nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2010‒04‒17
twenty papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Equilibrium fictions : a cognitive approach to societal rigidity By Hoff, Karla; Stiglitz, Joseph E.
  2. Overconfidence, Experience, and Professionalism: An Experimental Study By Lukas Menkhoff; Maik Schmeling; Ulrich Schmidt
  3. Overconfident Behavior In Informational Cascades: An Eye-Tracking Study By Alessandro Innocenti; Alessandra Rufa; Jacopo Semmoloni
  4. Loss Aversion and Intertemporal Choice: A Laboratory Investigation By Oxoby, Robert J.; Morrison, William G.
  5. Fears and realisations of employment insecurity By Andy Dickerson; Francis Green
  6. Why Volunteer? Evidence on the Role of Altruism, Image, and Incentives By Jeffrey Carpenter; Caitlin Knowles Myers
  7. Comparing the Effectiveness of Regulation and Pro-Social Emotions to Enhance Cooperation: Experimental Evidence from Fishing Communities in Colombia By Maria Claudia Lopez; James J. Murphy; John M. Spraggon; John K. Stranlund
  8. Testing Enforcement Strategies in the Field: Legal Threat, Moral Appeal and Social Information By Gerlinde Fellner; Rupert Sausgruber; Christian Traxler
  9. Beware of Broken Windows!First Impressions in Public-good Experiment By Martin Beckenkamp; Christoph Engel; Andreas Glöckner; Bernd Irlenbusch; Heike Hennig-Schmidt; Sebastian Kube; Michael Kurschilgen; Alexander Morell; Andreas Nicklisch; Hans-Theo Normann; Emanuel Towfigh
  10. Asymmetric Enforcement of Cooperation in a Social Dilemma By Nikos Nikiforakis; Hans-Theo Normann; Brian Wallace
  11. Hidden Costs of Control: Three Repetitions and an Extension By Matteo Ploner; Katrin Schmelz; Anthony Ziegelmeyer
  13. Turning the Lab into Jeremy Bentham’s Panopticon. The Effect of Punishment on Offenders and Non-Offenders By Christoph Engel; Bernd Irlenbusch
  14. Modelling Noise and Imprecision in Individual Decisions By Graham Loomes; José Luis Pinto-Prades; Jose Maria Abellan-Perpinan; Eva Rodriguez-Miguez
  15. Sticky Rebates: Rollback Rebates Induce Non-Rational Loyalty in Consumers – Experimental Evidence By Alexander Morell; Andreas Glöckner; Emanuel Towfigh
  16. Inductive reasoning about unawareness By Simon Grant; John Quiggin
  17. A Matter of Interpretation: Bargaining over Ambiguous Contracts By Simon Grant; Jeff Kline; John Quiggin
  18. On a dubious theory of cross-country differences in intelligence By Kevin Denny
  19. Are Attitudes Towards Economic Risk Heritable? Analyses Using the Australian Twin Study of Gambling By Le, Anh Tram; Miller, Paul W.; Slutske, Wendy S.; Martin, Nicholas G.
  20. The Dynamics of Cooperation in Group Lending - A Microfinance Experiment By Peter Werner

  1. By: Hoff, Karla; Stiglitz, Joseph E.
    Abstract: This paper assesses the role of ideas in economic change, combining economic and historical analysis with insights from psychology, sociology and anthropology. Belief systems shape the system of categories ("pre-confirmatory bias") and perceptions (confirmatory bias), and are themselves constrained by fundamental values. The authors illustrate the model using the historical construction of racial categories. Given the post-Reformation fundamental belief that all men had rights, colonial powers after the 15th century constructed ideologies that the colonized groups they exploited were naturally inferior, and gave these beliefs precedence over other aspects of belief systems. Historical work finds that doctrines of race came into their own in the colonies that became the United States after, not before, slavery; that out of the"scandal of empire"in India emerged a"race theory that cast Britons and Indians in a relationship of absolute difference"; and that arguments used by the settlers in Australia to justify their policies toward the Aborigines entailed in effect the expulsion of the Aborigines from the human race. Racial ideology shaped categories and perceptions in ways that the authors show can give rise to equilibrium fictions. In the framework of this paper, technology, contacts with the outside world, and changes in power and wealth matter not just directly but because they can lead to changes in ideology.
    Keywords: Cultural Policy,Race in Society,Educational Sciences,Cultural Heritage&Preservation,Ethics&Belief Systems
    Date: 2010–02–01
  2. By: Lukas Menkhoff; Maik Schmeling; Ulrich Schmidt
    Abstract: This paper presents an online-experiment on overconfidence in the context of financial markets. Our subject pool consists of institutional investors, investment advisors and individual investors, all of them being registered users of a large online platform for market sentiment data. Due to their registration, several socioeconomic characteristics of participants can be controlled for in our analysis. It turns out that there are stable differences in overconfidence between the three investor groups. Moreover, investment experience and age have a significant impact on the degree of overconfidence which goes surprisingly in opposite direction. We argue that these results have important implications for studies analyzing the impact of experience on behavior in (financial) markets
    Keywords: Market behavior, overconfidence, experience, professionalism
    JEL: G1 D81 F30
    Date: 2010–03
  3. By: Alessandro Innocenti; Alessandra Rufa; Jacopo Semmoloni
    Abstract: This paper investigates the validity of the Dual Process theory by using eye-tracking methods to trace the process of attention during a non-preference-based problem solving task, i.e. informational cascades. In this setting, gaze direction may convey evidence on how automatic detection is modified or sustained by controlled search. We provide laboratory evidence that gaze direction is driven by cognitive biases, such as overconfidence. In particular, we find a significant statistical correlation between first fixations and subjects’ actual choices. Our results suggest that attentional strategies are not necessarily consistent with efficient patterns of information collecting.
    Keywords: dual process theory, eye-tracking, cognitive biases, overconfidence, informational cascades.
    JEL: C91 D82 D83 D87
    Date: 2009–09
  4. By: Oxoby, Robert J. (University of Calgary); Morrison, William G. (Wilfrid Laurier University)
    Abstract: We present results from a laboratory study of loss aversion in the context of intertemporal choice. We investigate whether the provision of (windfall) endowments results in different elicited discount rates relative to subjects who earn income or earn and retain the income for a period before making intertemporal decisions. We hypothesize that loss aversion in an intertemporal choice yields higher discount rates among subjects earning and retaining. Our results support this hypothesis: among subjects who earn and retain their income we elicit substantially higher discount rates relative to those experiencing a windfall gain.
    Keywords: intertemporal choice, discount rates, experiments
    JEL: C91 D91
    Date: 2010–03
  5. By: Andy Dickerson (Department of Economics, The University of Sheffield Author-Person=pdi125); Francis Green
    Abstract: We investigate the validity of subjective data on expectations of job loss and on the probability of re-employment consequent on job loss, by examining associations between expectations and realisations. We find that subjective expectations data reveal private information about subsequent realisations of both job loss and of subsequent re-employment. As predictors of subsequent job loss, the expectations data perform better with numerical descriptors than with ordinal verbal descriptors. On average, employees overestimate the chance of losing their job; while they underestimate the difficulty of finding another job as good as the currently-held one. We recommend that survey items on employment insecurity should be explicit about each risk under investigation, and utilise a cardinal probability scale with discrete numerical descriptors.
    Keywords: Job insecurity, Expectations, Employability
    JEL: C81 D84 J01 J6
    Date: 2009–11
  6. By: Jeffrey Carpenter; Caitlin Knowles Myers
    Abstract: We examine motivations for prosocial behavior using new data on volunteer firefighters that contain a dictator-game based measure of altruism, surveyed measures of other behavioral factors, and call records that provide an objective measure of time spent volunteering. Controlling for a variety of other explanations, we find that the decision to volunteer is positively correlated with altruism as well as with concern for social reputation or image.” Moreover, by utilizing variation in the presence and level of small stipends paid to the firefighters, we find that the positive effect of monetary incentives declines with image concerns, supporting a prediction that extrinsic incentives can crowd out image motivation for prosocial behavior.
    Keywords: volunteer, altruism, reputation, extrinsic motivation, firefighter
    JEL: C93 D12 J22 D64 D82
    Date: 2010
  7. By: Maria Claudia Lopez (School of Environmental and Rural Studies, Bogota Colombia); James J. Murphy (Department of Economics, University of Alaska, Anchorage); John M. Spraggon; John K. Stranlund (Department of Resource Economics, University of Massachusetts, Amherst)
    Abstract: This paper presents the results from a series of framed field experiments conducted in fishing communities off the Caribbean coast of Colombia. The goal is to investigate the relative effectiveness of exogenous regulatory pressure and pro-social emotions in promoting cooperative behavior in a public goods context. The random public revelation of an individual’s contribution and its consequences for the rest of the group leads to significantly higher public good contributions and social welfare than regulatory pressure, even under regulations that are designed to motivate fully efficient contributions.
    Keywords: public goods, field experiments, pro-social emotions, social dilemma, regulation, enforcement.
    JEL: C93 H41 Q20 Q28
    Date: 2009–08
  8. By: Gerlinde Fellner (Department of Economics, Vienna University of Economics and Business); Rupert Sausgruber (Department of Public Economics, University of Innsbruck); Christian Traxler (Max Planck Institute for Research on Collective Goods,Bonn)
    Abstract: We run a large-scale natural field experiment to evaluate alternative strategies to enforce compliance with the law. The experiment varies the text of mailings sent to potential evaders of TV license fees. We find a strong alert effect of mailings, leading to a substantial increase in compliance. Among different mailing conditions a legal threat that stresses a high detection risk has a significant and highly robust deterrent effect. Neither appealing to morals nor imparting information about others' behavior enhances compliance. However, the information condition has a positive effect in municipalities where evasion is believed to be common. Overall, the economic model of crime performs remarkably well in explaining our data.
    Keywords: Field experiments, law enforcement, compliance, deterrence
    JEL: K42 C93
    Date: 2009–09
  9. By: Martin Beckenkamp; Christoph Engel (Max Planck Institute for Research on Collective Goods); Andreas Glöckner; Bernd Irlenbusch; Heike Hennig-Schmidt; Sebastian Kube; Michael Kurschilgen; Alexander Morell; Andreas Nicklisch; Hans-Theo Normann; Emanuel Towfigh
    Abstract: Broken Windows: the metaphor has changed New York and Los Angeles. Yet it is far from undisputed whether the broken windows policy was causal for reducing crime. In a series of lab experiments we show that first impressions are indeed causal for cooperativeness in three different institutional environments: absent targeted sanctions; with decentralised punishment; with decentralised punishment qualified by the risk of counterpunishment. In all environments, the effect of first impressions cannot be explained with, but adds to, participants’ initial level of benevolence. Mere impression management is not strong enough to stabilise cooperation though. It must be combined with some risk of sanctions.
    Keywords: Broken Windows, Impression Management, Criminal Policy, Public Good Experiment
    JEL: C91 D63 H41 K14 K42
    Date: 2009–07
  10. By: Nikos Nikiforakis (Department of Economics, The University of Melbourne); Hans-Theo Normann (Department of Economics, Goethe University Frankfurt); Brian Wallace (Department of Economics & ELSE, University College London)
    Abstract: We use a public-good experiment to analyze behavior in a decentralized asymmetric punishment institution. The institution is asymmetric in the sense that players differ in the effectiveness of their punishment. At the aggregate level, we observe remarkable similarities between outcomes in asymmetric and symmetric punishment institutions. Controlling for the average punishment effectiveness of the institutions, we find that asymmetric punishment institutions are as effective in fostering cooperation and as efficient as symmetric institutions. At the individual level, we find that players with higher punishment effectiveness contribute similar amounts to the public account, but have higher earnings and punish more than their weak counterparts.
    JEL: C92 D70 H41
    Date: 2009–06
  11. By: Matteo Ploner (University of Trento, Department of Economics, Computable and Experimental Economics Laboratory); Katrin Schmelz (Max Planck Institute of Economics, Strategic Interaction Group, Jena); Anthony Ziegelmeyer (Max Planck Institute of Economics, Strategic Interaction Group, Jena)
    Abstract: We report three repetitions of Falk and Kosfeld's (2006) low and medium control treatments with 364 subjects. Each repetition employs a sample drawn from a standard subject pool of students and demographics vary across samples. Our results largely conflict with those of the original study. We mainly observe hidden costs of control of low magnitude that lead to low-trust principal-agent relationships. Our subjects were asked, at the end of the experimental session, to complete a questionnaire in which they had to state their work motivation in hypothetical scenarios. Our questionnaires are identical to the ones administered in Falk and Kosfeld's (2006) questionnaire study. In contrast to the game play data, our questionnaire data are similar to those of the original questionnaire study. In an attempt to solve this puzzle, we report an extension with 228 subjects where performance-contingent earnings are absent i.e. both principals and agents are paid according to a flat participation fee. We observe that hidden costs outweigh benefits of control which shows that control aversion is more prevalent under hypothetical than under real incentives. Still, in the low control treatment, we observe much weaker negative responses to control in our extension than in the original study. This observation, the fact that the original study uses real incentives, and preliminary findings on the relationship between demographics and the degree of control aversion lead us to conclude that Falk and Kosfeld's (2006) experimental regularities originate from the characteristics of their subjects.
    Keywords: Control, Demographics, Experimental Economics, Incentives, Intrinsic Motivation
    JEL: C81 C91 M52 C81 C91 M52
    Date: 2010–02–18
  12. By: Daniele Nosenzo (University of Nottingham)
    Abstract: This study uses a three-person gift-exchange game experiment to examine the impact of pay comparisons on effort behavior. We compare effort choices made in a treatment where coworkers’ wages are secret with effort choices made in two ‘public wages’ treatments. The two ‘public wages’ treatments differ in whether co-workers’ wages are chosen by an employer, or are fixed exogenously by the experimenter. We find that pay comparison information has an overall detrimental impact on effort choices: employees respond less favorably to the wage offers made by the employer when they receive information about the wage paid to the co-worker as compared to the case where co-workers’ wages are secret. These effects are particularly pronounced in the treatment where the level of the co-worker’s wage is fixed exogenously.
    Keywords: social comparisons; wage comparisons; gift exchange; experiments
    JEL: C91 C92 J31
    Date: 2010–03
  13. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn); Bernd Irlenbusch (London School of Economics and Max Planck Institute for Research on Collective Goods)
    Abstract: The most famous element in Bentham’s theory of punishment, the Panopticon Prison, expresses his view of the two purposes of punishment, deterrence and special prevention. We investigate Bentham’s intuition in a public goods lab experiment by manipulating how much information on punishment experienced by others is available to would-be offenders. Compared with the tone that Jeremy Bentham set, our results are non-expected: If would-be offenders learn about contributions and punishment of others at the individual level, they contribute much less to the public project. Our results confirm the special prevention effect but show that the deterrence effect is smaller the more information on individual punishment is available.
    Keywords: Punishment, Deterrence, Special Prevention, Jeremy Bentham, Experiment, Public Good
    JEL: C91 H41 K14 K42
    Date: 2010–02
  14. By: Graham Loomes (University of Warwick); José Luis Pinto-Prades (Department of Economics,Universidad Pablo de Olavide); Jose Maria Abellan-Perpinan (U. de Murcia); Eva Rodriguez-Miguez (U. de Vigo)
    Abstract: When individuals take part in decision experiments, their answers are typically subject to some degree of noise / error / imprecision. There are different ways of modelling this stochastic element in the data, and the interpretation of the data can be altered radically, depending on the assumptions made about the stochastic specification. This paper presents the results of an experiment which gathered data of a kind that has until now been in short supply. These data strongly suggest that the 'usual' (Fechnerian) assumptions about errors are inappropriate for individual decision experiments. Moreover, they provide striking evidence that core preferences display systematic departures from transitivity which cannot be attributed to any 'error' story.
    Keywords: Error Imprecision Preferences Transitivity
    JEL: C44 C91
    Date: 2010–02
  15. By: Alexander Morell (Max Planck Institute for Research on Collective Goods); Andreas Glöckner (Max Planck Institute for Research on Collective Goods); Emanuel Towfigh (Max Planck Institute for Research on Collective Goods)
    Abstract: We investigate whether and how targeted rebates impede rational switching of consumers from an incumbent to an outside option (e.g., market entrant). In a real trading problem, participants repeatedly buy tokens and can enter a target rebate scheme. Buying in a rebate scheme considerably reduces the likelihood that they switch to a higher-payoff outside option later. We conclude that targeted rebates might have an underestimated potential to foreclose consumer markets. The stickiness effect increases with the increasing number of previous buying in the rebate scheme, but not with the size of the rebate. Prospect Theory can partially account for these effects.
    Date: 2009–08
  16. By: Simon Grant (Department of Economics, Rice University); John Quiggin (Department of Economics, University of Queensland)
    Abstract: We develop a model of games with awareness that allows for differential levels of awareness. We show that, for the standard modal logical interpretations of belief and awareness, a player cannot believe there exist propositions of which he is unaware. Nevertheless, we argue that a boundedly rational individual may regard the possibility that there exist propositions of which she is unaware as being supported by inductive reasoning, based on past experience and consideration of the limited awareness of others. In this paper, we provide a formal representation of inductive reasoning in the context of a dynamic game with awareness. We show that, given differential awareness over time and between players, individuals can derive inductive support for propositions expressing their own unawareness.
    JEL: D80 D82
    Date: 2009–06
  17. By: Simon Grant (Department of Economics, Rice University); Jeff Kline (Department of Economics, University of Queensland); John Quiggin (Department of Economics, University of Queensland)
    Abstract: We present a formal treatment of contracting in the face of ambiguity. The central idea is that boundedly rational individuals will not always interpret the same situation in the same way. More specifically, even with well defined contracts, the precise actions to be taken by each party to the contract might be disputable. Taking this potential for dispute into account, we analyze the effects of ambiguity on contracting. We find that risk averse agents will engage in ambiguous contracts for risk sharing reasons. We provide an application where ambiguity motivates the use of a liquidated damages contract.
    Keywords: ambiguity, bounded rationality, expected uncertain utility, incomplete contracts, liquidated damages.
    JEL: D80 D82
    Date: 2009–11
  18. By: Kevin Denny (University College Dublin)
    Abstract: Kanazawa (2007) offers an explanation for the variation across countries of average intelligence. It is based on the idea human intelligence is a domain specific adaptation and that both temperature and the distance from some putative point of origin are proxies for the degree of novelty that humans in a country have experienced. However the argument ignores many other considerations and is a priori weak and the data used questionable. A particular problem is that in calculating distances between countries it implicitly assumes that the earth is flat. This makes all the estimates biased and unreliable.
    Keywords: intelligence, measurement error, international comparisons
    Date: 2009–10–01
  19. By: Le, Anh Tram (Curtin University of Technology); Miller, Paul W. (Curtin University of Technology); Slutske, Wendy S. (University of Missouri-Columbia); Martin, Nicholas G. (Queensland Institute of Medical Research)
    Abstract: This study employs multiple regression models based on DeFries and Fulker (1985), and a large sample of twins, to assess heritability in attitudes towards economic risk, and the extent to which this heritability differs between males and females. Consistent with Cesarini, Dawes, Johannesson, Lichtenstein and Wallace (2009), it is found that attitudes towards risk are moderately heritable, with about 20 percent of the variation in these attitudes across individuals being linked to genetic differences. This value is less than one-half the estimates reported by Zyphur, Narayanan, Arvey and Alexander (2009) and Zhong, Chew, Set, Zhang, Xue, Sham, Ebstein and Israel (2009). While females are more risk averse than males, there is no evidence that heritability in attitudes towards risk differs between males and females. Even though heritability is shown to be important to economic risk taking, the analyses suggest that multivariate studies of the determinants of attitudes towards risk which to not take heritability into consideration still provide reliable estimates of the partial effects of other key variables, such as gender and educational attainment.
    Keywords: gender, heritability, risk
    JEL: G00 J01
    Date: 2010–03
  20. By: Peter Werner
    Abstract: We investigate the dynamics of borrower behavior in a microfinance experiment in which subjects are jointly responsible for credit repayment. Although cooperation levels are generally high, moral hazard problems persist among borrowers. Moreover, the path dependency of decisions mitigates the insurance effect of joint liability. We compare two conversion mechanisms from joint to individual liability. First, an active choice of the joint liability contract does not systematically increase cooperation. Second, conversion based on repayment success tends to have a detrimental impact on cooperation among the remaining joint liability borrowers.
    Keywords: microfinance, group lending, individual lending, social preferences
    JEL: O16 G21 C92 H41
    Date: 2010–03–11

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