nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2009‒12‒19
seventeen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. What Comes to Mind By Nicola Gennaioli; Andrei Shleifer
  2. Expectations as Endowments: Reference-Dependent Preferences and Exchange Behavior By Keith M. Marzilli Ericson; Andreas Fuster
  3. The Role of Expectations and Gender in Altruism By Rigdon, Mary L.; Levine, Adam Seth
  4. Heuristics and Biases in Travel Mode Choice By Alessandro Innocenti; Patrizia Lattarulo; Maria Grazia Pazienza
  5. Preference reversals and disparities between willingness to pay and willingness to accept in repeated markets By Graham Loomes; Chris Starmer; Robert Sugden
  6. Discrimination in grading?: experimental evidence from primary school By Sprietsma, Maresa
  7. From men and machines to the organizational learning curve By Fioretti, Guido
  8. The Law of Impersonal Transactions: Meaning and Difficulties By Benito Arruñada
  9. Constructive Decision Theory By Blume, Lawrence; Easley, David; Halpern, Joseph Y.
  10. Noncognitive skills in economics: models, measurement, and empirical evidence By Thiel, Hendrik; Thomsen, Stephan L.
  11. Evolution of the Week By Amy Peng; Francis McKenna
  12. Do clubs foster provision success ? By Mohamed Ali Bchir; Marc Willinger
  13. Social Comparison and Performance: Experimental Evidence on the Fair Wage-Effort Hypothesis By Simon Gaechter; Christian Thoeni
  14. Social preferences under risk: an experimental analysis By Bradler, Christiane
  15. Delegated Portfolio Management and Risk Taking Behavior By José Luiz Barros Fernandes; Juan Ignacio Peña; Benjamin Miranda Tabak
  16. On the Truly Noncooperative Game of Island Life: Introducing a Unified Theory of Value & Evolutionarily Stable Island Economic Development Strategy By Funk, Matt
  17. On the Travesty of the Tragedy of the Commons: Hardin's Nontrivial Error By Funk, Matt

  1. By: Nicola Gennaioli; Andrei Shleifer
    Abstract: We present a model of intuitive inference, called “local thinking,” in which an agent combines data received from the external world with information retrieved from memory to evaluate a hypothesis. In this model, selected and limited recall of information follows a version of the respresentativeness heuristic. The model can account for some of the evidence on judgment biases, including conjunction and disjunction fallacies, but also for several anomalies related to demand for insurance.
    Keywords: Local thinking, representativeness, stereotypes, insurance.
    Date: 2009–02
  2. By: Keith M. Marzilli Ericson; Andreas Fuster
    Date: 2009–12–04
  3. By: Rigdon, Mary L.; Levine, Adam Seth
    Abstract: A central question in the study of altruism has been whether there is a systematic gender difference in giving behavior. Most experimental economics research has found that women are more generous than men. Evidence also suggests that gender differences depend upon the price of giving: males are more altruistic when the price of giving is low, while females are more altruistic when the price of giving is high. However, in the modified dictator game, a key variable in one’s decision to give is what one expects to receive. Systematic differences in those expectations may well contribute to systematic differences in altruistic behavior. We show that these expectations drive an important and widely reported result. When these expectations are homegrown, we replicate the finding. When expectations of receiving are uniform rather than homegrown, gender differences in price sensitivity disappear: males and females give equal amounts. This suggests that it is gender differences in expectations about others’ giving — not differences in tastes for fairness — that explains the previous results.
    Keywords: altruism; charitable giving; dictator game; gender differences; experiment
    JEL: D64 C91
    Date: 2009–12–09
  4. By: Alessandro Innocenti; Patrizia Lattarulo; Maria Grazia Pazienza
    Abstract: . This study applies experimental methods to analyze travel mode choice. Two different scenarios are considered. In the first scenario, subjects have to decide whether to commute by car or by metro. Metro costs are fixed, while car costs are uncertain and determined by the joint effect of casual events and traffic congestion. In the second scenario, subjects have to decide whether to travel by car or by bus, both modes in which costs are determined by the combination of chance and congestion. Subjects receive feedback information on the actual travel times of both modes. We find that individuals exhibit a marked preference for cars, are inclined to confirm their first choice and demonstrate travel mode stickiness. We conclude that travel mode choice is subject to heuristics and biases that lead to robust deviations from rational choice.
    Keywords: travel mode choice, learning, information, heuristics, cognitive biases.
    JEL: C91 D83 R41 R48
    Date: 2009–12
  5. By: Graham Loomes (Department of Economics, University of Warwick); Chris Starmer (School of Economics, University of Nottingham); Robert Sugden (School of Economics, University of East Anglia)
    Abstract: Previous studies suggest that two otherwise robust ‘anomalies’ – preference reversals and disparities between buying and selling valuations – are eroded when respondents participate in repeated markets. We report an experiment which investigates whether this is true when factors neglected in previous studies are controlled, and which distinguishes between anomalies revealed in the behaviour of individual market participants and anomalies revealed in market prices. Our results confirm the decay of buy/sell disparities, but not of preference reversal. This raises doubts about the hypothesis that, in general, repeated markets reveal anomaly-free preferences, even among the marginal traders who determine prices.
    Keywords: preference reversal, willingness to accept, willingness to pay, repeated market
    JEL: C91
    Date: 2009–11
  6. By: Sprietsma, Maresa
    Abstract: This paper studies the effect of teacher expectations on essay grades in an experimental setting. To this purpose, we randomly assign Turkish or German first names to a set of essays so that some teachers believe a given essay was written by a German native pupil, whereas others believe it was written by a pupil of Turkish origin. We find that essays obtain significantly lower grades and lower secondary school recommendations when bearing a Turkish sounding name. --
    Keywords: Experiment,discrimination,grading,pupils with migration,background
    JEL: I20
    Date: 2009
  7. By: Fioretti, Guido
    Abstract: Learning curves can arise out of routing problems, or out of sequencing problems, or a combination of both. In this paper, learning curves arising out of routing problems are investigated by means of numerical simulations, whereas some properties of the learning curves arising out of sequencing problems are analyzed by means of a computational model. In both cases, the arousal of organizational learning curves is conceived as the emergence of routines. In both cases, the conditions for this to occur are that (i) there are sufficiently many novel possibilities of arranging the units composing the organization, and that (ii) these units are sufficiently many and sufficiently flexible.
    Keywords: Learning Curves; Routing Problems; Sequencing Problems; Routines
    JEL: M11 D29 D85
    Date: 2009–11–29
  8. By: Benito Arruñada
    Abstract: Most economic interactions happen in a context of sequential exchange in which innocent third parties suffer information asymmetry with respect to previous “originative” contracts. The law reduces transaction costs by protecting these third parties but preserves some element of consent by property right holders to avoid damaging property enforcement—e.g., it is they as principals who authorize agents in originative contracts. Judicial verifiability of these originative contracts is obtained either as an automatic byproduct of transactions or, when these would have remained private, by requiring them to be made public. Protecting third parties produces a sort of legal commodity which is easy to trade impersonally, improving the allocation and specialization of resources. Historical delay in generalizing this legal commoditization paradigm is attributed to path dependency—the law first developed for personal trade—and an unbalance in vested interests, as luddite legal professionals face weak public bureaucracies.
    Keywords: Property rights, formalization, impersonal transactions.
    JEL: O17 K22 K23 L59
    Date: 2009–11
  9. By: Blume, Lawrence (Department of Economics, Cornell University, Ithaca, USA); Easley, David (Department of Economics, Cornell University, Ithaca, USA); Halpern, Joseph Y. (Department of Computer Science, Cornell University, Ithaca, USA)
    Abstract: Contemporary approaches to decision making describe a decision problem by sets of states and outcomes, and a rich set of acts: functions from states to outcomes over which the decision maker (DM) has preferences. Real problems do not come so equipped. It is often unclear what the state and outcome spaces would be. We present an alternative foundation for decision making, in which the primitive objects of choice are syntactic programs. We show that if the DM's preference relation on objects of choice satisfies appropriate axioms, then we can find states, outcomes, and an embedding of the programs into Savage acts such that preferences can be represented by EU in the Savage framework. A modeler can test for SEU behavior without having access to the subjective states and outcomes. We illustrate the power of our approach by showing that it can represent DMs who are subject to framing effects.
    Keywords: Decision theory, subjective expected utility, behavioral anomalies
    JEL: D01
    Date: 2009–12
  10. By: Thiel, Hendrik; Thomsen, Stephan L.
    Abstract: There is an increasing economic literature considering personality. This paper provides an overview on the role of these skills regarding three main aspects of economic analysis: measurement, theoretical modeling, and empirical estimates. Based on the relevant literature from different disciplines, the common psychometric measures used to assess personality are discussed. A recently proposed theoretical framework of human capital production takes personality explicitly into account. It is reviewed to clarify the understanding of crucial features of skill development. Based on these foundations, the main results of the empirical literature regarding noncognitive skills are classified along the research questions and summarized. --
    Keywords: noncognitive skills,personality,human capital formation,psychometric measures
    JEL: I20 I28 J12 J24 J31
    Date: 2009
  11. By: Amy Peng (Department of Economics, Ryerson University, Toronto, Canada); Francis McKenna (Ontario Ministry of Finance, Toronto, Canada)
    Abstract: The purpose of this paper is to provide an intuitive explanation of the emergence and evolution of the week based on a historical precedent draw from ancient Egypt. In this paper, we view the week as a coordinating social institution that was created to resolve a fundamental problem of society - coordinating market exchange. Artificial adaptive agents are used to simulate the interactions among farmers going to market. The results show that the length of the week that emerges depends on the chosen cost and benefit specifications and random interactions.
    Keywords: social institution, coordination games, agent based models
    JEL: D02 B52 C63
    Date: 2009–11
  12. By: Mohamed Ali Bchir; Marc Willinger
    Abstract: We report the results of an experiment on the provision of a step-level collective good. We compare subjects’ behavior in a public good game and in a club good game. In the club good game, players who contribute less than the amount required to become a member, do not benefit from the collective good. Compared to the benchmark step-level public good, we find that the introduction of a small membership fee has surprisingly strong effects. It increases significantly the provision success of the collective good.
    Date: 2009–12
  13. By: Simon Gaechter (University of Nottingham); Christian Thoeni (University of St. Gallen)
    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
  14. By: Bradler, Christiane
    Abstract: The literature on social preferences provides overwhelming evidence of departures from pure self-interest of individuals. Experiments show that people care about others' well-being and their relative standing. This paper investigates whether this type of behavior persists when risk comes into play. I devise an experiment which sheds light on the interrelation of risk and social preferences by measuring (1) individual risk preferences, (2) interpersonal risk preferences, and (3) social preferences under certainty. The results reveal that a large share of subjects choose to accept more risk or less potential gain than individually preferred in order to increase another subject's payoff. Further, the willingness to do so appears to be influenced by the need of the other person and her potential relative standing. Surprisingly, the results do not suggest that a subject's social behavior under risk is related to his social concerns exhibited under certainty. --
    Keywords: social preferences,risk,other-regarding behavior,inequality aversion
    JEL: C91 D63 D81
    Date: 2009
  15. By: José Luiz Barros Fernandes; Juan Ignacio Peña; Benjamin Miranda Tabak
    Abstract: Standard models of moral hazard predict a negative relationship between risk and incentives; however empirical studies on mutual funds present mixed results. In this paper, we propose a behavioral principal-agent model in the context of professional managers, focusing on active and passive investment strategies. Using this general framework, we evaluate how incentives affect the risk taking behavior of managers, using the standard moral hazard model as a special case; and solve the previous contradiction. Empirical evidence, based on a comprehensive world sample of 4584 mutual funds, gives support to our theoretical model.
    Date: 2009–12
  16. By: Funk, Matt
    Abstract: This discourse offers a solution to The Problem of Sustainable Economic Development on islands. This hypothesis offers a foundational, sub-game solution to The Island Survival Game, a counterintuitive, dominant economic development strategy for ‘islands’ (and relatively insular states). This discourse also tables conceptual building blocks, prerequisite analytical tools, and a guiding principle for The Earth Island Survival Game, a bounded delay supergame which models The Problem of Sustainable Economic Development at the global level. We begin our exploration with an introduction to The Principle of Relative Insularity, a postulate which informs ESS for ‘island’ and ‘continental’ players alike. Next, we model ‘island’ economic development with two bio-geo-politico-economic models and respective strategies: The Mustique Co. Development Plan, and The Prince Edward Island Federal-Provincial Program for Social and Economic Advancement. These diametrically opposed strategies offer an extraordinary comparative study. One island serves as a highly descriptive model for The Problem of Sustainable Economic Development; the other model informs ESS. The Island Survival Game serves as a remarkable learning tool, offering lessons which promote Darwinian fitness, resource holding power, self-sufficiency, and cooperative behaviour, by illuminating the illusive path toward sustainable economic development.
    Keywords: Non-cooperative games; evolutionary game theory; relative insularity; islands; tragedy of the commons; sustainable economic development; resource holding power; evolutionarily stable strategy; long distance dispersal
    JEL: O1 O13 C72
    Date: 2009–07–04
  17. By: Funk, Matt
    Abstract: Garrett Hardin’s "Tragedy of the Commons" remains one of the most frequently cited works across the spectrum of science — indeed, a visit to the website of the influential journal which published this paper in 1968 reveals that this revolutionary communique remains amongst its ‘top articles’. But Hardin's enduring, influential theoretical development presents a serious problem: it is not a single theory, but rather four major theories in a stormy sea of ill-conceived and untenable auxiliary conjecture. Moreover, the solid core of Hardin's central thesis was simply a restatement of a previously published theory, the promethean vision of William Forster Lloyd.
    Keywords: Tragedy of the Commons; William Forster Lloyd; Garrett Hardin; Scientific Method;
    JEL: Q50 B40 Q20
    Date: 2009–12–11

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.