nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2010‒03‒13
eleven papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Do consumers make too much effort to save on cheap items and too little to save on expensive items? experimental results and implications for business strategy By Azar, Ofer H.
  2. Trust in Second Life By John Duffy
  3. Committing to Incentives: Should the Decision to Sanction be Revealed or Hidden? By Charlotte Klempt; Kerstin Pull
  4. Wage Transparency and Performance: A Real-Effort Experiment By Ben Greiner; Axel Ockenfels; Peter Werner
  5. Reciprocity in Teams: a Behavioral Explanation for Unpaid Overtime By Natalia
  6. Measuring the Willingness to Pay to Avoid Guilt: Estimation using Equilibrium ad Stated Belief Models By Charles Bellemare; Alexander Sebald; Martin Strobel
  7. Coexistence and dynamics of overconfidence and strategic incentives. By Bosquet, Katrien; de Goeij, Peter; Smedts, Kristien
  8. The Role of Early-Life Conditions in the Cognitive Decline due to Adverse Events Later in Life By van den Berg, Gerard J.; Deeg, Dorly J. H.; Lindeboom, Maarten; Portrait, France
  9. Agent-based Simulation of Cooperative Innovation By Flavio Lenz-Cesar; Almas Heshmati
  10. Switching Rates and the Asymptotic Behavior of Herding Models By Albrecht Irle; Jonas Kauschke; Thomas Lux; Mishael Milakovic
  11. Evolutionary theories of cultural change. By Wenseleers, Tom; Dewitte, Siegfried; De Block, Andreas

  1. By: Azar, Ofer H.
    Abstract: The article presents an experiment that illustrates a behavior that I denote “relative thinking.” Subjects in the experiment revealed the minimal price difference for which they were willing to spend 20 minutes and go to a cheaper store. Five different goods and nine different prices were used in a between-subjects design. Subjects showed striking positive correlation between the good’s price and their valuation of their time as it was reflected in their decisions. The experiment suggests that subjects think about both the relative and the absolute price differences, even though according to economic theory they should only consider the absolute price difference. Quantifying the effect suggests that consumers’ valuation of their time is approximately proportional to the square root of the price of the good they want to purchase. Studying economics courses seems to mitigate relative thinking. Several alternative explanations for the observed behavior are suggested and discussed, but the conclusion is that only the relative thinking explanation can account for the experimental results. Finally, several implications of relative thinking for business strategy are discussed.
    Keywords: Relative thinking; Consumer behavior; Behavioral economics
    JEL: M30 D10 M10 C91
    Date: 2009
  2. By: John Duffy
    Abstract: Some issues are raised with regard to conducting economic decision-making experiments in virtual worlds. The issues are illustrated via a visit to an experimental laboratory on Second Life. Some suggestions for addressing these issues are proposed.
    JEL: C72 C92 C93 C99
    Date: 2008–02
  3. By: Charlotte Klempt (Max Planck Institute of Economics, Jena); Kerstin Pull (Eberhard-Karls-Universität Tübingen, Faculty of Economics and Business Administration)
    Abstract: Sanctions are widely used to promote compliance in principal-agent-relationships. While there is ample evidence confirming the predicted positive incentive effect of sanctions, it has also been shown that imposing sanctions may in fact reduce compliance by crowding-out intrinsic motivation. We add to the literature on the hidden costs of control by showing that these costs are restricted to situations where principals ex ante reveal their decision to sanction low compliance. If this decision is not revealed and agents do not know whether they will be sanctioned or not in case of low compliance, we do not find evidence of crowding-out - not even in those cases where agents firmly believe that they will be sanctioned in case of low performance.
    Keywords: Intrinsic Motivation, Monetary Incentives, Job Performance
    JEL: C72 C91
    Date: 2010–03–03
  4. By: Ben Greiner; Axel Ockenfels; Peter Werner
    Abstract: We study the effect of wage changes on performance under varying contract schemes in a real-effort experiment. Without transparency about peer wages, an increase or decrease of wages does not affect performance. With transparency about peer wages, higher paid workers tend to work more accurately, and lower paid workers shirk more if wages are piece rate rather than flat.
    Keywords: labor market experiments, real effort, social comparison, wage schemes
    JEL: C91 J33 M52
    Date: 2010–03–01
  5. By: Natalia (University of Padua)
    Abstract: Relying on the relevance of other-regarding preferences in workplaces, the paper provides a behavioral explanation for the puzzle of unpaid overtime. It characterizes the optimal compensation schemes offered by the employer which induce overtime by exploiting workers’ horizontal reciprocity under both symmetric and asymmetric information about workers’ action. Finally, the paper shows that reciprocity furnishes a rationale for the composition of teams of reciprocal workers when the production technology induces negative externality among the employees’ efforts.
    Keywords: Overtime, Horizontal Reciprocity, Negative Reciprocity.
    Date: 2010–02
  6. By: Charles Bellemare; Alexander Sebald; Martin Strobel
    Abstract: We estimate structural models of guilt aversion to measure the population level of willingness to pay (WTP) to avoid feeling guilt by letting down another player. We compare estimates of WTP under the assumption that higher-order beliefs are in equilibrium (i.e. consistent with the choice distribution) with models estimated using stated beliefs which relax the equilibrium requirement. We estimate WTP in the later case by allowing stated beliefs to be correlated with guilt aversion, thus controlling for a possible source of a consensus effect. All models are estimated using data from an experiment of proposal and response conducted with a large and representative sample of the Dutch population. Our range of estimates suggests that responders are willing to pay between 0.40 and 0.80 Euro to avoid letting down proposers by 1 Euro. Furthermore, we find that WTP estimated using stated beliefs is substantially overestimated (by a factor of two) when correlation between preferences and beliefs is not controlled for. Finally, we find no evidence that WTP is significantly related to the observable socio-economic characteristics of players.
    Keywords: Guilt aversion, Willingness to pay, Equilibrium and stated beliefs models
    JEL: C93 D63 D84
    Date: 2010
  7. By: Bosquet, Katrien; de Goeij, Peter; Smedts, Kristien
    Abstract: We present a two-stage model for the decision making process of financial analysts when issuing earnings forecasts. In the first stage, financial analysts perform a fundamental earnings analysis in which they are, potentially, subject to a behavioral bias. In the second stage analysts can adjust their earnings forecast in line with their strategic incentives. The paper analyzes this decision process throughout the forecasting period and explains the underlying drivers. Using quarterly earnings forecasts, we document that throughout the entire forecasting period financial analysts overweight their private information. At the same time, financial analysts behave strategically. They issue initial optimistic forecasts by strategically inflating their forecast. In their last revision, they become pessimistic and strategically deflate their earnings forecast, which creates the possibility of a positive earnings surprise. This analysis of the dynamics of the decision process pro- vides empirical evidence on the coexistence of overconfidence and strategic incentives.
    Keywords: financial analysts; earnings forecasts; overconfidence; conflicts of interest;
    Date: 2009–10
  8. By: van den Berg, Gerard J. (University of Mannheim); Deeg, Dorly J. H. (VU University Amsterdam); Lindeboom, Maarten (VU University Amsterdam); Portrait, France (VU University Amsterdam)
    Abstract: Cognitive functioning of elderly individuals may be affected by events such as the loss of a (grand)child or partner or the onset of a serious chronic condition, and by negative economic shocks such as job loss or the reduction of pension benefits. It is conceivable that the impact of such events is stronger if conditions early in life were adverse. In this paper we address this using a Dutch longitudinal database that follows elderly individuals for more than 15 years and contains information on demographics, socio-economic conditions, life events, health, and cognitive functioning. We exploit exogenous variation in early-life conditions as generated by the business cycle. We also examine to what extent the cumulative effect of consecutive shocks later in life exceeds the sum of the separate effects, and whether economic and health shocks later in life reinforce each other in their effect on cognitive functioning.
    Keywords: cognitive functioning, business cycle, bereavement, developmental origins, retirement, health, long-run effects, dementia
    JEL: I12 I10 J14 E32
    Date: 2010–02
  9. By: Flavio Lenz-Cesar; Almas Heshmati (TEMEP, School of Industrial and Management Engineering College of Engineering, Seoul National University)
    Abstract: This paper introduces an agent-based simulation model representing the dynamic processes of cooperative R&D in the manufacturing sector of South Korea. Firms¡¯ behaviors were defined according to empirical findings on a dataset from the internationally standardized Korean Innovation Survey in 2005. Simulation algorithms and parameters were defined based on the determinants on firms¡¯ likelihood to participate in cooperation with other firms when conducting innovation activities. The calibration process was conducted to the point where artificially generated scenarios were equivalent to the one observed in the real world. The aim of this simulation game was to create a basic implementation that could be extended to test different policies strategies in order to observe sector responses (including cross-sector spillovers) when promoting cooperative innovation.
    Keywords: Collaborative R&D, Agent-base simulation, Korean innovation survey
    JEL: C15 D21 D85
    Date: 2010–01
  10. By: Albrecht Irle; Jonas Kauschke; Thomas Lux; Mishael Milakovic
    Abstract: Markov chains have experienced a surge of economic interest in the form of behavioral agent-based models that aim at explaining the statistical regularities of financial returns. We review some of the relevant mathematical facts and show how they apply to agent-based herding models, with the particular goal of establishing their asymptotic behavior because several studies have pointed out that the ability of such models to reproduce the stylized facts hinges crucially on the size of the agent population (typically denoted by n), a phenomenon that is also known as n-dependence. Our main finding is that n-(in)dependence traces back to both the topology and the velocity of information transmission among heterogeneous financial agents
    Keywords: Markov chains, agent-based finance, herding, N-dependence
    JEL: C10 D84 D85 G19
    Date: 2010–02
  11. By: Wenseleers, Tom; Dewitte, Siegfried; De Block, Andreas
    Abstract: Over the last decades, many scholars have hinted at the possibility of a grand evolutionary synthesis, which would revolutionize the social sciences by bringing genetic and cultural evolution under a common umbrella. Yet, the many perceived idiosyncrasies of cultural evolution have long posed an obstacle for such an interdisciplinary synthesis. New discoveries in biology as well as recent developments in theoretical evolutionary biology, however, show that the alleged differences between genetic and cultural evolution may be smaller than previously suspected. In addition, important applications of cultural evolution theory have started to appear in diverse fields within the social sciences. A general evolutionary theory of cultural change, therefore, finally seems to be within reach.
    Keywords: cultural evolution;
    Date: 2010

This nep-cbe issue is ©2010 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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