nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2010‒05‒02
sixteen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Do sporty people have access to higher job quality ? By Charlotte Cabane
  2. Herding of Institutional Traders By Stephanie Kremer
  3. Explaining the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions? By Snowberg, Erik; Wolfers, Justin
  4. Income Aspirations and Cooperation: Experimental Evidence By Dalton, P.S.
  5. Which Words Bond? An Experiment on Signaling in a Public Good Game By Serra Garcia, M.; Damme, E.E.C. van; Potters, J.J.M.
  6. Impure Altruism in Dictators’ Giving By Korenok Oleg; Edward L. Millner; Laura Razzolini
  7. The Benefit of Anonymity in Public Goods Games By David Reinstein; David Hugh-Jones
  8. Measuring the Willingness to Pay to Avoid Guilt: Estimation using Equilibrium and Stated Belief Models By Charles Bellemare; Alexander Sebald; Martin Strobel
  9. Choosing your object of benevolence: a field experiment on donation options By Aretz, Bodo; Kube, Sebastian
  10. Estimation of Peaked Densities Over the Interval [0,1] Using Two-Sided Power Distribution: Application to Lottery Experiments By Kontek, Krzysztof
  11. Decision Making in the Pension Fund Board Room: An Experiment With Dutch Pension Fund Trustees By Dalen, H.P. van; Henkens, K.; Koedijk, C.G.; Slager, A.M.H.
  12. Decisions with Endogenous Prference Parameters By Dalton, P.S.; Ghosal, S.
  13. Behavioral Decisions and Welfare By Dalton, P.S.; Ghosal, S.
  14. Risk and Rationalization – The role of affect and cognitive dissonance for sexual risk taking By Mannberg, Andréa
  15. The Behavioral Economics of Crime and Punishment By Sanjit Dhami; Ali al-Nowaihi
  16. An analysis of bounded rationality in judicial litigations: the case with loss/disappointment averses plaintiffs By Langlais, Eric

  1. By: Charlotte Cabane (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: It is known that non-cognitive skills are an important determinant of success in life. However, their returns are not simple to measure and, as a result, only relatively few studies have dealt with this empirical question on the labour market. We consider sports practice as a way to improve or signal non-cognitive skills endowment. Therefore, the analysis of its impact on the labour market integration allows us to evaluate the returns of some specific non-cognitive skills. We test the hypothesis that sporty people -ceteris paribus- have access to higher quality of job thanks to the non-cognitive skills they have or they are supposed to have. Using objective measures of job quality, we demonstrate that being sporty does matter and that its effect cannot be award to any other extracurricular activities.
    Keywords: Job quality, sport, non-cognitive skills.
    Date: 2010–03
  2. By: Stephanie Kremer
    Abstract: This paper sheds new light on herding of institutional investors by using a unique and superior database that identifies every transaction of financial institutions. First, the analysis reveals herding behavior of institutions. Second, the replica- tion of the analysis with low-frequent and anonymous transaction data, on which the bulk of literature is based, indicates an overestimation of herding by previous studies. Third, our results suggest that herding by large financial institutions is not intentional but results from sharing the same preference and investment style. Fourth, a panel analysis shows that herding on the sell side in stocks is positively related to past returns and past volatility while herding on the buy side is nega- tively related to past returns. In contrast to the literature, this indicates that large financial institutions do not show positive feedback strategies.
    Keywords: Investor Behavior, Institutional Trading, Stock Prices
    JEL: G11 G24 C23
    Date: 2010–04
  3. By: Snowberg, Erik (California Institute of Technology); Wolfers, Justin (Wharton School, University of Pennsylvania)
    Abstract: The favorite-longshot bias describes the longstanding empirical regularity that betting odds provide biased estimates of the probability of a horse winning – longshots are overbet, while favorites are underbet. Neoclassical explanations of this phenomenon focus on rational gamblers who overbet longshots due to risk-love. The competing behavioral explanations emphasize the role of misperceptions of probabilities. We provide novel empirical tests that can discriminate between these competing theories by assessing whether the models that explain gamblers' choices in one part of their choice set (betting to win) can also rationalize decisions over a wider choice set, including compound bets in the exacta, quinella or trifecta pools. Using a new, large-scale dataset ideally suited to implement these tests we find evidence in favor of the view that misperceptions of probability drive the favorite-longshot bias, as suggested by Prospect Theory.
    Keywords: pricing under risk, probability weighting, compound lotteries, favorite-longshot bias
    JEL: D49 G12 L83
    Date: 2010–04
  4. By: Dalton, P.S. (Tilburg University, Center for Economic Research)
    Abstract: This article is the first attempt to study the empirical link between income aspirations and cooperation in a one shot public good game. By combining experimental with survey data, we find evidence that the more frustrated people are with their income, the lower is their propensity to cooperate with foreigners and compatriots. The quantitative effect is remarkable: participants who are most frustrated are 46 percent more likely to free-ride on foreigners than those who are satisfied with their income.
    Keywords: Social Preferences;Aspirations;Cooperation;Maslow
    JEL: D01 D6 H4 C9
    Date: 2010
  5. By: Serra Garcia, M.; Damme, E.E.C. van; Potters, J.J.M. (Tilburg University, Center for Economic Research)
    Abstract: We compare signaling by words and actions in a one-shot 2-person public good game with private information. The informed player, who knows the exact return from contributing, can signal by contributing first (actions) or by sending a costless message (words). Words can be about the return or about her contribution decision. Theoretically, actions lead to fully e¢ cient contributions. Words can be as influential as actions, and thus elicit the uninformed player's contribution, but allow the informed player to free-ride. The exact language used is not expected to matter. Experimentally, we find that words can be as influential as actions. Free-riding, however, does depend on the language: the informed player free-rides less when she talks about her contribution than when she talks about the returns.
    Keywords: Information transmission;costly signaling;communication;experiment.
    JEL: C72 D82 D83
    Date: 2010
  6. By: Korenok Oleg (Department of Economics, VCU School of Business); Edward L. Millner (Department of Economics, VCU School of Business); Laura Razzolini (Department of Economics, VCU School of Business)
    Abstract: We design an experiment to test whether the behavior of dictators can be rationalized by the impurely altruistic utility function. By giving the recipients an endowment of varying levels, we create an environment that allows for observable differences in behavior depending upon whether pure or impure altruism is the primary motivation. We find that the behavior of 66 percent of the dictators can be rationalized by the impurely altruistic utility function, while only 16 percent of the dictators make choices that are consistent with the purely altruistic utility function.
    Keywords: Impure Altruism, Axioms of Revealed Preferences, Dictator Game
    JEL: C91 D01 D64 H30 H41
    Date: 2010–04
  7. By: David Reinstein; David Hugh-Jones
    Abstract: Previous work has found that in social dilemmas, the selfish always free-ride, while others will cooperate if they expect their peers to do so as well. Outcomes may thus depend on conditional cooperators’ beliefs about the number of selfish types. An early round of the game may be played anonymously, so that contributions cannot be traced back to particular individuals. By protecting low contributors from potential sanctions, this encourages selfish types to reveal their true preferences in their play. We offer a simple model illustrating when revelation of types can increase contributions, and when only an anonymous game can separate types. As a proof of concept, we run a laboratory experiment involving a two-stage public goods game with an exclusion decision between stages. An anonymous first stage led to significantly higher stage-two cooperation than a revealed first stage, a slower decline across the 15 repetitions, unusually high final-stage contributions relative to previous work, and greater profits. Statistical analysis shows that the anonymous first stage reduced uncertainty about types, and this preserved cooperation and led to greater efficiency. Our results suggest that customs such as anonymous church donations may play an important role in building social trust.
    Date: 2010–04–21
  8. By: Charles Bellemare (Département d’économique, Université Laval); Alexander Sebald (Department of Economics, University of Copenhagen); Martin Strobel (Department of Economics, Maastricht University)
    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: 2010–02
  9. By: Aretz, Bodo; Kube, Sebastian
    Abstract: In a large natural field experiment, we explore the effect of providing donors with the opportunity to choose the target country for their donations. We find that only a small fraction of donors use the option, which might reflect a reluctance to consider tradeoffs when those concern important, 'protected', values. However, those donors who choose their object of benevolence give significantly more, even when controlling for their donation history. In view of the latest research on identifable-victim effects, our findings underline that less inclusive targets can evoke more intense feelings than more inclusive ones stressing that altruistic motivation seems to be mediated by aroused empathetic emotions. --
    Keywords: charitable giving,identifiable victim,field experiment,altruism,contingent valuation
    JEL: D64 C93
    Date: 2010
  10. By: Kontek, Krzysztof
    Abstract: This paper deals with estimating peaked densities over the interval [0,1] using two-sided power distribution (Kotz, van Dorp, 2004). Such data were encountered in experiments determining certainty equivalents of lotteries (Kontek, 2010). This paper summarizes the basic properties of the two-sided power distribution (TP) and its generalized form (GTP). The GTP maximum likelihood estimator, a result not derived by Kotz and van Dorp, is presented. The TP and GTP are used to estimate certainty equivalent densities in two data sets from lottery experiments. The obtained results show that even a two-parametric TP distribution provides more accurate estimates than the smooth three-parametric generalized beta distribution GBT (Libby, Novick, 1982) in one of the considered data sets. The three-parametric GTP distribution outperforms GBT for these data. The results are, however, the very opposite for the second data set, in which the data are greatly scattered. The paper demonstrates that the TP and GTP distributions may be extremely useful in estimating peaked densities over the interval [0,1] and in studying the relative utility function.
    Keywords: Density Distribution; Maximum Likelihood Estimation; Lottery experiments; Relative Utility Function.
    JEL: C51 C16 C46 C91 C13 C02 C21 C01 D87
    Date: 2010–04–28
  11. By: Dalen, H.P. van; Henkens, K.; Koedijk, C.G.; Slager, A.M.H. (Tilburg University, Center for Economic Research)
    Abstract: We ask how pension fund trustees deal with the booms and busts that funds encounter, and to what extent the decisions of pension fund trustees are affected by behavioral biases. We examine these issues by using a vignette-method field experiment among Dutch pension fund trustees. We find that trustees display choices that accord with the phenomenon of loss aversion and that trustees allow their choices to be affected by the forces of social comparison: the reserve position of their fund compared to the position of other funds has a significant influence in choosing a pension fund policy mix.
    Keywords: pension funds;finance;governance;behavioral economics
    JEL: D7 G23 G11
    Date: 2010
  12. By: Dalton, P.S.; Ghosal, S. (Tilburg University, Center for Economic Research)
    Abstract: We relate the normative implications of a model of decision-making with endogenous preference parameters to choice theoretic models (Bernheim and Rangel 2007, 2009; Rubinstein and Salant, 2008) in which observed choices are determined by frames or ancillary conditions.
    Keywords: Decisions;choice;frames;standard;behavioral;welfare.
    JEL: D01 D62 C61 I30
    Date: 2010
  13. By: Dalton, P.S.; Ghosal, S. (Tilburg University, Center for Economic Research)
    Abstract: What are the normative implications of behavioral economics? We study a model where the decisions a person makes, consciously or unconsciously, affect her psycholog- ical state (reference point, beliefs, expectations, self-image) which, in turn, impacts on her ranking over available decisions in the first place. We distinguish between stan- dard decisions where the decision-maker internalizes the feedback from her actions to her psychological state, and behavioral decisions where the psychological state is taken as given (although a decision outcome requires that action and psychological state are mutually consistent). In a behavioral decision, the individual imposes an externality on herself. We provide an axiomatic characterization of behavioral decisions. We show that the testable implications of behavioral and standard decisions are di¤erent and the outcomes of the two decision problems are, typically, distinguishable. We discuss the consequences for public policy of our formal analysis and o¤er normative grounds for subsidized psychological therapies.
    Keywords: Behavioral Decisions;Welfare;Revealed Preferences;Normative Preferences
    JEL: D60 I30
    Date: 2010
  14. By: Mannberg, Andréa (Department of Economics, Umeå University)
    Abstract: This paper analyzes the mechanisms underlying excessive sexual risk taking in the presence of HIV. Drawing ideas from psychology on decision-making processes and risk evaluation, a theoretical model interacting affect-induced myopia and cognitive dissonance is developed and analyzed. The results of the theoretical analysis suggest that the effect of rationalization of personal risk depends on the risk of being HIV positive. Although rationalization causes excessive risk taking behavior for individuals with a relatively low lifetime risk, it may prevent fatalism among individuals whose lifetime risk of HIV is perceived as overwhelming.
    Keywords: HIV/AIDS; Self-control; Time inconsistency; Dissonance theory; Regret
    JEL: D81 D84 D91 I12
    Date: 2010–04–21
  15. By: Sanjit Dhami; Ali al-Nowaihi
    Abstract: The Becker proposition (BP) is one of the founding pillars of the modern literature on Law and Economics. It states that it is optimal to impose the severest possible punishment (to maintain effective deterrence) at the lowest possible probability (to economize on enforcement costs). The BP is not consistent with the evidence. This is known as the Becker paradox. Using evidence from a wide range of phenomena we show that none of the proposed explanations for the Becker paradox are satisfactory. The BP has largely been considered within an expected utility framework. We clarify the Becker proposition and its welfare implications under expected utility. We show that BP also holds under rank dependent expected utility and cumulative prospect theory, the two main alternatives to expected utility. al-Nowaihi and Dhami (2010a) recently propose composite cumulative prospect theory that combines prospect theory with cumulative prospect theory. Under plausible conditions CCP is able to resolve the Becker paradox. Our article opens the way for incorporating non-expected utility theories into an economic analysis of criminal activity.
    Keywords: Behavioral economics; Illegal activity; Expected utility theory; Rank dependent expected utility; Prospect theory; Prelec and composite Prelec probability weighting functions; Composite cumulative prospect theory; Punishment functions
    JEL: D81 K42
    Date: 2010–04
  16. By: Langlais, Eric
    Abstract: For psychologists, bounded rationality reflects the presence of cognitive dissonance and/or inconsistency, revealing that people use heuristics (Tversky and Kahneman (1974)) rather than sophisticated processes for the assessment of their beliefs. Recent research analyzing litigations and pretrial negotiations also focused on boundedly rational litigants (Bar-Gill (2005), Farmer and Peccorino (2002)) relying on a naïve modelling of the self-serving bias. Our paper in contrast introduces the case for disappointment averse litigants, relying on the axiomatic of Gull (1991). We show that this leads to a richer analysis in comparative statics; at the same time, this proves to be … disappointing: for the purposes of public policies in favour of the access to justice, recommendations are quite ambiguous.
    Keywords: conflicts; litigation; negotiation; disappointment aversion.
    JEL: D74 K13 K41 K31 C72
    Date: 2010–04

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