nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2010‒10‒02
twelve papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Expected Utility theory and the tyranny of catastrophic risks By Buchholz, Wolfgang; Schymura, Michael
  2. Fairness and Cheating By Daniel Houser; Stefan Vetter; Joachim Winter
  3. Is Crowding Out Due Entirely to Fundraising? Evidence from a Panel of Charities By James Andreoni; A. Abigail Payne
  4. We-thinking and vacillation between frames: filling a gap in Bacharach's theory By Smerilli, Alessandra
  5. Psychology for Economists By Piet Keizer
  6. Lying for the Greater Good: Bounded Rationality in a Team By Oktay Surucu
  7. Envy and Altruism in Children By Kirsten Häger
  8. The Framing of Games and the Psychology of Play By Martin Dufwenberg; Simon Gaechter; Heike Hennig-Schmidt
  9. Risk attitude, beliefs, and information in a corruption game: An experimental analysis By Berninghaus, Siegfried; Haller, Sven; Krüger, Tyll; Neumann, Thomas; Schosser, Stephan; Vogt, Bodo
  10. Small is beautiful: Experimental evidence of donors' preferences for charities By Borgloh, Sarah; Dannenberg, Astrid; Aretz, Bodo
  11. Myopia, redistribution and pensions By CREMER, Helmuth; PESTIEAU, Pierre
  12. Who Gives More? A Comparative Perspective of Philanthropic Giving through Foundations within the UEFA and the NFL By Helmut Dietl; Egon Franck; Julia Hillebrandt

  1. By: Buchholz, Wolfgang; Schymura, Michael
    Abstract: Expected Utility theory is not only applied to individual choices but also to ethical decisions, e.g. in cost-benefit analysis of climate change policy measures that affect future generations. In this context the crucial question arises whether EU theory is able to deal with 'catastrophic risks', i.e. risks of high, but very unlikely losses, in an ethically appealing way. In this paper we show that this is not the case. Rather, if in the framework of EU theory a plausible level of risk aversion is assumed, a 'tyranny of catastrophic risk' (TCR) emerges, i.e. project evaluation may be dominated by the catastrophic event even if its probability is negligibly small. With low degrees of risk aversion, however the catastrophic risk eventually has no impact at all when its probability goes to zero which is ethically not acceptable as well. -- Die Erwartungsnutzentheorie (EUT) kann nicht nur für Entscheidungen auf individueller Ebene angewandt werden, sondern auch aggregiert in ethischen Entscheidungssituationen, wie zum Beispiel in Kosten-Nutzen-Analysen bei der Evaluierung klimapoltischer Politik die vor allem zukünftige Generationen betreffen. In diesem Zusammenhang stellt sich die Frage, inwiefern die die EUT mit katastrophalen Ereignissen mit extrem niedriger Wahrscheinlichkeit umgehen kann. In unserer Arbeit zeigen wir die Schwierigkeiten der EUT beim Umgang mit katastrophalen Ereignissen auf. Falls man eine hinreichende Risikoaversion annimmt, tritt eine 'Tyrannei der katastrophalen Risken' (TCR) auf. Die Projektevaluation kann dann von extrem unwahrscheinlichen Ereignissen dominiert werden. Falls die angenommene Risikoaversion sehr gering ist, kann es passieren, das solche katastrophalen Ereignisse überhaupt keinen Einfluss auf das Ergebnis haben, was aus ethischer Perspektive genauso bedenklich ist. Der Artikel trägt bei zu der Literatur über die Paradoxien der EUT, wie z.B. dem Allais-Paradoxon oder Martin Weitzmans 'dismal theorem'. Wir behandeln den spezifischen Fall von katastrophalen Ereignissen mit sehr hohen Schäden und sehr geringer Eintrittswahrscheinlichkeit, wie es etwa beim Klimawandel der Fall sein kann. Nach einem einleitenden Teil zeigen wir in heuristischer Art und Weise, dass es aus ethischen Gründen notwendig sein kann, die Zahlungsbereitschaft zur Vermeidung von Extremereignissen nach oben zu begrenzen. Wir formalisieren dann die sogenannte 'Tyrannei der katastrophalen Risiken' (TCR) und zeigen auf, dass das Auftreten der TCR fundamental von der Wahl der zugrunde liegenden Nutzenfunktion abhängt. Wir folgern, dass man eine unrealistisch niedrige Risikoaversion annehmen müsste, um die TCR zu vermeiden. Am Ende bennenen wir die Alternativen zur EUT, die allerdings katastrophale Risiken noch mehr berücksichtigen und so das Problem der TCR noch verschärfen können.
    Keywords: utilitarianism,Expected Utility theory,catastrophic risks
    JEL: Q54
    Date: 2010
  2. By: Daniel Houser (George Mason University); Stefan Vetter (University of Munich); Joachim Winter (University of Munich)
    Abstract: We present evidence from a laboratory experiment showing that individuals who believe they were treated unfairly in an interaction with another person are more likely to cheat in a subsequent unrelated game. Specifically, subjects first participated in a dictator game. They then flipped a coin in private and reported the outcome. Subjects could increase their total payoff by cheating, i.e., lying about the outcome of the coin toss. We found that subjects were more likely to cheat in reporting the outcome of the coin flip when: 1) they received either nothing or a very small transfer from the dictator; and 2) they claimed to have been treated unfairly. This is consistent with the view that experiencing a norm violation is sufficient to justify the violation of another norm at the expense of a third party. This result extends the growing literature on social norms.
    Keywords: cheating; social norms; experimental design
    JEL: C91 D63
    Date: 2010–09
  3. By: James Andreoni; A. Abigail Payne
    Abstract: When the government gives a grant to a private charitable organization, do the donors to that organization give less? If they do, is it because the grants crowd out donors who feel they gave through taxes (classic crowd out), or is it because the grant crowds out the fund-raising of the charities who, after getting the grant, reduce efforts of fund-raising (fund-raising crowd out)? This is the first paper to separate these two effects. Using a panel of more than 8,000 charities, we find that crowding out is significant, at about 72 percent. We find this crowding out is due primarily to reduced fund-raising. Depending on which types of organizations are included in the analysis, crowding out attributable to classic crowd-out ranges from 30% to a slight crowd-in effect, while fund-raising crowd out ranges from 70% to over 100% of all crowd out. Such a finding could have important consequences for how governments structure grants to non-profits. Our results indicate, for example, that requirements that charities match a fraction of government grants with increases in private donations might be a feasible policy that could reduce the detrimental effects of crowding out.
    Keywords: charitable giving; fundraising; crowd-out
    JEL: H00 H32 H50
    Date: 2010–09
  4. By: Smerilli, Alessandra
    Abstract: The idea of team-thinking or we-thinking is increasingly drawing the attention of economists. The main claim of scholars who analyze we-thinking is that it is a coherent mode of reasoning people may use when they face a decision problem. But, if there is a general agreement on the existence of the we-mode of reasoning and on the fact people endorse it, scholars have different opinions about the way in which we-thinking arises and how it brings people to behave in a particular way. Then different authors have proposed different analyses of the issue. In this paper I address the issue by proposing a simple model of vacillation between the I and we-modes of reasoning, as a way in which we-thinking can arise in the face of a decision problem. The model is based on a not fully developed intuition - the double-crossing problem in the PD game - of Bacharach, whose theory is the most developed from an analytical point of view.
    Keywords: we-thinking; frames; vacillation; game theory
    JEL: C79 Z19 C72
    Date: 2010–08–25
  5. By: Piet Keizer
    Abstract: Orthodox economics focuses on the analysis of the way the economic force or motivation operates, thereby abstracting from the functioning of other primary forces or motivations, such as the social and the psychic motivation. By assuming perfect rationality psychic problems are ignored. This text discusses six approaches in psychology . cognitive, behaviourist, biological, psychodynamic, humanistic and social psychology - to find out what orthodox economics needs in order to extend its analysis with the more realistic idea of imperfect rationality. In this discussion the state of the art of behavioural economics in included.
    Keywords: orthodox economics, psychology, behavioural economics, imperfect rationality
    JEL: A11 A12 B13 B41
    Date: 2010–09
  6. By: Oktay Surucu (Advanced School of Economics, University Ca'Foscari of Venice)
    Abstract: The article is concerned with the interaction between fully and boundedly rational agents in situations where their interests are perfectly aligned. The cognitive limitations of the boundedly rational agent do not allow him to fully understand the market conditions and lead him to take non-optimal decisions in some situations. Using categorization to model bounded rationality, we show that the fully rational agent can manipulate information to help decreasing the expected loss caused by the boundedly rational agent. Assuming different types for the boundedly rational agent, who differ only in the categories used, we show that the fully rational agent may learn the type of the boundedly rational agent along their interaction. Using this additional information, the outcome can be improved and the amount of manipulated information can be decreased. Furthermore, as the length of the interaction gets longer the probability that the fully rational agent learns the type of the boundedly rational agent increases.
    Keywords: Bounded rationality; categorization; learning.
    JEL: C00 C70 D83
    Date: 2010–09
  7. By: Kirsten Häger (School of Economics and Business Administration, Friedrich Schiller University Jena)
    Abstract: Envy and altruism have been studied extensively in adults. Here, we report data from an experiment studying envious and altruistic behavior in children. We study a sample of German school children aged seven to ten in a natural setting. We run two treatments. One treatment investigates envy, the other one studies altruism. Additionally, we collect data on the children's cognitive and social skills, and on their socio-demographic background. Controlling for these factors, we find that older children are significantly more altruistic. Boys care more about their relative position than girls. Socio-demographic information have limited predictive power in both treatments.
    Keywords: artefactual field experiment, children, envy, altruism
    JEL: C91 C99
    Date: 2010–09–17
  8. By: Martin Dufwenberg; Simon Gaechter; Heike Hennig-Schmidt
    Abstract: Psychological game theory can provide rational-choice-based framing effects; frames influence beliefs, beliefs influence motivations. We explain this theoretically and explore empirical relevance experimentally. In a 2×2 design of one-shot public good games we show that frames affect subject’s first- and second-order beliefs, and contributions. From a psychological gametheoretic framework we derive two mutually compatible hypotheses about guilt aversion and reciprocity under which contributions are related to second- and first-order beliefs, respectively. Our results are consistent with either.
    Keywords: framing, psychological game theory, guilt aversion, reciprocity, public good games, voluntary cooperation
    JEL: C91 C72 D64 Z13
    Date: 2010–09
  9. By: Berninghaus, Siegfried; Haller, Sven; Krüger, Tyll; Neumann, Thomas; Schosser, Stephan; Vogt, Bodo
    Abstract: For our experiment on corruption we designed a coordination game to model the influence of risk attitudes, beliefs, and information on behavioral choices and determined the equilibria. We observed that the participants' risk attitudes failed to explain their choices between corrupt and non-corrupt behavior. Instead, beliefs appeared to be a better predictor of whether or not they would opt for the corrupt alternative. Furthermore, varying the quantity of information available to players (modeled by changing the degree of uncertainty) provided additional insight into the players' propensity to engage in corrupt behavior. The experimental results show that a higher degree of uncertainty in the informational setting reduces corruption. --
    Keywords: Corruption,game theory,experiment,risk attitude,beliefs
    JEL: D73 K42 C91 C92
    Date: 2010
  10. By: Borgloh, Sarah; Dannenberg, Astrid; Aretz, Bodo
    Abstract: This paper studies the effect of information about a charity's size on individuals' donations to that charity. We conducted a framed field experiment with a non-student sample, in which subjects had the opportunity to donate for various charitable purposes. The results show that if subjects are to choose between large organizations with high annual revenues and small organizations with low revenues, they prefer the small organizations. We also provide insights why donors prefer the small organizations and discriminate between different theoretical approaches. -- Die vorliegende Arbeit untersucht, inwieweit die Größe einer gemeinnützigen Organisation die Bereitschaft, an diese Organisation zu spenden, beeinflusst. Wenn sich Personen in der Realität für oder gegen eine Spende an eine gemeinnützige Organisation entscheiden, wissen sie üblicherweise nicht, wie sich die Einnahmen dieser Organisation genau zusammensetzen. Sie wissen nicht, wie viel ihr Nachbar oder andere Personen aus ihrem sozialen Umfeld an die Organisation spenden oder in welcher Höhe die Organisation staatliche Subventionen erhält. Die Spender haben vielmehr einen Eindruck von der Größe der Organisation in Form ihrer jährlichen Gesamteinnahmen, das heißt sie wissen, ob eine Organisation eher groß oder eher klein ist. Die verschiedenen theoretischen Ansätze, die für diese Fragestellung relevant sind, deuten nicht alle in die gleiche Richtung. Einige gehen von einem positiven Zusammenhang zwischen Einnahmen einer Organisation und der Bereitschaft, an diese Organisation zu spenden, aus, während andere einen negativen Zusammenhang vermuten. Experimentelle Studien haben bislang entweder nur die Wirkung staatlicher Subventionen oder nur die Wirkung sozialer Information über die privaten Beiträge anderer Spender untersucht, nicht jedoch den Nettoeffekt. Ziel der vorliegenden Arbeit ist es, diese Lücke zu schließen. Wir haben dazu ein Experiment durchgeführt, in dem nicht-studentische Versuchspersonen eine reale Spendenentscheidung getroffen haben. Die Hälfte der Versuchspersonen konnte sich dabei zwischen einer relativ kleinen Organisation mit geringen Jahreseinnahmen und einer relativ großen Organisation mit hohen Jahreseinnahmen entscheiden. Unsere Resultate zeigen einen negativen Zusammenhang zwischen der Organisationsgröße und der Spendenbereitschaft, wobei wir bewusst von Reputationseffekten abstrahiert haben. Die Studie zeigt außerdem, warum Spender kleine Organisationen bevorzugen. Sie kann damit zwischen verschiedenen theoretischen Ansätzen diskriminieren und liefert wichtige Informationen für die effektive Mitteleinwerbung von Fundraisern. Für die Mehrheit der Spender sind die geringeren Verwaltungsaufwendungen, das höhere Gewicht der eigenen Spende und die Bedürftigkeit der Einrichtung ausschlaggebend für die Wahl der kleinen Organisation.
    Keywords: charitable contributions,information,framed field experiment,fundraising
    JEL: H41 C91 D83
    Date: 2010
  11. By: CREMER, Helmuth (Toulouse School of Economics (GREMAQ, IDEI and Institut universitaire de France)); PESTIEAU, Pierre (CREPP, HEC-Management School, University of Liège, Belgium; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium; PSE and CEPR)
    Abstract: This paper reviews a number of recent contributions that study pension design with myopic individuals. Its objective is to explore how the presence of more or less myopic individuals affects pension design when individuals differ also in productivity. This double heterogeneity gives rise to an interesting interplay between paternalistic and redistributive considerations, which is at the heart of most of the results that are presented. The main part of the paper is devoted to the issue of pension design when myopic individual do not save “enough” for their retirement because their “myopic self” (with a high discount rate) emerges when labor supply and savings decisions are made. Some extensions and variations are considered in the second part. In particular we deal with situations where labor disutility or preferences for consumption are subject to “habit formation” and where sin goods have a detrimental effect on second period health. Myopic individuals tend to underestimate the effects of both habit formation and sinful consumption, which complicates public policy.
    Keywords: myopia, dual self, pensions, sin goods, habit formation
    JEL: E6 H55 D91
    Date: 2010–07–01
  12. By: Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich); Egon Franck (Institute for Strategy and Business Economics, University of Zurich); Julia Hillebrandt (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: Due to the specifics of the football governance systems and cultures of Europe and the United States, we hypothesize that the charitable foundation involvement of the National Football League (NFL) and its teams is more pronounced than that of the Union of European Football Associations (UEFA) and its Champions League (UCL) clubs. On the basis of a literature review, web research and emails to foundation staff, the study produces the following findings that support our hypothesis: At both the association/league and team level, the NFL is stronger as well as longer involved in charitable foundations than the UEFA. At the team level, 3 times as many NFL foundations as UCL club foundations exist. The minimum amount of giving of NFL team foundations is 13 times higher than that of UCL club foundations. On average, NFL team foundations are twice as old as their UEFA equivalents.
    Keywords: Sports philanthropy; Social responsibility; Foundations; Football; UEFA; Champions League; NFL; Europe; United States; Governance; Culture
    Date: 2010–09

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