nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2009‒11‒21
fifteen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. The Impact of Risk Aversion and Stress on the Incentive Effect of Performance Pay By C. Bram Cadsby; Fei Song; Francis Tapon
  2. Social Comparison and Performance: Experimental Evidence on the Fair Wage-Effort Hypothesis By Christian Thöni; Simon Gächter
  3. CSR, rationality and the ethical preferences of investors in a laboratory experiment By Costanza Consolandi; Alessandro Innocenti; Alessandro Vercelli
  4. The Ratio Bias Phenomenon : Fact or Artifact ? By Mathieu Lefebvre; Ferdinand Vieider; Marie-Claire Villeval
  5. Incentive Effects on Risk Attitude in Small Probability Prospects By Mathieu Lefebvre; Ferdinand Vieider; Marie-Claire Villeval
  6. Framing Effects as Violations of Extensionality By Sacha Bourgeois-Gironde; Raphaël Giraud
  7. Framing effects of risk communication in health-related decision making. Learning from a discrete choice experiment By Florence Nguyen; Marie-Odile Carrere; Nora Moumjid
  8. Learning Self-Control By S. Nageeb Ali
  9. A Computational Theory of Exchange: Willingness to pay, willingness to accept and the endowment effect By Lunn, Pete; Lunn, Mary
  10. Equilibrium Trust By Luca Anderlini; Daniele Terlizzese
  11. Consumer theory with bounded rational preferences By Gerasimou, Georgios
  12. Altruism and Social Integration. By Pablo Brañas-Garza; Ramón Cobo-Reyes; María Paz Espinosa; Natalia Jiménez; Jaromír Kovárík; Giovanni Ponti
  13. Sequential vs. Simultaneous Schelling Models: Experimental Evidence By Juan Miguel Benito; Pablo Brañas-Garza; Penélope Hernández; Juan A. Sanchis
  14. Personal identity. A theoretical and experimental analysis. By Fernando Aguiar; Pablo Brañas-Garza; María Paz Espinosa; Luis M. Miller
  15. Sweet Talk: A Theory of Persuasion By Di Maggio, Marco

  1. By: C. Bram Cadsby (Department of Economics, University of Guelph); Fei Song (Ted Rogers School of Business Management, Ryerson University); Francis Tapon (Department of Economics, University of Guelph)
    Abstract: We demonstrate that effectiveness of performance-contingent incentives is inversely related to individual risk-aversion levels through two mechanisms: 1) rational optimizing decisions about the amount of effort to supply when effort is positively correlated with risk exposure and 2) the possibly choke-inducing stress accompanying financial uncertainty. In two laboratory studies using real-effort tasks, we find a significant inverse relationship between productivity improvement under performance pay and risk-aversion levels. Moreover, we show that both mechanisms help explain this result. For about 25% of participants, performance actually deteriorates under performance pay, and the probability of such deterioration increases with risk aversion and stress.
    Keywords: risk aversion, performance pay, incentive, stress, choking under pressure, productivity, pay for performance, piece rate, experiment, compensation.
    JEL: C91 M52 J33
    Date: 2009
  2. By: Christian Thöni; Simon Gächter
    Abstract: We investigate the impact of wage comparisons for worker productivity. We present three studies which all use three-person gift-exchange experiments. Consistent with Akerlof and Yellen's (1990) fair wage-effort hypothesis we find that disadvantageous wage discrimination leads to lower efforts while advantageous wage discrimination does not increase efforts on average. Two studies allow us to measure wage comparison effects at the individual level. We observe strongly heterogeneous wage comparison effects. We also find that reactions to wage discrimination can be attributed to the underlying intentions of discrimination rather than to payoff consequences.
    Keywords: fair wage-effort hypothesis, wage comparison, gift exchange, horizontal fairness, discrimination
    JEL: J31 J71 C91 C92
    Date: 2009–11
  3. By: Costanza Consolandi; Alessandro Innocenti; Alessandro Vercelli
    Abstract: This experimental study aims to clarify to what extent and in which direction investors react to CSR (Corporate Social Responsibility) initiatives meant to upgrade the ethical standards of firms beyond the minimal requirements of law. Subjects in the laboratory were invited to invest their endowment in a portfolio of financial assets. We provided information on the expected returns of each stock and on its inclusion in an ethical index, or exclusion from it. Our findings show that subjects’ behavior appears to be a function not only of their individual pay-offs but also of the information on the ethical standards of the firms issuing stocks. Most of them, however, did not show a fully irrational behavior as they consistently correlated the share of stocks with their expected returns. We may conclude that the sizeable reaction of our sample’s investors to the inclusion of a stock in the ethical index, or its exclusion from it, is the fruit of a deliberate choice.
    Keywords: ethical stock indexes, Corporate Social Responsibility, investors, experiment.
    JEL: G30 M14 Q56
    Date: 2009–08
  4. By: Mathieu Lefebvre (University of Liège, CREPP; Boulevard du Rectorat, 7 Bâtiment 31, boîte 39, 4000 Liège, Belgium); Ferdinand Vieider (University Lyon 2, Lyon, F-69007, France; CNRS, GATE, 93, Chemin de Mouilles Ecully, F- 69130, France, and DIW, Berlin, Germany); Marie-Claire Villeval (University Lyon 2, Lyon, F-69007, France; CNRS, GATE, 93, Chemin de Mouilles Ecully, F- 69130, France, IZA, Bonn, Germany, and CCP, Aarhus, Denmark)
    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: D81 I19
    Date: 2009
  5. By: Mathieu Lefebvre (University of Liège, CREPP; Boulevard du Rectorat, 7 Bâtiment 31, boîte 39, 4000 Liège, Belgium); Ferdinand Vieider (University Lyon 2, Lyon, F-69007, France; CNRS, GATE, 93, Chemin de Mouilles Ecully, F- 69130, France, and DIW, Berlin, Germany); Marie-Claire Villeval (University Lyon 2, Lyon, F-69007, France; CNRS, GATE, 93, Chemin de Mouilles Ecully, F- 69130, France, IZA, Bonn, Germany, and CCP, Aarhus, Denmark)
    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
  6. By: Sacha Bourgeois-Gironde (IJN - Institut Jean-Nicod - CNRS : UMR8129 - Ecole Normale Supérieure de Paris - ENS Paris - Ecole des Hautes Etudes en Sciences Sociales (EHESS)); Raphaël Giraud (CRESE - Université de Franche-Comté : EA)
    Abstract: Framing effects occur when different descriptions of the same decision problem give rise to divergent decisions. They can be seen as a violation of the decisiontheoretic version of the principle of extensionality (PE). The PE in logic means that two logically equivalent sentences can be substituted salva veritate. We explore what this notion of extensionality becomes in decision contexts. Violations of extensionality may have rational grounds. Based on some ideas proposed by the psychologist Craig McKenzie and colleagues, we contend that framing effects are justified when the selection of one particular frame conveys choice relevant information. We first discuss this idea from a philosophical point of view, and proceed next to formalize it first in the context of the Bolker–Jeffrey decision theory. Finally, we extend the previous analysis to non-expected utility theories using the Biseparable Preference model introduced by Ghirardato and Marinacci (2001) and therefore show that the analysis is independent of the assumptions of Bayesian decision theory.
    Keywords: framing-effects; extensionality; information processing; Bolker-Jeffrey decision model; biseparable preferences
    Date: 2009
  7. By: Florence Nguyen (University of Lyon, Lyon, F-69003, France; CNRS, UMR 5824, GATE, Ecully, F-69130, France; ENS LSH, Lyon, F-69007, France ; Centre Leon Berard, Lyon, F-69003, France); Marie-Odile Carrere (University of Lyon, Lyon, F-69003, France; CNRS, UMR 5824, GATE, Ecully, F-69130, France; ENS LSH, Lyon, F-69007, France ; Centre Leon Berard, Lyon, F-69003, France); Nora Moumjid (University of Lyon, Lyon, F-69003, France; CNRS, UMR 5824, GATE, Ecully, F-69130, France; ENS LSH, Lyon, F-69007, France ; Centre Leon Berard, Lyon, F-69003, France)
    Abstract: Background How to communicate uncertainty is a major concern in medicine and in health economics. We aimed at studying the framing effects of risk communication on stated preferences in a discrete choice experiment (DCE) performed to elicit women’s preferences for Hormone Replacement Therapy. Methods Two versions of the questionnaire were randomly administered to respondents. Multiple risks were expressed as natural frequencies using either a constant reference class (Design 1) or variable reference classes (Design 2). We first tested whether Design 1 would impose a lower cognitive burden than Design 2. We then examined whether the two designs resulted in different utility model estimates. Results Design 1 improved consistency (monotonicity and stability). However, rates of dominance or intransitive responses did not differ across designs. Design 1 decreased women’s sensitivity to the risk of fractures and increased their sensitivity to the risk of breast cancer as compared to all other attributes. Discussion Framing effects of risk communication on stated preferences may be a major problem in the design of DCEs. More research is needed to determine whether our findings are replicable and to further investigate the normative question of how to improve risk communication in health-related decision-making.
    Keywords: Framing effects, Risk communication, Discrete choice experiment
    JEL: C12 I19 D83
    Date: 2009
  8. By: S. Nageeb Ali
    Date: 2009–11–10
  9. By: Lunn, Pete; Lunn, Mary
    Abstract: We present a theory of exchange that provides an alternative explanation for the endowment effect. Unlike standard neoclassical theories and Prospect Theory, our approach is not based on preference structure, but on adaptive responses to the problem of exchange when value is uncertain. We combine assumptions from perceptual and economic theory into a highly generalised model. Agents who maximise surplus but perceive uncertainty in the value of goods, set willingness to accept (WTA) above willingness to pay (WTP). The disparity increases with the perceived uncertainty of value. We show also how feedback over repeated exchanges may have heuristic value in learning to set optimal WTA and WTP. Our model receives some support from empirical studies of exchange.
    Keywords: exchange/uncertainty/willingness to accept/willingness to pay
    Date: 2009–11
  10. By: Luca Anderlini; Daniele Terlizzese
    Date: 2009–11–05
  11. By: Gerasimou, Georgios
    Abstract: The neoclassical consumer maximizes utility and makes choices by completely preordering the feasible alternatives and weighing when indifferent. The consumer studied in this paper chooses by weighing when indifferent and also when indecisive, without necessarily preordering the alternatives or exhausting her budget. Preferences therefore need not be complete, transitive or non-satiated but are assumed strictly convex and "adaptive". The latter axiom is new and parallels that of ambiguity aversion in choice under uncertainty.
    Keywords: preferences: incomplete; intransitive; convex; adaptive; representation; demand.
    JEL: D11 D01
    Date: 2009–01–28
  12. By: Pablo Brañas-Garza (Universidad de Granada); Ramón Cobo-Reyes (Universidad de Granada); María Paz Espinosa (The University of the Basque Country); Natalia Jiménez (Universidad de Granada); Jaromír Kovárík (The University of the Basque Country); Giovanni Ponti (Università di Ferrara and Universidad de Alicante)
    Abstract: We report on a two-stage experiment in which i) we first elicit the social network within a section of undergraduate students and ii) we then measure their altruistic attitudes by means of a standard Dictator game. We observe that more socially integrated subjects are also more altruistic, as betweenness centrality and reciprocal degree are positively correlated with the level of giving, even after controlling for framing and social distance, which have been shown to significantly affect giving in previous studies. Our findings suggest that social distance and social integration are complementary determinants of altruistic behavior.
    Keywords: Altruism, centrality, social network experiments.
    JEL: C93 D85
    Date: 2009–11–16
  13. By: Juan Miguel Benito (Universidad Pública de Navarra (Spain)); Pablo Brañas-Garza (Department of Economic Theory and Economic History, University of Granada.); Penélope Hernández (Universitat de Valéncia and ERI-CES (Spain)); Juan A. Sanchis (Universitat de Valéncia and ERI-CES (Spain))
    Abstract: This work shows the results of experiments where subjects play the Schelling's spatial proximity model (1969, 1971a), in which choices are made sequentially, and a variation of it where the decision-making is simultaneous. The results of the sequential experiments are identical to Schelling's prediction: subjects finish in a segregated equilibrium. Likewise, in the variant of simultaneous decision the same result is reached: segregation. Subjects’ heterogeneity generates a series of focal points in the first round; the subjects in order to locate themselves use these focal points immediately, and as a result, the segregation takes place again.
    Keywords: Schelling models, economic experiments, segregation
    Date: 2009–09–29
  14. By: Fernando Aguiar (IESA-CSIC); Pablo Brañas-Garza (Universidad de Granada); María Paz Espinosa (The University of the Basque Country); Luis M. Miller (University of Oxford)
    Abstract: This paper aims to analize the role of personal identity in altruism. To this end, it starts by reviewing critically the growing literature on economics and identity. Considering the ambiguities that the concept of social identity poses, our proposal focuses on the concept of personal identity. A formal model to study how personal identity enters in individuals' utility function when facing a Dictator Game decision is then presented. Finally, this 'identity-based' utility function is studied experimentally. The experiment allows us to study the main parameters of the model, suggesting that we should move with caution when attributing identities to individuals.
    Keywords: personal identity, dictator game, game theory, experiments.
    Date: 2009–11–16
  15. By: Di Maggio, Marco
    Abstract: This paper introduces a model of sweet talk in which a seller may acquire verifiable information and selectively disclose it to a buyer to negotiate a deal. We start by analyzing a model with common priors in which the seller generates information for two reasons: a trading motive and a profit motive that is, to make trade possible or to increase the gains from it. There exists a negotiation region in which the seller continues to reveal information even if trading is already profitable. We extend the model, allowing for different prior beliefs about the value of the object, arguing that a complementarity between the seller's confidence and the precision of his information endogenously arises. Appointing an optimistic salesman may be costly because he may destroy profitable trading opportunities. We also allow the seller to choose in which market to trade: a matching market with a fixed price or a haggling market. Our model also provides a testable difference between a model of trading with homogenous priors and one with heterogeneous priors and finds application in understanding contracts as reference points.
    Keywords: persuasion games; haggling; negotiation; bargaining; heterogeneous priors; overconfidence; consummate and perfunctory performance; verifiable information.
    JEL: D86 C78 D82 D83
    Date: 2009–11–15

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