nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2009‒09‒26
twenty papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Born Under a Lucky Star? By Nobuyuki Hanaki; Alan Kirman; Matteo Marsili
  2. Overreaction to Fearsome Risks By Zeckhauser, Richard
  3. How groups reach agreement in risky choices: an experiment By Jingjing Zhang; Marco Casari
  4. Preference for Skew in Lotteries: Evidence from the Laboratory By Thomas Astebro; José Mata; Luis Santos-Pinto
  5. An understanding of influence on human behavior By Popp, Alexandru W. A.
  6. Confidence and ambiguity By Hill, Brian
  7. Knowledge Flat-talk: A Conceit of Supposed Experts and a Seduction to All By Klein, Daniel B.
  8. Focal Points and Economic Efficiency: Role of Relative Label Salience By Quazi Shahriar; Subhasish Dugar
  9. Modeling Social Preferences: A Generalized Model of Inequity Aversion By Hayat Khan
  10. Individual vs. collective contracts: An experimental investigation using the gift exchange game By Sophia Chong; Pablo Guillen
  11. Competition for power and altruism By Luigi Bosco
  12. Reducing Efficiency through Communication in Competitive Coordination Games By Timothy N. Cason; Roman M. Sheremeta; Jingjing Zhang
  13. Altruism, Other-Regarding Behavior and Identity: The Moral Basis of Prosperity and Oppression By Basu, Kaushik
  14. Trust and the Reference Point for Trustworthiness in Gulf and Western Countries By Bohnet, Iris; Hermann, Benedikt; Zeckhauser, Richard
  15. A Laboratory Study of a Multi-Level Trust Game with Communication By Roman M. Sheremeta; Jingjing Zhang
  16. Trust in Others: Does Religion Matter? By Joseph Daniels; Marc von der Ruhr
  17. The Right Amount of Trust By Jeffrey Butler; Paola Giuliano; Luigi Guiso
  18. Absolute vs. Relative Notion of Wealth Changes By Kontek, Krzysztof
  19. An Economic Model of Behaviour: Attitudes Towards Altruistic Blood and Organ Donations. By Juan M. Cabasés Hita; María Errea Rodríguez
  20. Quality Risk Aversion, Conjectures, and New Product Diffusion By Francesco Bogliacino; Giorgio Rampa

  1. By: Nobuyuki Hanaki; Alan Kirman; Matteo Marsili
    Abstract: This paper suggests that people can learn to behave in a way which makes them unlucky or lucky. Learning from experience will lead them to make choices which may lead to "luckier" outcomes than others. By so doing they may reinforce the choices of those who find themselves with unlucky outcomes. In this situation, people have reasonably learned to behave as they do and their behaviour is consistent with their experience. The lucky ones were not "born under a lucky star" they learned to be lucky.
    Date: 2009
  2. By: Zeckhauser, Richard (Harvard University)
    Abstract: Fearsome risks are those that stimulate strong emotional responses. Such risks, which usually involve high consequences, tend to have low probabilities, since life today is no longer nasty, brutish and short. In the face of a low-probability fearsome risk, people often exaggerate the benefits of preventive, risk-reducing, or ameliorative measures. In both personal life and politics, the result is damaging overreactions to risks. We offer evidence for the phenomenon of probability neglect, failing to distinguish between high and low-probability risks. Action bias is a likely result.
    Date: 2008–12
  3. By: Jingjing Zhang; Marco Casari
    Abstract: This paper studies how groups resolve disagreement when they must reach unanimity after submitting individual proposals and exchanging text-form messages via a chat window in lottery choice experiments. We find that the majority proposal does not always prevail. The minority proposal prevails sometimes, especially when it is closer to risk neutrality. About one third of the groups disagrees after communication and would have got zero payoffs if disagreement remains after two more attempts without communication. In these groups, extrovert subjects are more likely to lead the group outcome than confused or conscientious subjects. Overall group choices are more coherent and closer to risk neutrality than individualsÕ. Checking the recorded messages, we find that the chat activity is intense, growing with the level of disagreement and aims at finding consensus. The amount and timing of chat messages help us to predict which choice prevails in the group.
    Keywords: Risk Attitude, Group Decision Making, Communication, Experiments
    JEL: C92 D81
    Date: 2009–09
  4. By: Thomas Astebro; José Mata; Luis Santos-Pinto
    Abstract: Using a laboratory experiment we investigate how skew inuences 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
  5. By: Popp, Alexandru W. A.
    Abstract: We describe a candid model for learning, why and how learning transpires. We investigate the original as well as the leading conditions of the learning process. We provide an insight into the realm of beliefs and their formation, their interaction and influence with the actor’s environment. In addition, we provide to our terms (and terminology) real definitions, thus differentiating between nominal and real definitions. Having this approach, the same terminology can be employed by other models, theories or frameworks without creating ‘expert language’ barriers. Moreover, we provide an understanding of the influence that learning in general has on human behavior.
    Keywords: conceptual conglomerate; learning; learning process; human behavior.
    JEL: C79 C99 Z19 D83
    Date: 2009–07–17
  6. By: Hill, Brian
    Abstract: This paper proposes a model of the decision-maker’s confidence in his probability judgements, in terms of an implausibility measure – a real-valued function on the set of probability functions. A decision rule is axiomatised according to which the decision-maker evaluates acts using sets of probability functions which vary depending on the agent’s implausibility measure and on what is at stake in the choice of the act. The framework proposed yields a natural notion of comparative aversion to lack of confidence, or ambiguity aversion, and allows the definition of an ambiguity premium. It is shown that these notions are equivalent and can be characterised in terms of the implausibility measure representing the agent’s confidence. A simple portfolio example is presented.
    Keywords: Confidence; multiple priors; ambiguity aversion; ambiguity premium; implausibility measure
    JEL: C69 D81
    Date: 2009–02–20
  7. By: Klein, Daniel B. (The Ratio Institute)
    Abstract: Knowledge consists of the triad: information, interpretation, and judgment. Information is the reading of the facts through a working interpretation. Much of modern political economy has miscarried by discoursing as though interpretation were symmetric and final. This move has the effect of flattening knowledge down to information – here dubbed “knowledge flat-talk.” Economic prosperity depends greatly on discovery, but discovery is often a transcending of the working interpretation, not merely the acquisition of new information. Models typically assume that the modeler’s working interpretation is common knowledge. But often the sets of relevant knowledge of the relevant actors do not approximate the common knowledge assumption. We need better understanding and appreciation of asymmetric interpretation and its dynamics.
    Keywords: knowledge; information; interpretation; judgment; common knowledge
    JEL: A10 D80
    Date: 2009–09–21
  8. By: Quazi Shahriar (Department of Economics, San Diego State University); Subhasish Dugar (Department of Economics, University of Calgary)
    Abstract: We experimentally analyze efficiency-enhancing power of focal points in 2x2 Pareto-ranked coordination games. We find that the power of focal labels, when attached to the Pareto-efficient strategy, to promote efficiency critically depends upon the alternative strategy’s label salience. When the relative salience of our focal labels is considerably weaker, focal labels mostly fail to raise expected efficiency beyond the mixed-strategy prediction. But when the relative salience of our focal labels is markedly stronger, focal labels raise expected efficiency much beyond the mixed-strategy prediction. Furthermore, we find that focal labels’ efficiency-enhancing power decreases as a measure of risk-dominance increases across games.
    Date: 2009–09
  9. By: Hayat Khan
    Abstract: Taking note of the wide variety and growing list of models in the literature to explain patterns of behavior observed in laboratory experiments, this paper identifies two tests, the Variety Test (ability of a model to explain outcomes under variety or alternative scenarios) and the Psychological Test (ability of a model to conform to psychological intuition), that can be used to judge any model of other-regarding behavior. It is argued that for a mathematical model to qualify as a social welfare function, it must simultaneously pass the two tests. It is shown that none of the models proposed to date passes these two tests simultaneously. The paper proposes a generalized model of inequity aversion which parsimoniously explains interior solution in the dictator game and dynamics of outcomes in other games. The paper postulates that one’s idea of equitable distribution is state-dependent, where the state is determined by psychological and structural parameters. The state could be fair, superior or inferior. Individuals in a fair state have zero equity-bias and split the pie evenly. Those in a superior (inferior) state have positive (negative) equity-bias and value more (less) than fair distribution as equitable distribution. Given psychological tendencies of an individual, every experimental design/structure assigns one of the three states to players which lead to individual-specific valuation of equity. Prediction about outcomes across different experiments and designs can be made through predicting their impact on equity-bias. All aspects of an individual’s behavior, such as altruism, fairness, reciprocity, self-serving bias, kindness, intentions etc, manifest themselves in the equity-bias. The model therefore is all-encompassing.
    Keywords: Experimental Economics, Social Preferences, Other-regarding Preferences, Inequity aversion.
    JEL: B4 C9 D8 O1
    Date: 2009–09–21
  10. By: Sophia Chong; Pablo Guillen
    Abstract: This paper compares individual with collective contracts using modified repeated gift exchange games. The game had two variations, both following a partner design. In the individual variation different workers in the same firm can receive separate wages, and in the collective variation all workers in the same firm receive the same wage. These two variations are played altering the order. Thus the experiment has four treatments, two within subjects (regarding the games played) and two between subjects (regarding the order in which the games are played). We did not find significant differences between the two variations of the game when subjects had no experience. However, individual agreements turned out to be more efficient when subjects have previously experienced collective agreements. This result suggests subjects learned to reciprocate when they played the collective variation followed by the individual variation of the gift exchange game.
    Keywords: laboratory experiments, gift exchange, collective contracts.
    JEL: C92
    Date: 2009–09–14
  11. By: Luigi Bosco
    Abstract: The paper analyzes the trade-off between power and altruism by using an experimental framework which involved a group of experimental agents, undergraduate students of the University of Siena. The results show that the introduction into the experimental structure of a tournament for the power appreciably altered the behaviour of agents. More specifically the degree of altruism, measured by the dictator offers, significantly decreased when the agents were able to trade altruism for power. The results were more clear-cut and robust in the case of the dictator game, but also in the case of the ultimatum game the introduction of the tournament for power altered the behavior of subjects. A significant gender effect emerged
    Keywords: Altruism, Dictator game, Ultimatum game, Hierarchy
    JEL: C91 D64
    Date: 2009–07
  12. By: Timothy N. Cason; Roman M. Sheremeta; Jingjing Zhang
    Abstract: Costless pre-play communication has been found to effectively facilitate coordination and enhance efficiency by increasing individual payoffs in games with Pareto-ranked equilibria. We report an experiment in which two groups compete in a weakest-link contest by expending costly efforts. Allowing group members to communicate before choosing efforts leads to more aggressive competition and greater coordination, but also results in substantially lower payoffs than a control treatment without communication. Our experiment thus provides evidence that communication can reduce efficiency in competitive coordination games. This contrasts sharply with experimental findings from public goods and other coordination games, where communication enhances efficiency and often leads to socially optimal outcomes.
    Keywords: Contest; Between-group Competition; Within-group Competition; Cooperation; Coordination; Free-riding; Experiments
    JEL: C71 C72 C91 C92 D72 H41
    Date: 2009–09
  13. By: Basu, Kaushik (Cornell University)
    Abstract: Much of economics is built on the assumption that individuals are driven by self-interest and economic development is an outcome of the free play of such individuals. On the few occasions that the existence of altruism is recognized in economics, the tendency is to build this from the axiom of individual selfishness. The aim of this paper is to break from this tradition and to treat as a primitive that individuals are endowed with the 'cooperative spirit', which allows them to work in their collective interest, even when that may not be in their self-interest. The paper tracks the interface between altruism and group identity. By using the basic structure of a Prisoner's Dilemma game among randomly picked individuals and building into it assumptions of general or in-group altruism, the paper demonstrates how our selfish rationality interacts with our innate sense of cooperation. The model is used to outline circumstances under which cooperation will occur and circumstances where it will break down. The paper also studies how sub-groups of a society can form cooperative blocks, whether to simply do better for themselves or exploit others.
    Date: 2009–04
  14. By: Bohnet, Iris (Harvard University); Hermann, Benedikt (European Commission); Zeckhauser, Richard (Harvard University)
    Abstract: Why is private investment so low in Gulf compared to Western countries? We investigate cross-regional differences in trust and reference points for trustworthiness as possible factors. Experiments controlling for cross-regional differences in institutions and beliefs about trustworthiness reveal that Gulf citizens pay much more than Westerners to avoid trusting, and hardly respond when returns to trusting change. These differences can be explained by subjects' gain/loss utility relative to their region's reference point for trustworthiness. The relation-based production of trust in the Gulf induces higher levels of trustworthiness, albeit within groups, than the rule-based interactions prevalent in the West.
    Date: 2009–06
  15. By: Roman M. Sheremeta; Jingjing Zhang
    Abstract: This experimental study explores how communication influences efficiency, trust and trustworthiness in a small group when one member is left out of communication. To study this problem, we introduce a novel three-player trust game where player 1 can send any portion of his endowment to player 2. The amount sent gets tripled. Player 2 decides how much to send to player 3. The amount is again tripled, and player 3 then decides the allocation among the three players. The baseline treatment with no communication shows that on average players 1 and 2 send significant amounts and player 3 reciprocates even though all players are randomly regrouped every period. When we add communication between players 2 and 3, the amounts sent and returned between these two increase. The interesting finding is that there are external effects of communication: player 1 who is outside communication sends 60% more and receives 140% more than in the no communication treatment. As a result, social welfare and efficiency increase from 48% to 73%.
    Keywords: Multi-level Trust Games; Experiments; Reciprocity; Communication
    JEL: C72 C91 D72
    Date: 2009–09
  16. By: Joseph Daniels (Center for Global and Economic Studies, Marquette University); Marc von der Ruhr (Department of Economics, Saint Norbert College)
    Abstract: Though the recent literature offers intuitively appealing bases for, and evidence of a linkage between religious beliefs, religious participation and economic outcomes, evidence on a relationship between religion and trust is mixed. By allowing for an attendance effect, disaggregating Protestant denominations, and using a more extensive data set, probit models of the General Social Survey (GSS), 1975 through 2000, show that Black Protestants, Pentecostals, fundamentalist Protestants, and Catholics, trust others less than individuals who do not claim a preference for a particular denomination. For conservation denominations the effect of religion is though affiliation not attendance. In contrast, liberal Protestants trust others more and this effect is reinforced by attendance. The impact of religion on moderate Protestants is only through attendance, as frequency of attendance increases trust of others while the denomination effect is insignificant.
    Keywords: religion, social trust
    JEL: Z12
    Date: 2009
  17. By: Jeffrey Butler; Paola Giuliano; Luigi Guiso
    Abstract: A vast literature has investigated the relationship between trust and aggregate economic performance. We investigate the relationship between individual trust and individual economic performance. We .nd that individual income is hump-shaped in a measure of intensity of trust beliefs available in the European Social Survey. We show that heterogeneity of trust beliefs in the population, coupled with the tendency of individuals to extrapolate beliefs about others from their own level of trustworthiness, could generate the non-monotonic relationship between trust and income. Highly trustworthy individuals think others are like them and tend to form beliefs that are too optimistic, causing them to assume too much social risk, to be cheated more often and ultimately perform less well than those who happen to have a trustworthiness level close to the mean of the population. On the other hand, the low-trustworthiness types form beliefs that are too conservative and thereby avoid being cheated, but give up prfitable opportunities too often and, consequently, underperform. Our estimates imply that the cost of either excessive or too little trust is comparable to the income lost by foregoing college. Furthermore, we find that people who trust more are cheated more often by banks as well as when purchasing goods second hand, when relying on the services of a plumber or a mechanic and when buying food. We complement the survey evidence with experimental evidence showing that own trustworthiness and expectations of others' trustworthiness in a trust game are strongly correlated and that performance in the game is hump-shaped.
    Keywords: Trust, trustworthiness, economic performance, culture, false consensus
    JEL: A1 A12 D1 O15 Z1
    Date: 2009
  18. By: Kontek, Krzysztof
    Abstract: This paper discusses solutions derived from lottery experiments using two contradicting assumptions: that people perceive wealth changes as absolute amounts of money; and that people consider wealth changes as a proportion of some reference value dependant on the context of the problem under consideration. The former assumption leads to the design of Prospect Theory, the latter - to the aspiration / relative utility function (Kontek, 2009a), a solution closely resembling the utility function hypothesized by Markowitz (1952). This paper presents several crucial arguments for the latter approach, the major one being that people regard changes in wealth in a relative way is founded on Weber’s Law. This fundamental law of psychophysics contradicts the claim that gains and losses are perceived in absolute terms. Second, the absolute notion inevitably leads to the concept of probability weighting having to be incorporated into the descriptive model. This is not necessary when gains and losses are considered as relative values. Finally, the absolute notion leads to ambiguous solutions in that many different explanations for people’s behavior may be derived from the same set of experimental data. No such danger exists with the relative notion of gains and losses. This paper therefore provides strong arguments for rejecting the Prospect Theory approach and lays a foundation for a new Relative Utility Theory in the field of decision making under conditions of risk.
    Keywords: Prospect / Cumulative Prospect Theory; Probability Weighting Function; Markowitz Hypothesis; Aspiration / Relative Utility Function / Theory; Mental Accounts; Problem Framing and Scaling; Psychophysics; Weber’s Law; Experimental Design; Lottery; Decision Making Under Risk.
    JEL: D81 D01 D87 C91
    Date: 2009–09–16
  19. By: Juan M. Cabasés Hita (Departamento de Economía-UPNA); María Errea Rodríguez (Departamento de Economía-UPNA)
    Abstract: The aim of this research is to model altruistic blood and organ donors behaviour. First, we make an analysis of the decision of to be or not to be a donor for any individual. We propose a model where individuals compare the expected utility of deciding to become a donor, with the utility of the alternative decision (not to become a donor). Second, we continue with the identification of the variables having influence over this decision, the expected effects of such a donation (positive and negative) and the importance of the expectations over individuals well-being and the subsequent decision. We work with rational individuals that behave altruistically when making a decision. The model is specific because the goods we consider can only cover vital needs. We posed hypothesis about some variables for each kind of the donations considered (blood and organ donations). This hypothesis can be useful to identify which are the variables having influence actually over this decision. We propose a pilot survey to test our model. First results from a university students survey show the relevant variables influencing blood an organ donations, and seem to confirm the model.
    Keywords: altruism, interdependent utility functions, attitudes, blood/organ donations and behaviour
    Date: 2009
  20. By: Francesco Bogliacino; Giorgio Rampa
    Abstract: In this paper we provide a generalization of the standard models of the diffusion of a new product. Consumers are heterogeneous and risk averse, and the firm is uncertain about the demand curve: both learn from past observations. The attitude towards risk has important effects with regard to the diffusion pattern. In our model, downward-biased signals to consumers can prevent the success of the product, even if its objective quality is high: a “lock-in” result. We show in addition that the standard logistic pattern can be derived from the model. Finally, we discuss the asymptotic behavior of the learning dynamics, with regard to the multiplicity and the stability of equilibria, and to their welfare properties.
    Keywords: Heterogeneity, Multiple equilibria, Lock-in, Product diffusion, Risk aversion.
    JEL: L15 D81 O33
    Date: 2009–09–27

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