nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2010‒01‒30
twelve papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Social choice among complex objects By Luigi Marengo; Simona Settepanella
  2. Risk in a Simple Temporal Framework for Expected Utility Theory and for SKAT, the Stages of Knowledge Ahead Theory By Robin Pope; Reinhard Selten
  3. Cognitive hierarchies and the centipede game By Bottero, Margherita
  4. Bounded Rationality as Deliberation Costs: Theory and Evidence from a Pricing Field Experiment in India By Dean E. Spears
  5. Rational and Boundedly Rational Behavior in Sender-receiver Games By Massimiliano Landi; Domenico Colucci
  6. Screening, Competition, and Job Design By Bartling, Björn; Fehr, Ernst; Schmidt, Klaus M.
  7. Altruism and Career Concerns By Shchetinin, Oleg
  8. The neuro-scientific foundations of the exploration-exploitation dilemma. By Daniella Laureiro-Martínez; Stefano Brusoni; Maurizio Zollo
  9. Colonel Blotto’s Top Secret Files By Ayala Arad; Ariel Rubinstein
  10. Asking for Help: Survey And Experimental Evidence on Financial Advice And Behavior Change By Angela A. Hung; Joanne Yoong
  11. Cognitive Issues in Policy Making By Akira IIDA
  12. Dynamic Treatment Effect Analysis of TV Effects on Child Cognitive Development By Fali Huang; Myoung-jae Lee

  1. By: Luigi Marengo; Simona Settepanella
    Abstract: We present a geometric model of social choice when the latter takes place among bundles of interdependent elements, that we will call objects. We show that the outcome of the social choice process is highly dependent on the way these bundles are formed. By bundling and unbundling the same set of constituent elements an authority has the power of determine the social outcome. We provide necessary and sufficient conditions under which a social outcome may be a local or global optimum for a set of objects, and we show that, by appropriately redefining the set of objects, intransitive cycles may be broken and the median voter may be turned into a loser.
    Keywords: social choice; object construction power; agenda power; intransitive cycles; median voter
    JEL: D71 D72
    Date: 2009–01–13
  2. By: Robin Pope; Reinhard Selten
    Abstract: The paper re-expresses arguments against the normative validity of expected utility theory in Robin Pope (1983, 1991a, 1991b, 1985, 1995, 2000, 2001, 2005, 2006, 2007). These concern the neglect of the evolving stages of knowledge ahead (stages of what the future will bring). Such evolution is fundamental to an experience of risk, yet not consistently incorporated even in axiomatised temporal versions of expected utility. Its neglect entails a disregard of emotional and financial effects on well-being before a particular risk is resolved. These are arguments are complemented with an analysis of the essential uniqueness property in the context of temporal and atemporal expected utility theory and a proof of the absence of a limit property natural in an axiomatised approach to temporal expected utility theory. Problems of the time structure of risk are investigated in a simple temporal framework restricted to a subclass of temporal lotteries in the sense of David Kreps and Evan Porteus (1978). This subclass is narrow but wide enough to discuss basic issues. It will be shown that there are serious objections against the modification of expected utility theory axiomatised by Kreps and Porteus (1978, 1979). By contrast the umbrella theory proffered by Pope that she has now termed SKAT, the Stages of Knowledge Ahead Theory, offers an epistemically consistent framework within which to construct particular models to deal with particular decision situations. A model by Caplin and Leahy (2001) will also be discussed and contrasted with the modelling within SKAT (Pope, Leopold and Leitner 2006).
    JEL: B50 D81 D87 I10
    Date: 2009–11
  3. By: Bottero, Margherita (Dept. of Economics, Stockholm School of Economics)
    Abstract: In this work, I extend the normal form cognitive hierarchy model (Camerer et al. (2004)) to a class of nite two-person extensive form games. I study two versions of such a model: the rst is as faithful as possible to the normal form assumptions, while the second modi es them slightly. In both cases I consider the possibility of bayesian updating. I apply the two versions to the centipede game, testing empirically the relevant predictions. The results show that the cognitive hierarchy model outperforms backward induction in predicting experimental behavior. Moreover, modifying the original assumptions improves our understanding of the data.
    Keywords: centipede game; cognitive hierarchy; paradox backward induction; experimental data analysis
    JEL: C72 C92 D81
    Date: 2010–01–19
  4. By: Dean E. Spears (Princeton University)
    Abstract: How might bounded rationality shape decisions to spend? A field experiment verifies a theory of bounded rationality as deliberation costs that can explain findings from previous experiments on pricing in developing countries. The model predicts that (1) eliminating deliberation costs will increase purchasing at a higher price without impacting behavior at a lower price, (2) bounded rationality has certain greater effects on poorer people, and (3) deliberation costs can suppress screening by prices. Each prediction is confirmed by an experiment that sold soap in rural Indian villages. The experiment interacted assignment to different subsidized prices with a treatment that eliminated marginal deliberation costs. The results suggest implications of bounded rationality for theory and social policy.
    Keywords: Rationality, price, India
    JEL: C01 D19 E30 H31 C93
    Date: 2009–10
  5. By: Massimiliano Landi; Domenico Colucci (Singapore Management University)
    Abstract: We consider a signalling game in which a population of receivers decide on the outcome by majority rule, sender and receivers have conflicting interests, and there is uncertainty about both players’ types. We model players rationality along the lines of recent findings in behavioral game theory. We characterize the structure of the equilibria in the reduced game so obtained. We find that all pure strategy equilibria are consistent with successful attempts to mislead the receivers, and relate them to the message bin Laden sent on the eve of the 2004 US Presidential elections. The same result holds if we allow for some uncertainty about the sign of the correlation between the sender’s and the receivers’ payoffs.
    Keywords: bin Laden, sender receiver games, US Presidential elections, signalling game, payoffs
    JEL: C70 D72 D70
    Date: 2010–01
  6. By: Bartling, Björn; Fehr, Ernst; Schmidt, Klaus M.
    Abstract: In recent decades, many firms offered more discretion to their employees, often increasing the productivity of effort but also leaving more opportunities for shirking. These “high-performance work systems” are difficult to understand in terms of standard moral hazard models. We show experimentally that complementarities between high effort discretion, rent-sharing, screening opportunities, and competition are important driving forces behind these new forms of work organization. We document in particular the endogenous emergence of two fundamentally distinct types of employment strategies. Employers either implement a control strategy, which consists of low effort discretion and little or no rent-sharing, or they implement a trust strategy, which stipulates high effort discretion and substantial rent-sharing. If employers cannot screen employees, the control strategy prevails, while the possibility of screening renders the trust strategy profitable. The introduction of competition substantially fosters the trust strategy, reduces market segmentation, and leads to large welfare gains for both employers and employees.
    Keywords: job design; high-performance work systems; screening; reputation; competition; trust; control; social preferences; complementarities
    JEL: C91 D86
    Date: 2010–01
  7. By: Shchetinin, Oleg (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: The paper studies the impact of altruism on Agent’s motivation in the career concerns model. I show that career concerns incentive is lessened by altruism. As a consequence, altruism can decrease effort, though conventional wisdom suggests that effort should always be higher for the more altruistic worker. This means that not only intrinsic motivation can be crowded by extrinsic incentives; crowding effect can go in the opposite direction as well. This emphasizes a new channel of interaction between intrinsic and extrinsic motivation. The paper also studies the effect of altruism on wage. Interestingly, the model provides an example of winner’s blessing and shows that ambitions can hinder altruistic relationship. The model can be naturally applied to the workplace relationship and to the local public good provision.<p>
    Keywords: Extrinsic and intrinsic motivation; Career concerns; Altruism; Crowding-out
    JEL: D64 D82 M52
    Date: 2010–01–22
  8. By: Daniella Laureiro-Martínez (KITeS, Universita' Bocconi, Milano, Italy); Stefano Brusoni (KITeS, Universita' Bocconi, Milano, Italy); Maurizio Zollo (KITeS, Universita' Bocconi, Milano, Italy)
    Abstract: This paper aims to leverage neuroscience and psychology to contribute to the development of a microfoundation for an important managerial dilemma: the organizational ability to continuously explore novel domains of activity and exploit the current knowledge base with increasing efficacy. The dilemma for firms is at how to search for sustained competitive advantage. The conflicting objectives of exploration and exploitation compete for scarce resources, among which managerial attention is possibly the most critical. We propose that some recent neuroscientific findings could help us uncover the individual-level foundations of the organizational ability to both explore and exploit. Critical to our analysis is an understanding of how individuals allocate their limited time to alternative uses and vary the scope of their attention. We build on recent evidence on the way that individual learning modes are altered, in order to extend the discussion on organizational exploration and exploitation.
    Date: 2009–04
  9. By: Ayala Arad; Ariel Rubinstein
    Date: 2010–01–20
  10. 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: 2010–01
  11. By: Akira IIDA (Policy Research Institute)
    Abstract: In any policy making exercise, whether it is about matters of economic, social or political problems, both domestic and international, such as diplomatic relations or national defense, there are various cognitive issues that affect the design and implementation of the policy. Without correct cognition of the actuality and history regarding the problems in question, or without correct cognition of the problems that might arise in the process of the policy implementation, the policy making exercise is bound to fail. Yet, in the history of economics, sociology or the study of the diplomacy or of national defense, philosophical inquiry about “cognitive issues in policy making� has been very poor. More specifically, on one hand, epistemologists have hesitated to go into this kind of inquiry, since policy making always embraces questions of values or other subjective judgments, and hence, objectivity is not assured. On the other hand, the attention of the economist, sociologist, or analysts on diplomacy and national defense has focused on the analysis of relationships among the economic, social, diplomatic or defense factors, while neglecting the cognitive issues in policy making itself. Policy makers should have far better knowledge in this area, but they have paid scarce attention to it, despite their policy failures, caused by their failures to recognize the factors that really mattered in the case in question
    Keywords: policy making, cognitive issues, epistemology theory, paradigm theory
    JEL: E61 E66 E60
    Date: 2010–01
  12. By: Fali Huang; Myoung-jae Lee (Singapore Management University)
    Abstract: We investigate whether TV watching at ages 6-7 and 8-9 affects cognitive development measured by math and reading scores at ages 8-9 using a rich childhood longitudinal sample from NLSY79. Dynamic panel data models are estimated to handle the unobserved child-specific factor, endogeneity of TV watching, and dynamic nature of the causal relation. A special emphasis is put on the last aspect where TV watching affects cognitive development which in turn affects the future TV watching. When this feedback occurs, it is not straightforward to identify and estimate the TV effect. We adopt estimation methods available in the biostatistics literature which can deal with the feedback feature; we also apply the “standard� econometric panel data IV approaches. Overall, for math score at ages 8-9, we find that watching TV for more than two hours per day during ages 6-9 has a negative total effect mostly due to a large negative effect of TV watching at the younger ages 6-7. For reading score, there are evidences that TV watching between 2-4 hours per day has a positive effect whereas the effect is negative outside this range. In both cases, however, the effect magnitudes are economically small.
    Keywords: TV watching, treatment effect, panel data, dynamic model, Granger causality
    JEL: C33 I20 J13 E60
    Date: 2010–01

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