibration in experiments. Since we investigate a very subtle third-order property we test our method in the laboratory employing a factorial design. We find that it yields robust results and that prudence is observed on the aggregate as well as on the individual level. Further we show that preferences based on statistical moments, in particular skewness seeking, can at most approximately explain individuals' behavior in the experiment.
    Keywords: Decision making under uncertainty, risk preferences, prudence, downside risk, statistical moments, laboratory experiment
    JEL: D81 C91
    Date: 2009–09
  7. By: Samuel Bowles (Santa Fe Institute, University of Siena, and University of Massachusetts Amherst); Sandra Polanía Reyes (University of Siena)
    Abstract: Policies and explicit incentives designed for self-regarding individuals sometimes are less effective or even counterproductive when they diminish altruism, ethical norms and other social preferences. Evidence from 51 experimental studies indicates that this crowding out effect is pervasive, and that crowding in also occurs. A model in which self-regarding and social preferences may be either substitutes or complements is developed and evidence for the mechanisms underlying this non-additivity feature of preferences is provided. The result is a preference-based analogue to the Lucas Critique restricting feasible implementation to allocations that are supportable given the effect of incentives on preferences. JEL Categories: D64, H41, D78, Z13, C90
    Keywords: Public goods, behavioral experiments, social preferences, second best, motivational crowding, explicit incentives
    Date: 2009–09
  8. By: Ingela Alger (Department of Economics, Carleton University)
    Abstract: How can a desire to cooperate in one-shot interactions survive, even though it gives a material disadvantage to its carrier? I analyze this issue using a one-shot public goods game between two altruistic individuals. Within a pair, the least altruistic individual is better off materially. Between pairs, individuals in the pair with the highest degree of altruism are better off materially. I determine the evolutionarily stable degree of altruism, allowing for assortative matching. The stable degree of altruism is strictly smaller than the degree of assortativity, and it may be negative. It is also increasing in the degree of assortativity. For a given degree of assortativity, the stable degree of altruism depends on the relative strength of the within-pair and the between-group e¤ect on material welfare. This relative strength in turn depends on the production and cost functions in the underlying public goods game.
    Keywords: public goods, teamwork, altruism, evolution of preferences, evolutionary stability
    JEL: D02 D13
    Date: 2009–08–26
  9. By: Robin Cubitt (University of Nottingham); Michalis Drouvelis (University of York); Simon Gaechter (University of Nottingham); Ruslan Kabalin (University of Nottingham)
    Abstract: In the last thirty years economists and other social scientists investigated people’s normative views on principles of distributive justice. Here we study people’s normative views in social dilemmas, which underlie many situations of economic and social significance. Using insights from moral philosophy and psychology we provide an analysis of the morality of free riding. We use experimental survey methods to investigate people’s moral judgments empirically. We vary others’ contributions, the framing (“give-some” vs. “take-some”) and whether contributions are simultaneous or sequential. We find that moral judgments depend strongly on others’ behaviour; and that failing to give is condemned more strongly than withdrawing all support.
    Keywords: moral judgments, framing effects, public goods experiments, free riding
    Date: 2009–08
  10. By: Santos-Pinto, Luís; Astebro, Thomas; Mata, José
    Abstract: Using a laboratory experiment we investigate how skew in uences choices under risk. We find that subjects make significantly riskier choices when the distribution of payoffs is positively skewed, these choices being driven in part by the shape of the utility function but also by subjective distortion of probabilities. A utility model with probability distortion calibrated on laboratory data is able to explain why most gamblers in public lotteries buy only a small number of tickets.
    Keywords: Risk; Skew; Gambling; Lab Experiment
    JEL: D81 C91
    Date: 2009–06–09
  11. By: Pavlo R. Blavatskyy
    Abstract: This note presents an algorithm that extends a binary choice model to choice among multiple alternatives. Both neoclassical microeconomic theory and Luce choice model are consistent with the proposed algorithm. The algorithm is compatible with several empirical findings (asymmetric dominance and attraction effects) that cannot be explained within standard models.
    Keywords: Probabilistic choice, binary choice, multiple alternatives
    JEL: C44 D11 D70 D81
    Date: 2009–09
  12. By: Faria, Joao; Jellal, Mohamed
    Abstract: This paper provides a socio-psychological theory of efficiency wage growth. The model blends agency theory with the Forced Savings hypothesis by assuming that firms set an increasing wage profile to minimize shirking costs, and that workers’ effort is positively related to the variation of wages. In its simple formulation the model derives some interesting results, such as: i) a positive relationship between the growth rate of efficiency wages and the discount rate; ii) for the case of constant returns of motivation, the growth rate of wages is unrelated with technology and workers’ preferences. The model also allows the analysis of the optimal path of employment. The positive impact of increasing efficiency wage profile on job creation depends only on workers’ returns of motivation and technology.
    Keywords: Dynamic Efficiency Wage Profile, Job Satisfaction,Jobs Creation
    JEL: J41 J28 J23
    Date: 2009–09

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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