nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2010‒06‒04
fourteen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. How to get what you want when you do not know what you want. A model of incentives, organizational structure and learning By Luigi Marengo; Corrado Pasquali
  2. The Online Laboratory: Conducting Experiments in a Real Labor Market By Horton, John J.; Rand, David G.; Zeckhauser, Richard
  3. Multi-Outcome Lotteries: Prospect Theory vs. Relative Utility By Kontek, Krzysztof
  4. Priming Cooperation in Social Dilemma Games By M Drouvelis; R Metcalfe; N Powdthavee
  5. Social Relationships and Trust By Christine Binzel; Dietmar Fehr
  6. Temptation and commitment in the laboratory By Daniel Houser; Daniel Schunk; Joachim Winter; Erte Xiao
  7. Taking punishment into your own hands: An experiment on the motivation underlying punishment By Duersch, Peter; Müller, Julia
  8. Regulating Altruistic Agents By Anthony Heyes; Sandeep Kapur
  9. Anomalies in Economics and Finance By Christopher L. Gilbert
  10. Does Shelf-Labeling of Organic Foods Increase Sales? Results from a Natural Experiment By Daunfeldt, Sven-Olov; Rudholm, Niklas
  11. Volunteers and conditions under which crowd-out effect could appear. An empirical evidence of psychological self-determination theory By Fiorillo, Damiano
  12. Landscape in the Economy of Conspicuous Consumptions By Situngkir, Hokky
  13. Open Source Software Production, Spontaneous Input, and Organizational Learning By Garzarelli, Giampaolo; Fontanella, Riccardo
  14. Camera Surveillance as a Measure of Counterterrorism? By Alois Stutzer; Michael Zehnder

  1. By: Luigi Marengo; Corrado Pasquali
    Abstract: In this paper we present a model of the interplay between learning, incentives and the allocation of decision rights in the context of a generalized agency problem. Within this context, not only actors face conflicting interests but diverging cognitive ?visions? of the right course of action as well. We show that a principal may obtain the implementation of desired organizational policies by means of appropriate incentives or by means of appropriate design of the allocation of decisions, when the latter is cheaper but more complex. We also show that when the principal is uncertain about which course of action is more appropriate and wants to learn it from the environment, organizational structure and incentives interact in non-trivial ways and must be carefully tuned. When learning is not at stake, incentives and organizational structure are substitutes. When instead learning is at stake, organizational structure and incentives may complement each other and have to be fine tuned according to the complexity of the learning process and the competitive pressure which is put on fast or slow learning.
    Keywords: Incentives, Organizational Structure, Learning
    Date: 2010–05–25
  2. By: Horton, John J. (Harvard University); Rand, David G. (Harvard University); Zeckhauser, Richard (Harvard University)
    Abstract: Online labor markets have great potential as platforms for conducting experiments, as they provide immediate access to a large and diverse subject pool and allow researchers to conduct randomized controlled trials. We argue that online experiments can be just as valid--both internally and externally--as laboratory and field experiments, while requiring far less money and time to design and to conduct. In this paper, we first describe the benefits of conducting experiments in online labor markets; we then use one such market to replicate three classic experiments and confirm their results. We confirm that subjects (1) reverse decisions in response to how a decision-problem is framed, (2) have pro-social preferences (value payoffs to others positively), and (3) respond to priming by altering their choices. We also conduct a labor supply field experiment in which we confirm that workers have upward sloping labor supply curves. In addition to reporting these results, we discuss the unique threats to validity in an online setting and propose methods for coping with these threats. We also discuss the external validity of results from online domains and explain why online results can have external validity equal to or even better than that of traditional methods, depending on the research question. We conclude with our views on the potential role that online experiments can play within the social sciences, and then recommend software development priorities and best practices.
    JEL: C70 C91 C92 C93 J20
    Date: 2010–04
  3. By: Kontek, Krzysztof
    Abstract: This paper discusses two approaches for the analysis of multi-outcome lotteries. The first uses Cumulative Prospect Theory. The second is the Relative Utility Function, which strongly resembles the utility function hypothesized by Markowitz (1952). It is shown that the relative utility model follows Expected Utility Theory with a transformed outcome domain. An illustrative example demonstrates that not only it is a simpler model, but it also provides more sound predictions regarding certainty equivalents of multi-outcome lotteries. The paper discusses estimation procedures for both models. It is noted that Cumulative Prospect Theory has been derived using two-outcome lotteries only, and it is hard to find any evidence in the literature of its parameters ever having been estimated by using lotteries with more than two outcomes. Least squares (mean) and quantile (including median) regression estimations are presented for the relative utility model. It turns out that the estimations for two- and three-outcome lotteries are essentially the same. This confirms the correctness of the model and vindicates the homogeneity of responses given by subjects. An additional advantage of the relative utility model is that it allows multi-outcome lotteries, together with the estimation results, to be presented on a single graph. This is not possible using Cumulative Prospect Theory.
    Keywords: Multi-Prize Lotteries; Lottery / Prospect Valuation; Markowitz Hypothesis; Prospect / Cumulative Prospect Theory; Aspiration / Relative Utility Function.
    JEL: C13 C51 D81 C21 C91 D87
    Date: 2010–05–28
  4. By: M Drouvelis; R Metcalfe; N Powdthavee
    Abstract: Research on public goods mainly focuses its attention on the ability of incentives, beliefs and group structure to affect behaviour in social dilemma interactions. This paper investigates the pure effects of a rather subtle mechanism on social preferences in a one-shot linear public good game. Using priming techniques from social psychology, we activate the concept of cooperation and explore the extent to which this intervention brings about changes in people's voluntary contributions to the public good and self-reported emotional responses. Our findings suggest that priming cooperation increases contribution levels, controlling for subjects' gender. Our priming effect is much stronger for females than for males. This difference can be explained by a shift in subjects' beliefs about contributions. We also find a significant impact of priming on mean positive emotional responses.
    Keywords: Priming, contributions, beliefs, emotional responses, public goods experiments
    JEL: C92 D01 H41
  5. By: Christine Binzel; Dietmar Fehr
    Abstract: While social relationships play an important role for individuals to cope with missing market institutions, they also limit individuals' range of trading partners. This paper aims at understanding the determinants of trust at various social distances when information asymmetries are present. Among participants from an informal housing area in Cairo we find that the increase in trust following a reduction in social distance comes from the fact that trustors are much more inclined to follow their beliefs when interacting with their friend. When interacting with an ex-ante unknown agent instead, the decision to trust is mainly driven by social preferences. Nevertheless, trustors underestimate their friend's intrinsic motivation to cooperate, leading to a loss in social welfare. We relate this to the agents' inability to signal their trustworthiness in an environment characterized by strong social norms.
    Keywords: Trust, hidden action, social distance, solidarity, reciprocity, economic development
    JEL: C72 C93 D82 O12
    Date: 2010
  6. By: Daniel Houser; Daniel Schunk; Joachim Winter; Erte Xiao
    Abstract: Temptation and self-control in intertemporal choice environments are receiving increasing attention in the theoretical economics literature. Nevertheless, there remains a scarcity of empirical evidence from controlled environments informing behavior under repeated temptations. This is unfortunate in light of the fact that in many natural environments, the same temptation must be repeatedly resisted. This paper fills that gap by reporting data from a novel laboratory study of economic decisions under repeat temptations. Subjects are repeatedly offered an option with instantaneous benefit that also entails a substantial reduction to overall earnings. We show that this option is “tempting” in the sense that a substantial fraction of our subjects incur pecuniary costs to eliminate the choice, and thus commit to not choosing the tempting alternative. We compare the timing and price-elasticity of these commitment decisions to predictions from existing theoretical models of decision under temptation. Our data are broadly consistent with theory, with the notable exception that commitment often occurs with delay rather than at the first opportunity. Moreover, the timing of commitment is significantly impacted by the cost of the commitment device. The patterns we report have direct implications for economic theory, and are a first step toward designing mechanisms that promote prudent economic decisions under temptation.
    Keywords: Self-control, willpower, temptation, commitment, laboratory experiment
    JEL: D11 C91
    Date: 2010–05
  7. By: Duersch, Peter; Müller, Julia
    Abstract: In a punishment experiment, we separate the demand for punishment in general from a possible demand to conduct punishment personally. Subjects experience an unfair split of their earnings from a real effort task and have to decide on the punishment of the person who determines the distribution. First, it is established whether the allocator's payoff is reduced and, afterwards, subjects take part in a second price auction for the right to (physically) carry out the act of payoff reduction. This auction only resolves who will punish, not whether punishment takes place, so only subjects with a demand for personal punishment should bid.
    Keywords: personal punishment; real effort task; experiment; auction; desire to win
    JEL: C92
    Date: 2010–05–28
  8. By: Anthony Heyes (Royal Holloway, University of London); Sandeep Kapur (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: Altruism or `regard for others' can encourage self-restraint among generators of negative externalities, thereby mitigating the externality problem. We explore how introducing impure altruism into standard regulatory settings alters regulatory prescriptions. We show that the optimal calibration of both quantitative controls and externality taxes are affected. It also leads to surprising results on the comparative performance of instruments. Under quantity-based regulation welfare is increasing in the propensity for altruism in the population; under price-based regulation the relationship is non-monotonic. Price-based regulation is preferred when the population is either predominantly altruistic or predominantly selfish, quantity-based regulation for cases in between.
    Date: 2010–05
  9. By: Christopher L. Gilbert
    Abstract: The term “anomaly” played a crucial role in Thomas Kuhn’s characterization of scientific progress. For Kuhn, an anomaly is a puzzle which challenges an accepted paradigm. Puzzles only achieve anomalous status once an alternative paradigm becomes available which allows explanation of the puzzle. Anomalies were introduced into the finance literature by Michael Jensen but more as resolvable puzzles than Kuhnian anomalies. They entered economics via Richard Thaler who saw behavioural economics as the alternative to the neoclassical paradigm. Both authors use the term anomaly in a deliberately Kuhnian manner. Kuhn formulated his ideas by looking back across the history of physics. By contrast, behavioural economists use Kuhn’s concepts in a forward-looking manner as a marketing tool for their ideas.
    Keywords: anomaly, behavioural, effects.
    Date: 2010
  10. By: Daunfeldt, Sven-Olov (The Ratio Institute and Dalarna University); Rudholm, Niklas (The Swedish Retail Institute (HUI) and Dalarna University)
    Abstract: Can a simple point-of-purchase (POP) shelf-label increase sales of organic foods? We use a random-effects, random-coefficients model, including a time adjustment variable, to test data from a natural experiment in a hypermarket in Gävle, Sweden. Our model incorporates both product specific heterogeneity in the effects of labeling and consumer adjustment to the labels over time. The introduction of POP displays was found to lead to an increase in sales of organic coffee and olive oil, but a reduction in sales of organic flour. All targeted products became less price-sensitive. The results reveal that product specific heterogeneity has to be accounted for, and in some cases consumers adjusted to labeling over time.
    Keywords: Product labeling; random coefficient models; ecological products; experimental economics
    JEL: L66 L81 M31 M37
    Date: 2010–05–26
  11. By: Fiorillo, Damiano
    Abstract: The paper analyses if monetary rewards to continuative Italian volunteers decrease their intrinsic motivation undermining the satisfaction of psychological needs for autonomy and competence. It uses a Survey on Employment in the Social Care and Educational Services conducted by FIVOL-FEO in 1998. The paper shows that monetary rewards increase the satisfaction of psychological needs for autonomy and competence, but the satisfaction of psychological needs for autonomy and competence does not mediate between monetary rewards and intrinsic motivation.
    Keywords: Self-determination; self-evaluation; intrinsic motivation; monetary rewards
    JEL: C13 D71 C31 Z13 C25
    Date: 2010–05
  12. By: Situngkir, Hokky
    Abstract: Psychological states side by side with the bounded rational expectations among social agents contributes to the pattern of consumptions in economic system. One of the psychological states are the envy – a tendency to emulate any gaps with other agents’ properties. The evolutionary game theoretic works on conspicuous consumption are explored by growing the micro-view of economic agency in lattice-based populations, the landscape of consumptions. The emerged macro-view of multiple equilibria is shown in computational simulative demonstrations altogether with the spatial clustered agents based upon the emerged agents’ economic profiles.
    Keywords: conspicuous consumption; behavioral economics; agent-based simulations
    JEL: D11 C63 D82 C78 B40 C02 C62 E20 A14
    Date: 2010–05–07
  13. By: Garzarelli, Giampaolo; Fontanella, Riccardo
    Abstract: This work shows that the modular organization of voluntary Open Source Software (OSS) production, whereby programmers supply effort of their accord, capitalizes more on division than on specialization of labor. This is so because voluntary OSS production is characterized by an organizational learning process that dominates the individual one. Organizational learning reveals production choices that would otherwise remain unknown, thereby increasing productivity and indirectly reinforcing incentives to undertake collective problem solving.
    Keywords: Division of Labor; Mistake-ridden Learning; Modularity; Open Source Software; Self-selection; Voluntary Production
    JEL: L23 D20 L17
    Date: 2010
  14. By: Alois Stutzer; Michael Zehnder
    Abstract: Camera surveillance has recently gained prominence in policy proposals on combating terrorism. We evaluate this instrument of counterterrorism as resting on the premise of a deterrence effect. Based on comparative arguments and previous evidence on crime, we expect camera surveillance to have a relatively smaller deterrent effect on terrorism than on other forms of crime. In particular, we emphasize opportunities for substitution (i.e., displacement effects), the interaction with media attention aspired to by terrorists, the limits of real-time interventions, the crowding-out of social surveillance, the risk of misguided profiling, and politico-economic concerns regarding the misuse of the technology.
    Keywords: Camera surveillance, closed-circuit television (CCTV), public security, deterrence, terrorism
    JEL: H56 K42
    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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.