nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2009‒10‒31
fourteen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Are Risk Aversion and Impatience Related to Cognitive Ability? By Dohmen Thomas; Falk Armin; Huffman David; Sunde Uwe
  2. The Non-Use of Bayes Rule: Representative Evidence on Bounded Rationality By Dohmen Thomas; Falk Armin; Huffman David; Marklein Felix; Sunde Uwe
  3. On The Relevance Of Irrelevant Information By Alexei Parakhonyak
  4. From changing cognitions to changing the context: a dual-route model of behaviour change By Vlaev, I; Dolan, P
  5. A new notion of progress: Institutional quality By Germana Bottone
  6. Normality Bias in the Field: Evidence from Panel Data By Stephan Nüesch; Hartmut Haas
  7. CEO overconfidence and dividend policy By Sanjay Deshmukh; Anand M. Goel; Keith M. Howe
  8. Does indignation lead to generosity? An experimental investigation By Emmanuel PETIT (GREThA UMR CNRS 5113)
  9. Social Background, Cooperative Behavior, and Norm Enforcement By Kocher, Martin; Martinsson, Peter; Visser, Martine
  10. Do You Reward and Punish In The Way You Think Others Expect You To? By Omar Al-Ubaydli; Min Sok Lee
  11. Trust and the Distribution of Caution By Breuer, Janice; McDermott, John
  12. Unequal Outside Options in the Lost Wallet Game By Maroš Servátka; Radovan Vadovic
  13. Specific Human Capital as a Source of Superior Team Performance By Egon Franck; Stephan Nüesch; Jan Pieper
  14. The Impact of Female Sex Hormones on Competitiveness By Thomas Buser

  1. By: Dohmen Thomas; Falk Armin; Huffman David; Sunde Uwe (METEOR)
    Abstract: This paper investigates whether risk aversion and impatience are correlated with cognitive ability. We conduct incentive compatible choice experiments measuring risk aversion, and impatience over an annual time horizon, for a representative sample of roughly 1,000 German adults. A measure of cognitive ability is provided by two submodules of one of the most widely used IQ tests. Interviews are conducted in subjects'' own homes. We find that lower cognitive ability is associated with greater risk aversion, and more pronounced impatience. These relationships are statistically and economically significant, and robust to controlling for personal characteristics, educational attainment, income, and measures of liquidity constraints. We perform a series of additional robustness checks, which help rule out other possible confounds.
    Keywords: Economics ;
    Date: 2009
  2. By: Dohmen Thomas; Falk Armin; Huffman David; Marklein Felix; Sunde Uwe (METEOR)
    Abstract: The ability to process new information and to compute conditional probabilities is crucial for making appropriate decisions under uncertainty. In this paper, we investigate the capability of inferring conditional probabilities in a representative sample of the German population. Our results show that only a small fraction of the population responds consistently with Bayes'' rule. Instead, most individuals either neglect the base probability, or the arrival of new information, in their responses. The probability to give normatively correctanswers decreases with the level of education.
    Keywords: labour economics ;
    Date: 2009
  3. By: Alexei Parakhonyak (Erasmus University Rotterdam)
    Abstract: This paper analyses the role of information in the search process. I
    Keywords: Search; Consumer Search; Value of Information
    JEL: D01 D80
    Date: 2009–10–12
  4. By: Vlaev, I; Dolan, P
    Abstract: Existing theories of behaviour change in psychology and behavioural economics rely mostly on changing cognitions and incentives as a route to altering behavioural responses. We propose a more general reflective-automatic model (RAM), which postulates that, in addition to cognitive change, interventions can also rely exclusively on contextual change as an alternative route to behaviour change. RAM is a dual-process model which assumes that these two routes rely predominantly on different information processing systems – the reflective system is in charge of changing cognitions and the automatic system responds to changing the context. We also identify four processes: salience, norms, affect, and priming (SNAP), which can bring about behaviour change by relying mainly on the automatic system. The SNAP processes might be important targets for population-wide behaviour change initiatives and have important implications for psychological research, health promotion and policy analysis
    Date: 2009–06–23
  5. By: Germana Bottone (ISAE - Institute for Studies and Economic Analyses)
    Abstract: The notions of human capital and growth have been debated for a long time in economic literature. The limits of these concepts are generally recognised. In fact, recently, there has been an attempt to articulate a more extensive definition of “human capital” by considering all the attributes embodied in individuals that are relevant to economic activity. On the other hand, the GDP growth rate has been included into the Human Development Index, taking into account different aspects of development such as life expectation, literacy and health. Nevertheless, the evolution of the definitions of human capital and growth is in some way restricted to their economic meaning, neglecting the intrinsic complexity of concepts demanding an in-depth re-examination of their social, cultural, and historical value. Using an interdisciplinary approach, this paper focuses on the conceptual meaning of progress. Progress was considered as the economic, social, and cultural evolution of a country. The idea of evolution has ancient roots and is subjective. In economic and social terms, evolution may be deemed as the path human beings follow towards freedom. Since the earliest times, humanity has been fighting against poverty, scarcity of resources, disease, abuse of power by a group, environmental disaster. In order to give a more complex definition of progress entailing the idea that freedom is its driving force, we used the main concepts of institutional and evolutionary economics. Highlighting the contributions of the best Old Institutionalists (Veblen, Commons, Dewey, and Ayres), we introduced two alternative notions: “knowledge” in place of human capital and “progress” instead of economic growth. Local knowledge is the most important factor of development, while, on the other hand, the model of ongoing institutional change is the “alarm bell” for progress or stagnation. In this way, institutional change towards freedom and the providing of incentives for progressive forces become a proxy for the level of cultural, social, and economic progress reached by a society. Progressive forces may grow in societies where there are no barriers to the free exchange of opinions and knowledge and where education and training systems are conceived to create autonomous people. The enemy of progressive forces are “ceremonial institutions”, that is institutions opposing any kind of renewal. Using the available data, we showed that the GDP growth rate is not necessarily a factor of human life satisfaction and it does not necessarily improve the quality of life. We compared some European Countries to demonstrate that there is no clear-cut link between material wealth and the quality of life. Instead, at a given level of material wealth, the freedom of choice and the governance indicators seem much more correlated to life satisfaction. Finally, utilizing the Veblen’s notion of “recursive causality”, we highlighted that it is possible for policy makers to foster a given institutional context rather than an alternative one. Therefore, it is possible that the culture of “GDP growth” has influenced institutions and has created a number of problems (pollution, social distrust, social immobility, life dissatisfaction, corruption, and rent-seeking) which emerged in the recent financial and economic crisis.
    Keywords: human capital, growth, institutional economics.
    JEL: J24 J31 O3 B52
    Date: 2009–09
  6. By: Stephan Nüesch (Institute for Strategy and Business Economics, University of Zurich); Hartmut Haas (Towers Perrin)
    Abstract: Scenario studies in social psychology have shown that more negative feelings are attributed to negative outcomes following abnormal behavior than to the same negative outcomes caused by normal behavior. This study employs field data to test whether individuals avoid unconventional behavior in order to reduce anticipated negative affections. Using panel data from professional German soccer, we find evidence that after a positive game result, soccer coaches follow the “never change a winning team” heuristic, whereas after a lost game, coaches become more active and change the starting lineup. This effect is robust to the inclusion of potential confounders such as injuries, suspensions, and unobserved heterogeneity of the coaches and the teams and cannot be explained by increased subsequent team performance.
    Date: 2009
  7. By: Sanjay Deshmukh; Anand M. Goel; Keith M. Howe
    Abstract: We develop a model of the effect of CEO overconfidence on dividend policy and empirically examine many of its predictions. Consistent with our main prediction, we find that the level of dividend payout is lower in firms managed by overconfident CEOs. We document that this reduction in dividends associated with CEO overconfidence is greater in firms with lower growth opportunities, lower cash flow, and greater information asymmetry. We also show that the magnitude of the positive market reaction to a dividend-increase announcement is lower for firms managed by overconfident CEOs. Our overall results are consistent with the predictions of our model.
    Date: 2009
  8. By: Emmanuel PETIT (GREThA UMR CNRS 5113)
    Abstract: We test the effect of emotions on moral behaviour in a one shot gift-exchange game. Using the emotional induction technique, we induce either positive or negative emotions to the subjects before they play the game. We also consider a control treatment, without any affect manipulation. Emotional induction was effective: participants who saw the shocking and appalling movie reported significantly stronger negative emotions and weaker positive emotions than those who saw the funny movie. We find that players’ choices differ significantly across emotional conditions: we observe essentially that second movers who experience positive or neutral emotions do reciprocate whereas subjects overwhelmed with indignation, anger or guilt feelings show a very strong unconditional generous behaviour and do not reciprocate at all. We argue that indignation has a strong proactive force which allows subjects to reveal to themselves their own true values.
    Keywords: Emotions; moral values; gift-exchange game
    JEL: A12 C70 C91
    Date: 2009
  9. By: Kocher, Martin (Department of Economics, University of Munich,); Martinsson, Peter (Department of Economics, School of Business, Economics and Law, Göteborg University); Visser, Martine (School of Economics, University of Cape Town)
    Abstract: Studies have shown that there are differences in cooperative behavior across countries. Furthermore, differences in the use and the reaction on the introduction of a norm enforcement mechansism have been documented in cross-cultural studies, recently. We present data which prove that stark differences in both dimensions can exist even within the same town. For this end, a unique data set was created, based on public goods experiments conducted in South Africa. Most of the group differences can, however, be explained by variables accounting for social capital and social environment, such as trust or household violence.<p>
    Keywords: Cooperation; public goods; punishment; experiment; social capital; South Africa
    JEL: C72 C91 H41 Z13
    Date: 2009–10–19
  10. By: Omar Al-Ubaydli (Department of Economics and Mercatus Center, George Mason University); Min Sok Lee (Citadel Group Foundation, Chicago, IL)
    Abstract: This paper addresses three questions: (1) When deciding on whether to reward or punish someone, how does how you think others expect you to behave affect your decision? (2) Does it depend upon whether others expect you to reward them vs. punish them? (3) What is the interpretation of such a causal effect? We investigate these questions using a modification of the lost wallet trust game (Dufwenberg and Gneezy (2000)) that permits punishment. Like previous studies, we collect data on what second- movers think that first-movers expect them to do by directly eliciting the second-moversÕ expectations. Unlike previous studies, we ensure exogeneity of these expectations by instrumenting for them. The instrument is the expectations of neutral observers which are disclosed to second-movers prior to the elicitation of second-moversÕ expectations. We find that what you think others expect you to do has a zero causal effect on both reward and punishment decisions. We also find that it is important to instrument for second-order expectations because they are endogenous. We interpret these findings in terms of models of guilt-aversion and intentional reciprocity.
    Keywords: Behavioral confirmation, guilt, intentions, reciprocity, reward, punishment
    JEL: D63 D64 D84
    Date: 2009–06
  11. By: Breuer, Janice; McDermott, John
    Abstract: Trust is often considered a determinant of economic performance. The exogeneity of trust, however, is questionable. We develop a model with heterogeneous agents to determine aggregate trustworthiness, trust, and output. People differ according to their risk aversion (caution). The distribution of risk aversion across individuals -- along with the threat of punishment -- is critical in the process by which trust is formed. The mean and variance of the distribution of caution have direct and indirect effects on trust. For the mean, the direct effect of caution is intuitive: societies with more cautious populations would have less trust. The indirect effect, however works through the perception of trustworthiness and leads to more trust. The net effect is, paradoxically, positive in homogenous societies. In heterogeneous societies, the reverse is true. Trust and output are endogenous, and not monotonically related across countries with different moments of the distribution of caution.
    Keywords: trust; trustworthiness; risk aversion; caution; output
    JEL: Z1 C7 Z13
    Date: 2009–08
  12. By: Maroš Servátka (University of Canterbury); Radovan Vadovic
    Abstract: Experimental evidence suggests the size of the foregone outside option of the first mover does not affect the behavior of the second mover in the lost wallet game. In this paper we experimentally compare the behavior of subjects when they face an outside option with unequal payoffs, i.e., the first mover gets 10 and the second mover gets 0, and when they face an outside option with equal payoffs, i.e., both get 5. Consistent with the most of the literature we do not find a significant difference in behavior of second movers.
    Keywords: Experimental economics; fairness; inequality; lost wallet game; outside option
    JEL: C72 C78 C91
    Date: 2009–10–16
  13. By: Egon Franck (Institute for Strategy and Business Economics, University of Zurich); Stephan Nüesch (Institute for Strategy and Business Economics, University of Zurich); Jan Pieper (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: In this paper, we empirically investigate the performance effect of team-specific human capital in highly interactive teams. Based on the tenets of the resource-based view of the firm and on the ideas of typical learning functions, we hypothesize that team members’ shared experience in working together positively impacts team performance, but at diminishing rates. Holding a team’s stock of general human capital and other potential drivers constant, we find support for this prediction. Implications concerning investment decisions into human capital as well as the transferability of our findings to other contexts are discussed.
    Date: 2009
  14. By: Thomas Buser (School of Economics, University of Amsterdam)
    Abstract: We use fluctuations of female sex hormones occurring naturally over the menstrual cycle or induced by hormonal contraceptives to determine the importance of sex hormones in explaining gender differences in competitiveness. Participants in a laboratory experiment solve a simple arithmetics task first under a piece rate and then under a competitive tournament scheme. Subjects can then choose which compensation scheme to apply in a third round. We find that sex hormones have a strong effect on whether women select into the competitive environment. The observed patterns are consistent with a negative impact especially of progesterone on competitiveness and our results therefore provide a partial biological explanation for gender differences in competitiveness. We consider three possible indirect pathways through which sex hormones could affect competitiveness: via an impact on risk aversion, via an impact on performance, and via an impact on overconfidence. None of these hold up to the data and we conclude that sex hormones have a more direct impact on competitiveness.
    Keywords: competitiveness; gender differences; hormones; lab experiment
    JEL: C91 C92 J16
    Date: 2009–09–29

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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