nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2010‒05‒08
twelve papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Are Young People's Educational Outcomes Linked to their Sense of Control? By Barón, Juan D.; Cobb-Clark, Deborah A.
  2. Sexual Risk Taking among Young Adults in Cape Town - Effects of Expected Health and Income By Bezabih, Mintewab; Mannberg, Andréa; Visser, Martine
  3. The Provision of Relative Performance Feedback Information: An Experimental Analysis of Performance and Happiness By Ghazala Azmat; Nagore Iriberri
  4. Cheating, Emotions, and Rationality: An Experiment on Tax Evasion By Giorgio Coricelli; Matteus Joffily; Claude Montmarquette; Marie-Claire Villeval
  5. Social Ties and Subjective Performance Evaluations: An Empirical Investigation By Breuer, Kathrin; Nieken, Petra; Sliwka, Dirk
  6. Are Overconfident CEOs Better Innovators? By Hirshleifer, David; Low, Angie; Teoh, Siew Hong
  7. How Do Investors React Under Uncertainty? By Ron Bird; Danny Yeung
  8. Public Goods and Voting on Formal Sanction Schemes: An Experiment By Louis Putterman; Jean-Robert Tyran; Kenju Kamei
  9. Is there a relation between trust and trustworthiness? By Tamás Kovács; Marc Willinger
  10. Why Less Informed Managers May Be Better Leaders By Sergei Guriev; Anton Suvorov
  11. Joblessness and Perceptions about the Effectiveness of Democracy By Duha Altindag; Naci Mocan
  12. Over-indebtedness and the interplay of factual and mental money management: An interview study By Bernadette Kamleitner; Bianca Hornung; Erich Kirchler

  1. By: Barón, Juan D. (Banco de la República de Colombia); Cobb-Clark, Deborah A. (University of Melbourne)
    Abstract: This paper analyzes the link between young people's sense (locus) of control over their lives and their investments in education. We find that young people with a more internal locus of control have a higher probability of finishing secondary school and, conditional on completion, meeting the requirements to obtain a university entrance rank. Moreover, those with an internal locus of control who obtain a university entrance rank achieve somewhat higher rankings than do their peers who have a more external locus of control. Not surprisingly, there is a negative relationship between growing up in disadvantage and educational outcomes. However, this effect does not appear to operate indirectly by increasing the likelihood of having a more external locus of control. In particular, we find no significant relationship between family welfare history and young people's locus of control.
    Keywords: locus of control, parental socio-economic background, education
    JEL: I38 J24 H31
    Date: 2010–04
  2. By: Bezabih, Mintewab (University of Portsmouth); Mannberg, Andréa (Department of Economics, Umeå University); Visser, Martine (University of Cape Town)
    Abstract: This paper empirically assesses links between expectations of future health and income on sexual risk taking on a sample of young adults in Cape Town, South Africa. An important contribution of the paper lies in combining a wide range of variables measuring risky sexual behavior such that the maximum information possible is extracted from, and adequate weights are attached to each measure, as opposed to previous studies that are based on individual measures or arbitrary aggregations. The findings indicate that expected income and health and future uncertainty are significant determinants of current patterns of sexual risk taking. From a policy perspective, the results suggest that reducing poverty and improving social insurance as well as reducing the taboo related to talking about HIV may constitute important issues to be addressed.
    Keywords: HIV/AIDS; Health risk; Risk aversion
    JEL: D81 D84 D91 I10
    Date: 2010–04–30
  3. By: Ghazala Azmat; Nagore Iriberri
    Abstract: This paper studies the effect of providing relative performance feedback information on individual performance and on individual affective response, when agents are rewarded according to their absolute performance. In a laboratory set-up, agents perform a real effort task and when receiving feedback, they are asked to rate their happiness, arousal and feeling of dominance. Control subjects learn only their absolute performance, while the treated subjects additionally learn the average performance in the session. Performance is 17 percent higher when relative performance feedback is provided. Furthermore, although feedback increases the performance independent of the content (i.e., performing above or below the average), the content is determinant for the affective response. When subjects are treated, the inequality in the happiness and the feeling of dominance between those subjects performing above and below the average increases by 8 and 6 percentage points, respectively.
    Keywords: relative performance, piece-rate, feedback, social comparison, happiness.
    JEL: I21 M52 C30
    Date: 2010–04
  4. By: Giorgio Coricelli (ISC - Institut des Sciences Cognitives - CNRS : UMR5015 - Université Claude Bernard - Lyon I); Matteus Joffily (ISC - Institut des Sciences Cognitives - CNRS : UMR5015 - Université Claude Bernard - Lyon I); Claude Montmarquette (CIRANO - Centre interuniversitaire de recherche en analyse des organisations - Université du Québec à Montréal); Marie-Claire Villeval (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: The economics-of-crime approach usually ignores the emotional cost and benefit of cheating. In this paper, we investigate the relationships between emotions, deception, and rational decision-making by means of an experiment on tax evasion. Emotions are measured by skin conductance responses and self-reports. We show that the intensity of anticipated and anticipatory emotions before reporting positively correlates with both the decision to cheat and the proportion of evaded income. The experienced emotional arousal after an audit increases with the monetary sanctions and the arousal is even stronger when the evader's picture is publicly displayed. We also find that the risk of a public exposure of deception deters evasion whereas the amount of fines encourages evasion. These results suggest that an audit policy that strengthens the emotional dimension of cheating favors compliance.
    Keywords: deception ; tax evasion ; emotions ; physiological measures ; experiment
    Date: 2010
  5. By: Breuer, Kathrin (University of Cologne); Nieken, Petra (University of Cologne); Sliwka, Dirk (University of Cologne)
    Abstract: We empirically investigate possible distortions in subjective performance evaluations. A key hypothesis is that evaluations are more upward biased the closer the social ties between supervisor and appraised employee. We test this hypothesis with a company data set from a call center organization which contains not only subjective assessments but also several more objective measures of performance. Controlling for these performance measures, we find strong evidence that evaluations are upwards biased in smaller teams and some evidence that supervisors give better ratings to employees they themselves have evaluated before.
    Keywords: subjective performance evaluation, bias, social ties, team size, favoritism
    JEL: M52
    Date: 2010–04
  6. By: Hirshleifer, David; Low, Angie; Teoh, Siew Hong
    Abstract: Using options- and press-based proxies for CEO overconfidence (Malmendier and Tate 2005a, 2005b, 2008), we find that over the 1993-2003 period, firms with overconfident CEOs have greater return volatility, invest more in innovation, obtain more patents and patent citations, and achieve greater innovative success for given research and development (R&D) expenditure. Overconfident managers only achieve greater innovation than non-overconfident managers in innovative industries. Overconfidence is not associated with lower sales, ROA, or Q.
    Keywords: CEO Overconfidence; Innovation; R&D; Patent
    JEL: M52 G30 M40
    Date: 2010–04–29
  7. By: Ron Bird (School of Finance and Economics, University of Technology, Sydney); Danny Yeung (School of Finance and Economics, University of Technology, Sydney)
    Abstract: It has long been accepted in finance that risk plays an important role in determining valuation where risk reflects that investors are unsure as to the exact value of future returns but are able to express their prior expectations by way of a probability distribution of these returns. Knights (1921) introduced the concept of uncertainty where we possess incomplete knowledge about this distribution and so are unable to formulate priors over all possible outcomes. A number of writers (Gilboa and Schmeidler, 1989; Epstein and Schneider, 2003) have developed models that suggest that ambiguity, like risk, has a negative impact on valuation. The most common approach taken in these models is to assume that investors take a conservative approach when faced with uncertainty and base their decisions on the worst case scenario (maxmin expected utility). The area on which we concentrate in this paper is how the market faced with uncertainty reacts to the receipt of new information. The proposition being that under maxmin expected utility, the interpretation that the market will place on any information received will become more pessimistic as uncertainty increases, upgrading any bad news and downgrading any good news. Williams (2009) uses changes in the VIX (i.e. implied market volatility) as a measure of market uncertainty in his US study where he evaluates the markets response to the release of earnings news. There is a plethora of evidence dating back to Ball and Brown (1968) that confirms that the market responds positively (negatively) to good (bad) news earnings announcements. Williams finds that this response is conditioned by market uncertainty with there being the predicted asymmetric reaction to good and bad earnings news – the negative reaction to bad news increasing with uncertainty and the positive reaction to good news decreasing. In this study we use Australian data to also examine the impact of uncertainty on the market response to earnings announcements. One important difference in our findings to those of Williams is that it is not only changes in VIX but also the level of VIX that influence how the market responds to earnings information. Although generally confirming a pessimistic response by investors to earnings released at a time of high market uncertainly, we find evidence of a slight optimistic bias in the reaction of investors to earnings released at a time of low market uncertainty. We also find that the level of pessimism engendered when uncertainly is high may be significantly diluted if it occurs contemporaneously with strong market sentiment.
    Date: 2010–04–01
  8. By: Louis Putterman; Jean-Robert Tyran; Kenju Kamei
    Abstract: The burgeoning literature on the use of sanctions to support public goods provision has largely neglected the use of formal or centralized sanctions. We let subjects playing a linear public goods game vote on the parameters of a formal sanction scheme capable both of resolving and of exacerbating the free-rider problem, depending on parameter settings. Most groups quickly learned to choose parameters inducing efficient outcomes. But despite uniform money payoffs implying common interest in those parameters, voting patterns suggest significant influence of cooperative orientation, political attitudes, and of gender and intelligence.
    Keywords: Public good; voluntary contribution; formal sanction; experiment; penalty;
    Date: 2010
  9. By: Tamás Kovács; Marc Willinger
    Abstract: We provide new evidence about a positive correlation between the own amount sent and the own amount returned in the investment game. Our analysis relies on experimental data collected under the strategy method for establishing our main result. While the percentage returned is independent of the amount received for most of our subjects, it is strongly correlated to their amount sent as a trustor. Our analysis is based on a two-way classification of subjects : according to their trusting type and according to their reciprocal type. We show the existence of a strong correlation between trusting types and reciprocal types within subjects.
    Date: 2010–03
  10. By: Sergei Guriev (New Economic School (Moscow)); Anton Suvorov (New Economic School (Moscow))
    Abstract: Unlike the textbook model of a top manager being an omniscient planner, coordinator and monitor, the real life managers suffer from discontinuity, lack of systematic information collection and limited time for analysis and re?ection. Why do not business leaders set up their organizations in the way that would allow themselves to make informed choices based on thorough analysis? We argue that in some situations top managers may benefit from being less informed. In our model, additional information raises ex post flexibility of the decision-makers which may undermine the ex ante incentives of their subordinates to make specific investments. The subordinates expect less informed leaders to be more committed to the original strategy which increases the returns to the strategy-specific investments. We show that this effect is more likely to take place in more predictable environments; we also discuss how this effect depends on the hierarchical structure of the organization.
    Keywords: leadership, commitment, organizational structure
    Date: 2010–04
  11. By: Duha Altindag (Louisiana State University); Naci Mocan (Louisiana State University)
    Abstract: Using micro data on more than 130,000 individuals from 69 countries, we analyze the extent to which joblessness of the individuals and the prevailing unemployment rate in the country impact perceptions of the effectiveness of democracy. We find that personal joblessness experience translates into negative opinions about the effectiveness of democracy, and it increases the desire for a rouge leader. Evidence from people who live in European countries suggests that being jobless for more than a year is the main source of the impact. Joblessness-related negative attitude towards the effectiveness of democracy is not because of a general displeasure towards the government, but rather, it is targeted towards democracy. We also find that well-educated and wealthier individuals are less likely to indicate that democracies are ineffective. The beliefs about the effectiveness of democracy as system of governance are also shaped by the unemployment rate in countries with low levels of democracy. The results suggest that periods of high unemployment and joblessness would hinder the development of democracy.
    Keywords: Unemployment duration, Democracy, Education, Development, World Values Survey
    JEL: J2 O1 P1
    Date: 2010–05
  12. By: Bernadette Kamleitner; Bianca Hornung; Erich Kirchler
    Abstract: Previous research has shown that money management contributes to over-indebtedness. This article sheds new light on this relation by looking at factual money management and its mental underpinnings, mental accounting. In a conceptual model we propose that fuzzy factual and mental money management practices aggravated by lack of congruency between factual and mental structures play an important role in over-indebtedness. Twenty-five in-depth interviews deliver preliminary support for this proposition. Successful financial control seems to build on efficient and inter-coordinated factual and mental money management. This reduces the willpower necessary for controlling financial behavior and helps to prevent and fight over-indebtedness.
    Keywords: debt, money management, mental accounting, self-control
    JEL: D14 D1
    Date: 2010–04

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