nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2009‒11‒14
twenty papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Social and private learning with endogenous decision timing By Julian Jamison; David Owens; Glenn Woroch
  2. A Structural Analysis of Disappointment Aversion in a Real Effort Competition By Gill, David; Prowse, Victoria L.
  3. How norms can generate conflict By Fabian Winter; Heiko Rauhut; Dirk Helbing
  4. Lab Experiments Are a Major Source of Knowledge in the Social Sciences By Falk, Armin; Heckman, James J.
  5. The Power of An Outside Option that Generates a Focal Point: An Experimental Investigation By Quazi Shahriar
  6. Bidding in common value fair division games: The winner's curse or even worse? By Alice Becker; Tobias Brünner
  7. Historical Trust Levels Predict Current Welfare State Design By Bergh, Andreas; Bjørnskov, Christian
  8. Two Heads Are Less Bubbly than One: Team Decision-Making in an Experimental Asset Market By Cheung, Stephen L.; Palan, Stefan
  9. Incentive Effects on Risk Attitude in Small Probability Prospects By Lefèbvre, Mathieu; Vieider, Ferdinand M.; Villeval, Marie Claire
  10. Social Interaction, Co-Worker Altruism, and Incentives By Dur, Robert; Sol, Joeri
  11. The Ratio Bias Phenomenon: Fact or Artifact? By Lefèbvre, Mathieu; Vieider, Ferdinand M.; Villeval, Marie Claire
  12. Asking for Help: Survey And Experimental Evidence on Financial Advice And Behavior Change By Angela A. Hung; Joanne Yoong
  13. Risk Attitudes and Investment Decisions across European Countries: Are Women More Conservative Investors than Men? By Oleg Badunenko; Nataliya Barasinska; Dorothea Schäfer
  14. On the Adjudication of Conflicting Claims: An Experimental Study By Carmen Herrero; Juan D. Moreno-Ternero; Giovanni Ponti
  15. The Endowment Effect in Groups with and without Strategic Incentives By Andreas Glöckner; Janet Kleber; Stephan Tontrup; Stefan Bechtold
  16. Commitment Contracts By Gharad Bryan; Dean Karlan; Scott Nelson
  17. Understanding the Two Components of Risk Attitudes: An Experimental Analysis By Jianying Qiu; Eva-Maria Steiger
  18. Testing Enforcement Strategies in the Field: Legal Threat, Moral Appeal and Social Information By Gerlinde Fellner; Rupert Sausgruber; Christian Traxler
  19. Gender, education and reciprocal generosity: Evidence from 1,500 experiment subjects By Pablo Brañas-Garza; Juan C. Cárdenas; Máximo Rossi
  20. Decision theory under ambiguity By Johanna Etner; Meglena Jeleva; Jean-Marc Tallon

  1. By: Julian Jamison; David Owens; Glenn Woroch
    Abstract: Firms often face choices about when to upgrade and what to upgrade to. We discuss this in the context of upgrading to a new technology (for example, a new computer system), but it applies equally to the upgrading of processes (for example, a new organizational structure) or to individual choices (for example, buying a new car). This paper uses an experimental approach to determine how people address such problems, with a particular focus on the impact of information flows. Specifically, subjects face a multi-round decision, choosing when (if ever) to upgrade from the status quo to either a safe or a risky new technology. The safe technology yields more than the status quo, and the risky technology may yield either less than the status quo or more than the safe technology. Every round, subjects who have not yet upgraded receive noisy information about the true quality of the risky technology. Our focus on the timing of endogenous choice is novel and differentiates the results from previous experimental papers on herding and cascades. We find that, in the single-person decision problem, subjects tend to wait too long before choosing (relative to optimal behavior). In the second treatment, they observe payoff-irrelevant choices of other subjects. This turns out to induce slightly faster decisions, so the "irrationality" of fads actually improves profits in our framework. In the third and final treatment, subjects observe payoff-relevant choices of other subjects (that is, others who have the same value for the risky technology but independent private signals). Behavior here is very similar to the second treatment, so having "real" information does not seem to have a strong marginal effect. Overall we find that social learning, whether or not the behavior of others is truly informative, plays a large role in upgrade decisions and hence in technology diffusion.
    Keywords: Human behavior
    Date: 2009
  2. By: Gill, David (University of Southampton); Prowse, Victoria L. (University of Oxford)
    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: 2009–10
  3. By: Fabian Winter (Max Planck Institute of Economics, Jena); Heiko Rauhut (ETH Zurich, Swiss Federal Institute of Technology); Dirk Helbing (ETH Zurich, Swiss Federal Institute of Technology)
    Abstract: Norms play an important role in establishing social order. The current literature focuses on the emergence, maintenance and impact of norms with regard to coordination and cooperation. However, the issue of norm-related conflict deserves more attention. We develop a general theory of "normative conflict" by differentiating between two different kinds of conflict. The first results from distinct expectations of which means should be chosen to fulfil the norm, the second from distinct expectations of how strong the norm should restrain the self-interest. We demonstrate the empirical relevance of normative conflict in an experiment that applies the "strategy method" to the ultimatum game. Our data reveal normative conflict among different types of actors, in particular among egoistic, equity, equality and "cherry picker" types.
    Keywords: Social norms, normative conflict, cooperation, ultimatum game, strategy method, equity
    JEL: Z13 C91 D30
    Date: 2009–11–02
  4. By: Falk, Armin (University of Bonn); Heckman, James J. (University of Chicago)
    Abstract: Laboratory experiments are a widely used methodology for advancing causal knowledge in the physical and life sciences. With the exception of psychology, the adoption of laboratory experiments has been much slower in the social sciences, although during the last two decades, the use of lab experiments has accelerated. Nonetheless, there remains considerable resistance among social scientists who argue that lab experiments lack "realism" and "generalizability". In this article we discuss the advantages and limitations of laboratory social science experiments by comparing them to research based on non-experimental data and to field experiments. We argue that many recent objections against lab experiments are misguided and that even more lab experiments should be conducted.
    Keywords: laboratory experiments, field experiments, controlled variation
    JEL: C90 C91 C92 C93 D00
    Date: 2009–10
  5. By: Quazi Shahriar (Department of Economics, San Diego State University)
    Abstract: Existing experimental studies have shown that an outside option, when offered to one of the two players who later participate in a battle-of-the-sexes game, facilitates coordination by making the equilibrium that favors the same player focal. Since the other player’s payoff in the outside option was lower than that in the focal point, it is possible that there was a reciprocal motive of the other player to coordinate on the focal point. Then it is possible that the actual power of the outside option to generate the focal point was either lower or non-existent. The current paper reports results of an experiment designed to test for the focal point effect of the outside option by controlling for the reciprocal motive of the other player. The results confirm that the outside option can generate the focal point even when the reciprocal motive is absent. In fact, the saliency of the focal point is higher after controlling for reciprocity.
    Date: 2009–10
  6. By: Alice Becker (Max Planck Institute for Economics, Jena); Tobias Brünner (Goethe University Frankfurt)
    Abstract: A unique indivisible commodity with an unknown common value is owned by group of individuals and should be allocated to one of them while compensating the others monetarily. We study the so-called fair division game (Güth, Ivanova-Stenzel, Königstein, and Strobel (2002, 2005)) theoretically and experimentally for the common value case and compare our results to the corresponding common value auction. Whereas symmetric risk neutral Nash equilibria are rather similar for both games, behavior differs strikingly. Implementing auctions and fair division games in the lab in a repeated setting under first- and second-price rule, we find that overall behavior is much more dispersed for the fair division games than for the auctions. Winners' profit margins and shading rates are on average slightly lower for the fair division game. Moreover, we find that behavior in the fair division game separates into extreme over- and underbidding.
    Keywords: common value auction, winner's curse, fair division game
    JEL: C73 C91 D44
    Date: 2009–11–04
  7. By: Bergh, Andreas (The Ratio Institute and Lund University); Bjørnskov, Christian (Aarhus School of Business, Aarhus University)
    Abstract: Using cross-sectional data for 76 countries, we apply instrumental variable techniques based on pronoun drop, temperature and monarchies to demonstrate that historical trust levels predict several indicators of current welfare state design, including universalism and high levels of regulatory freedom. We argue that high levels of trust and trustworthiness are necessary, but not sufficient, conditions for societies to develop successful universal welfare states that would otherwise be highly vulnerable to free riding and fraudulent behavior. Our results do not exclude positive feedback from welfare state universalism to individual trust, although we claim that the important causal link runs from historically trust levels to current welfare state design.
    Keywords: Social trust; Welfare State
    JEL: Z13
    Date: 2009–10–29
  8. By: Cheung, Stephen L. (University of Sydney); Palan, Stefan (University of Graz)
    Abstract: We study the effect of team decision-making on bubbles and crashes in experimental asset markets of the kind introduced by Smith, Suchanek and Williams (1988). We find that populating such markets with teams of size two instead of individuals significantly reduces the severity of mispricing. In particular we observe that under our teams treatment, deviations in prices away from intrinsic value are significantly smaller in magnitude, shorter in duration and associated with lower volume and price volatility. We also find an unexpected gender effect in team composition, manifesting itself in more extreme – though not consistently more profitable – behaviour by all-male teams. Since these effects are not observed among male participants generally, we conjecture that they may be due to factors specific to the psychology of decision-making in male-dominated environments.
    Keywords: asset market experiments, price bubbles, group decision-making, gender composition of teams
    JEL: C92 D70 G12
    Date: 2009–10
  9. By: Lefèbvre, Mathieu (CREPP, Université de Liège); Vieider, Ferdinand M. (CNRS, GATE); Villeval, Marie Claire (CNRS, GATE)
    Abstract: Most studies on the role of incentives on risk attitude report data obtained from within-subject experimental investigations. This may however raise an issue of sequentiality of effects as later choices may be influenced by earlier ones. This paper reports instead between-subject results on the effect of monetary stakes on risk attitudes for small probability prospects in a laboratory experiment. Under low stakes, we find the typical risk seeking behavior for small probabilities predicted by the prospect theory. But under high stakes, we provide some evidence that risk seeking behavior is dramatically reduced. This could suggest that utility is not consistently concave over the outcome space, but rather contains a convex section for very small amounts.
    Keywords: risk attitude, incentives, decision, experiment
    JEL: C91 D81 D89
    Date: 2009–11
  10. By: Dur, Robert (Erasmus University Rotterdam); Sol, Joeri (Erasmus University Rotterdam)
    Abstract: Social interaction with colleagues is an important job attribute for many workers. To attract and retain workers, managers therefore need to think about how to create and preserve high-quality co-worker relationships. This paper develops a principal-multi-agent model where agents do not only engage in productive activities, but also in social interaction with their colleagues, which in turn creates co-worker altruism. We study how financial incentives for productive activities can improve or damage the work climate. We show that both team incentives and relative incentives can help to create a good work climate.
    Keywords: social interaction, altruism, incentive contracts, co-worker satisfaction
    JEL: D86 J41 M50
    Date: 2009–10
  11. By: Lefèbvre, Mathieu (CREPP, Université de Liège); Vieider, Ferdinand M. (CNRS, GATE); Villeval, Marie Claire (CNRS, GATE)
    Abstract: The ratio bias – according to which individuals prefer to bet on probabilities expressed as a ratio of large numbers to normatively equivalent or superior probabilities expressed as a ratio of small numbers – has recently gained momentum, with researchers especially in health economics emphasizing the policy importance of the phenomenon. Although the bias has been replicated several times, some doubts remain about its economic significance. Our two experiments show that the bias disappears once order effects are excluded, and once salient and dominant incentives are provided. This holds true for both choice and valuation tasks. Also, adding context to the decision problem does not change this outcome. No ratio bias could be found in between-subject tests either, which leads us to the conclusion that the policy relevance of the phenomenon is doubtful at best.
    Keywords: ratio bias, financial incentives, error rates, experiment
    JEL: C91 D81 I19
    Date: 2009–11
  12. By: Angela A. Hung; Joanne Yoong
    Abstract: When do individuals actually improve their financial behavior in response to advice? Using survey data from current defined-contribution plan holders in the RAND American Life Panel (a probability sample of US households), the authors find little evidence of improved DC plan behaviors due to advice, although they cannot rule out problems of reverse causality and selection. To complement the analysis of survey data, they design and implement a hypothetical choice experiment in which ALP respondents are asked to perform a portfolio allocation task, with or without advice. Their results show that unsolicited advice has no effect on investment behavior, in terms of behavioral outcomes. However, individuals who actively solicit advice ultimately improve performance, in spite of negative selection on financial ability. One interesting implication for policymakers is that expanding access to advice can have positive effects (particularly for the less financially literate); however, more extensive compulsory programs of financial counseling may be ultimately ineffective.
    Date: 2009–09
  13. By: Oleg Badunenko; Nataliya Barasinska; Dorothea Schäfer
    Abstract: This study questions the popular stereotype that women are more risk averse than men in their financial investment decisions. The analysis is based on micro-level data from large-scale surveys of private households in five European countries. In our analysis of investment decisions, we directly account for individuals' self-perceived willingness to take financial risks. The empirical evidence we provide only weakly supports the gender differences argument. We find that women are less likely to invest in risky financial assets. However, when the probability of investing is controlled for, males and females are found to allocate equal shares of their wealth to risky assets.
    Keywords: Gender, risk aversion, financial behavior
    JEL: G11 J16
    Date: 2009
  14. By: Carmen Herrero (U. de Alicante e IVIE); Juan D. Moreno-Ternero (U. de Málaga, Universidad Pablo de Olavide y CORE, Universit´e catholique de Louvain); Giovanni Ponti (U. de Alicante y Università di Ferrara)
    Abstract: This paper reports an experimental study on three well-known solutions for problems of adjudicating conflicting claims: the constrained equal awards, the proportional, and the constrained equal losses rules. We first let subjects play three games designed such that the unique equilibrium allocation coincides with the recommendation of one of these three rules. In addition, we let subjects play an additional game, that has the property that all (and only) strategy profiles in which players coordinate on the same rule constitute a strict Nash equilibrium. While in the first three games subjects’ play easily converges to the unique equilibrium rule, in the last game the proportional rule overwhelmingly prevails as a coordination device, especially when we frame the game as an hypothetical bankruptcy situation. We also administered a questionnaire to a different group of students, asking them to act as impartial arbitrators to solve (among others) the same problems played in the lab. Also in this case, respondents were sensitive to the framing of the questions, but the proportional rule was selected by the vast majority of respondents.
    Keywords: Claims problems, Proportional rule, Experimental Economics
    JEL: C91 D63 D74
    Date: 2009–11
  15. By: Andreas Glöckner (Max Planck Institute for Research on Collective Goods); Janet Kleber (Max Planck Institute for Research on Collective Goods); Stephan Tontrup (Max Planck Institute for Economics, Jena); Stefan Bechtold (ETH, Zurich)
    Abstract: The realization of market transactions often depends on decisions in groups in which members are anonymous and cannot communicate, but have interrelated outcomes. In a comprehensive study, we investigated the interaction of group effects, strategic effects and endowment effects in different group situations. We show that groups display an endowment effects for uncertain goods which is reduced by about 50% compared to the endowment effect in individuals in corresponding situations. In group situations with additional strategic incentives to overprice the endowment effect completely diminished. The strategic effects and group effects on pricing in group situations cannot be found for participants’ personal valuations of the good, whereas the endowment effect for personal valuations prevailed in both group conditions. This indicates that the endowment effect might be more fundamental than group effects and strategic effects. A paramorphic model for pricing in strategic group situations is suggested and practical implications are discussed.
    Keywords: Decision Making, Endowment Effects, Groups, Strategic Incentives
    Date: 2009–10
  16. By: Gharad Bryan (Yale University); Dean Karlan (Economic Growth Center,Yale University); Scott Nelson (Yale University)
    Abstract: We review the theoretical and empirical literature on commitment devices.A commitment device is any arrangement, entered into by an individual, with the aim of making it easier to fulfill his or her own future plans. We argue that there is growing empirical evidence supporting the proposition that people demand commitment devices and that these devices can change behavior. We highlight the importance of further research exploring soft commitment – those involving only psychological costs – and the welfare consequences of hard commitments – those involving actual costs – especially in the presence of bounded rationality.
    Keywords: consumer/household economics, institutional and behavioral economics
    JEL: D14
    Date: 2009–10
  17. By: Jianying Qiu (Department of Economics, University of Innsbruck); Eva-Maria Steiger (Stratigic Interaction Group, Max Planck Institute of Economics, Jena)
    Abstract: Economics and management science share the tradition of ordering risk aversion by ï¬tting the best expected utility (EU) model with a certain utility function to individual data, and then using the utility curvature for each individual as the sole index of risk attitude. (Cumulative) Prospect theory (CPT) has demonstrated various empirical deï¬ciencies of EU and introduced the weighting of probabilities as an additional component to capture risk attitude. However, if utility curvature and probability weighting were strongly correlated, the utility curvature in EU alone, while not properly describing risky behavior in general, would still capture most of the variance regarding degrees of risk aversion. This study shows, however, that such a strong correlation does not exist. Though, most individuals exhibit concave utility and convex probability weighting, the two components show no correlation. Thus neglecting one component entails a loss.
    Keywords: risk attitudes, cumulative prospect theory, experimental study
    JEL: C91 D81
    Date: 2009–11–02
  18. By: Gerlinde Fellner; Rupert Sausgruber; Christian Traxler
    Abstract: We run a large-scale natural field experiment to evaluate alternative strategies to en- force compliance with the law. The experiment varies the text of mailings sent to potential evaders of TV license fees. We find a strong alert effect of mailings, leading to a substantial increase in compliance. Among different mailing conditions a legal threat that stresses a high detection risk has a significant and highly robust deterrent effect. Neither appealing to morals nor imparting information about others' behavior enhances compliance. However, the information condition has a positive effect in municipalities where evasion is believed to be common. Overall, the economic model of crime performs remarkably well in explaining our data.
    Keywords: Field experiments, law enforcement, compliance, deterrence
    JEL: K42 C93
    Date: 2009–10
  19. By: Pablo Brañas-Garza (Universidad de Granada- España); Juan C. Cárdenas (Universidad de los Andes- Colombia); Máximo Rossi (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: There is not general consensus about if women are more or less generous than men. Although the number of papers supporting more generous females is a bit larger than the opposed it is not possible to establish any definitive and systematic gender bias. This paper provides new evidence on this topic using a unique experimental dataset. We used data from a field experiment conducted under identical conditions (and monetary payoffs) in 6 Latin American cities, Bogotá, Buenos Aires, Caracas, Lima, Montevideo and San José. Our dataset amounted to 3,107 experimental subjects who played the Trust Game. We will analyze the determinants of behavior of second movers, that is, what determines reciprocal generosity. In sharp contrast to previous papers we found that males are more generous than females. In the light of this result, we carried out a systematic analysis of individual features (income, education, age, etc.) for females and males separately. We found differential motivations for women and men. Third, we see that (individual) education enhances prosocial behavior. Lastly, we see that subjects’ expectations are crucial.
    Keywords: reciprocal altruism, gender, education
    JEL: C93 D64 J16
    Date: 2009–08
  20. By: Johanna Etner (CERSES - Centre de recherche sens, ethique, société - CNRS : UMR8137 - Université Paris Descartes - Paris V); Meglena Jeleva (GAINS - Université du Maine); Jean-Marc Tallon (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We review recent advances in the field of decision making under uncertainty or ambiguity.
    Keywords: Ambiguity, ambiguity aversion, uncertainty, decision.
    Date: 2009–10

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