nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2010‒04‒11
ten papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Preferences, Choice, Goal Attainment, Satisfaction:That’s Life? By Rowena Pecchenino;
  2. Is the Welfare State Sustainable? Experimental Evidence on Citizens’ Preferences for Redistribution By Ilja Neustadt; Peter Zweifel
  3. Mean, Median or Mode? A Striking Conclusion From Lottery Experiments By Kontek, Krzysztof
  4. Mandatory Sick Pay Provision: A Labor Market Experiment By Bauernschuster, Stefan; Duersch, Peter; Oechssler, Jörg; Vadovic, Radovan
  5. A Structural Analysis of Disappointment Aversion in a Real Effort Competition By Gill, David; Prowse, Victoria
  6. Psychological Pressure in Competitive Environments: Evidence from a Randomized Natural Experiment: Comment By Kocher, Martin G.; Lenz, Marc V.; Sutter, Matthias
  7. Affective Decision-Making: A Theory of Optimism-Bias By Anat Bracha; Donald J. Brown
  8. Social psychology and environmental economics : a new look at ex ante corrections of biased preference evaluation. By Nicolas Jacquemet; Alexander G. James; Stéphane Luchini; Jason F. Shogren
  9. The Provision of Public Goods with Positive Group Interdependencies By Werner Güth; Lauri Sääksvuori
  10. Coarse Thinking and Pricing a Financial Option By Siddiqi, Hammad

  1. By: Rowena Pecchenino (Economics,Finance and Accounting,National University of Ireland, Maynooth);
    Abstract: We make choices to achieve an objective. The objective is defined by an individual’s preferences. Subject to constraints, the objective is approached or achieved. Is this a good characterization of life? To answer this question we weaken one of the most basic assumptions of economics: individuals know their preferences. Instead we assume that an individual’s preferences are shaped and reshaped by his environment, experiences, expectations, and by exogenous events. In this model of individual self-discovery, preferences emerge, evolve, and change. These redefinitions change the future course of the individual’s life and reinterpret his past. They characterize a life lived.
    Keywords: Identity, Preferences, Choice, Life
    JEL: D01
    Date: 2010
  2. By: Ilja Neustadt (Socioeconomic Institute, University of Zurich); Peter Zweifel (Socioeconomic Institute, University of Zurich)
    Abstract: The sustainability of the welfare state ultimately depends on citizens’ preferences for income redistribution. They are elicited through a Discrete Choice Experiment performed in 2008 in Switzerland. Attributes are redistribution as GDP share, its uses (the unemployed, old-age pensioners, people with ill health etc.), and nationality of beneficiary. Estimated marginal willingness to pay (WTP) is positive among those who deem benefits too low, and negative otherwise. However, even those who state that government should reduce income inequality exhibit a negative WTP on average. The major finding is that estimated average WTP is maximum at 21% of GDP, clearly below the current value of 25%. Thus, the present Swiss welfare state does not appear sustainable.
    Keywords: Income redistribution, preferences, willingness to pay, welfare state, sustainability, discrete choice experiments,
    JEL: C35 C93 D63 H29
    Date: 2010–03
  3. By: Kontek, Krzysztof
    Abstract: This paper deals with estimating data from experiments determining lottery certainty equivalents. The paper presents the parametric and nonparametric results of the least squares (mean), quantile (including median) and mode estimations. The examined data are found to be positively skewed for low probabilities and negatively skewed for high probabilities. This observation leads to the striking conclusion that lottery valuations are only nonlinearly related to probability when means are considered. Such nonlinearity is not confirmed by the mode estimator in which case the most likely lottery valuations are close to their expected values. This means that the most likely behavior of a group is fully rational. This conclusion is a significant departure from one of the fundamental results concerning lottery experiments presented so far.
    Keywords: Lottery experiments; Least Squares; Quantile; Median; and Mode Estimators; Nonparametric and Parametric Estimators; Relative Utility Function; Prospect Theory.
    JEL: C51 D81 C91 C13 C14 C81 C21 C01 D87
    Date: 2010–03–30
  4. By: Bauernschuster, Stefan; Duersch, Peter; Oechssler, Jörg; Vadovic, Radovan
    Abstract: Sick-pay is a common provision in labor contracts. It insures workers against a sudden loss of income due to unexpected absences and helps them smooth consumption. Therefore, many governments find sick-pay socially desirable and choose to mandate its provision. But sick-pay is not without its problems. Not only it suffers from moral hazard but more importantly it is subject to a potentially serious adverse selection problem (higher sick-pay attracts sicker workers). In this paper we report results of an experiment which inquires to the extend and the severity of the adverse selection when sick-pay is voluntary versus when it is mandatory. Theoretically, mandating sick-pay may be effective in diminishing adverse selection. However, our data provide clean evidence that counteracting effects are more salient. Mandatory sick pay exacerbates moral hazard problems by changing fairness perceptions and, as a consequence, increases sick pay provision far above the mandatory levels.
    Keywords: sick pay; sick leave; experiment; gift exchange.
    JEL: C9 C7 J3
    Date: 2010–03–30
  5. By: Gill, David; Prowse, Victoria
    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. We predict that a disappointment averse agent, who is loss averse around her endogenous choice-acclimating 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. <br><br> Keynames; Disappointment aversion; Loss aversion; Reference-dependent preferences; Reference point adjustment; Expectations; Tournament; Real effort experiment; Slider task. <br><br> JEL Classification: C91; D03.
    Date: 2010–03–01
  6. By: Kocher, Martin G. (University of Munich); Lenz, Marc V. (University of Cologne); Sutter, Matthias (University of Innsbruck)
    Abstract: Apesteguia and Palacios-Huerta (forthcoming) report for a sample of 129 shootouts from various seasons in ten different competitions that teams kicking first in soccer penalty shootouts win significantly more often than teams kicking second. Collecting data for the entire history of six major soccer competitions we cannot replicate their result. Teams kicking first win only 53.4% of 262 shootouts in our data, which is not significantly different from random. Our findings have two implications: (1) Apesteguia and Palacios-Huerta's results are not generally robust. (2) Using specific subsamples without a coherent criterion for data selection might lead to non-representative findings.
    Keywords: tournament, first-mover advantage, psychological pressure, field experiment, soccer, penalty shootouts
    JEL: C93
    Date: 2010–03
  7. By: Anat Bracha (Federal Reserve Bank of Boston); Donald J. Brown (Department of Economics, Yale University)
    Abstract: Optimism-bias is inconsistent with the independence of decision weights and payoffs found in models of choice under risk, such as expected utility theory and prospect theory. Hence, to explain the evidence suggesting that agents are optimistically biased, we propose an alternative model of risky choice, affective decision-making, where decision weights -- which we label affective or perceived risk -- are endogenized. Affective decision making (ADM) is a strategic model of choice under risk, where we posit two cognitive processes: the "rational" and the "emotional" processes. The two processes interact in a simultaneous-move intrapersonal potential game, and observed choice is the result of a pure strategy Nash equilibrium in this potential game. We show that regular ADM potential games have an odd number of locally unique pure strategy Nash equilibria, and demonstrate this finding for affective decision making in insurance markets. We prove that ADM potential games are refutable, by axiomatizing the ADM potential maximizers.
    Keywords: Affective decision-making, Optimism-bias, ADM potential games, Demand for insurance
    JEL: D01 D81 G22
    Date: 2010–03
  8. By: Nicolas Jacquemet (Centre d'Economie de la Sorbonne - Paris School of Economics); Alexander G. James (University of Wyoming - Department of Economics); Stéphane Luchini (Groupe de Recherche en Economie Quantitative d'Aix-Marseille); Jason F. Shogren (University of Wyoming - Department of Economics)
    Abstract: Environmental economics is now a long standing field of research ; much has been learned on how environmental policy can use incentives to drive individual behaviors. Among the many examples, preference elicitation is the most discussed case in which incentives fail to accurately implement efficient behavior. Using this as our motivating example, herein we explore the cross-fertilization between environmental economics and social psychology. We first review how the lessons drawn from social psychology helped address the hypothetical bias issue. We then turn to the future of this process by focusing on how cheap talk scripts influence preference elicitation. Our experimental results shows CT scripts work through persuasion – i.e. changes mind, but poorly changes actions. in that sense, preference elicitation still lacks a way of making communication binding – i.e. a way to alter intrinsic motivation of subjects to behave truthfully.
    Keywords: Social psychology, commitment, persuasive communication, preference elicitation.
    JEL: C9 H4 Q5
    Date: 2010–02
  9. By: Werner Güth (Max Planck Insitute of Economics, Jena); Lauri Sääksvuori (Max Planck Insitute of Economics, Jena)
    Abstract: This article examines the nature of human behavior in a nested social dilemma referred to as the Spillover Game. Players are divided into two groups with positive production interdependencies. Based on theoretically derived opportunistic, local, and global optima, our experimental results demonstrate the importance of in-group beneficiaries over global efficiency. We find that the observed behavior is primarily determined by an imperfect conditional cooperation that prioritizes local level feedback. Results stress the importance of building strong local level commitment to encourage the provision of public goods with positive externalities.
    Keywords: Public good, experiment, groups, Spillover Game, social dilemma
    JEL: H41 C72 C91 C92
    Date: 2010–03–25
  10. By: Siddiqi, Hammad
    Abstract: Mullainathan et al [Quarterly Journal of Economics, May 2008] present a formalization of the concept of coarse thinking in the context of a model of persuasion. The essential idea behind coarse thinking is that people put situations into categories and the values assigned to attributes in a given situation are affected by the values of corresponding attributes in other co-categorized situations. We derive a new option pricing formula based on the assumption that the market consists of coarse thinkers as well as rational investors. The new formula, called the behavioral Black-Scholes formula is a generalization of the Black-Scholes formula. The new formula provides an explanation for the implied volatility skew puzzle in index options. In contrast with the Black-Scholes model, the implied volatility backed-out from the behavioral Black-Scholes formula is a constant. This finding suggests that the volatility skew (smile) may be a reflection of coarse thinking. That is, the skew is seen if rational investors are assumed to exist when actual investors are heterogeneous; coarse thinkers and rational investors.
    Keywords: Coarse Thinking; Financial Options; Rational Pricing. Implied Volatility; Implied Volatility Skew; Implied Volatility Smile; Black-Scholes Model
    JEL: G12 D00
    Date: 2009–12–30

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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