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on Cognitive and Behavioural Economics |
| By: | Marco Faillo (Department of Economics, University of Trento); Daniela Grieco (Department of Economics (University of Verona)); Luca Zarri (Department of Economics (University of Verona)) |
| Abstract: | In the framework of a finitely repeated public goods game with costly punishment options, we introduce a novel restrictive setup where a principle of legitimacy holds, in the sense that only virtuous behavior (that is, being a high contributor) allows one to gain access to sanctioning opportunities (‘entitlement’) and only wrongful behavior (that is, being a low contributor) makes one a potential target of peer punishment (‘desert’). As a consequence, acting virtuously guarantees that it will not be possible to be punished by less virtuous subjects (‘immunity’). These restrictions, by allowing for ‘legitimate punishment’ only, rule out by construction so called antisocial punishment as well as vengeful behavior. Moreover, we manipulate the amount of information over others’ contributions that subjects receive before making their punishment decisions. Our preliminary results show that restrictions lead to an increase of cooperation levels and virtuous restrictions combined with detailed feedback on peers’ contribution significantly increase contribution levels and make cooperation sustainable over time. |
| Keywords: | Experimental Economics, Public Good Games, Costly Punishment, Cooperation, Legitimacy, Immunity |
| JEL: | C72 C91 C92 D23 D72 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:ver:wpaper:16/2010&r=cbe |
| By: | Luc Behaghel; David M. Blau |
| Abstract: | We use a US Social Security reform as a quasi-experiment to provide evidence on framing effects in retirement behavior. The reform increased the full retirement age (FRA) from 65 to 66 in two month increments per year of birth for cohorts born from 1938 to 1943. We find strong evidence that the spike in the benefit claiming hazard at 65 moved in lockstep along with the FRA. Results on self-reported retirement and exit from employment are less clear-cut, but go in the same direction. The responsiveness to the new FRA is stronger for people with higher cognitive skills. We interpret the findings as evidence of reference dependence with loss aversion. We develop a simple labor supply model with reference dependence that can explain the results. The model has potentially important implications for framing of future Social Security reforms. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2010-37&r=cbe |
| By: | Jordi Brandts (Universitat Autònoma de Barcelona and Instituto de Análisis Económico (CSIC)); Enrique Fatas (Universidad de València) |
| Abstract: | We present a brief overview of the experimental economics literature on social preferences. In numerous experiments, economically incentivized subjects are willing to sacrifice part of their material earnings to compensate the kind behavior of others, or will be willing to reciprocate at a non-negligible cost, or even pay a positive price for punishing the behavior of selfish individuals. All these actions are labeled as social in economics because there is no apparent way to reconcile them with any reasonable form of pure self-interest. We focus on social dilemma games and want to communicate two main messages. First, research in experimental economics has produced abundant evidence that illustrates the social components of people’s preferences. Second, social sanctions of different types play an important role in facilitating cooperative behavior. |
| Date: | 2010–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:gra:wpaper:10/15&r=cbe |
| By: | Giovanna Devetag; Sibilla Di Guida |
| Abstract: | In this paper we test the effect of descriptive "features" on initial strategic behavior in normal form games, where "descriptive" are all those features that can be modified without altering the (Nash) equilibrium structure of a game. We observe that our experimental subjects behave according to some simple heuristics based on descriptive features, and that these heuristics are stable even across strategically different games. This suggests that a categorization of games based on features may be more accurate in predicting agents' initial behavior than the standard categorization based on Nash equilibria, as shown by the analysis of individual behavior. Analysis of choice patterns and individual response times suggests that non-equilibrium choices may be due to the use of incorrect and simplified mental representations of the game structure, rather than to beliefs in other players' irrationality. Of the four stationary concepts analyzed (Nash equilibrium, QRE, action sampling, and payoff sampling), QRE results the best in fitting the data. |
| Keywords: | normal form games; one-shot games; response times; dominance; similarity; categorization; focal points |
| JEL: | C72 C91 C92 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:trt:disawp:1007&r=cbe |
| By: | Blanco, Mariana; Engelmann, Dirk; Normann, Hans-Theo |
| Abstract: | We assess the predictive power of a model of other-regarding preferences - inequality aversion - using a within-subjects design. We run four different experiments (ultimatum game, dictator game, sequential-move prisoners' dilemma and public-good game) with the same sample of subjects. We elicit two parameters of inequality aversion to test several hypotheses across games. We find that within-subject tests can differ markedly from aggregate-level analyses. Inequality-aversion has predictive power at the aggregate level but performs less well at the individual level. The model seems to capture various behavioral motives in different games but the correlation of these motives is low within subjects. -- |
| Keywords: | behavioral economics,experimental economics,inequality aversion,otherregarding preferences |
| JEL: | C72 C91 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:06&r=cbe |
| By: | Michailova, Julija |
| Abstract: | In this paper influence of behavioral factors (overconfidence and risk aversion) on financial decision making of economic subjects is analyzed. For this purpose two kinds of experiments were conducted: asset market and risk aversion experiments. In conducted asset market sessions subjects, based on their pre-experimental overconfidence scores, were assigned to two types of markets: the least overconfident ones formed five “rational” markets and the most overconfident ones formed five “overconfident” markets. Data collected from ten experimental sessions revealed that individual performance and trade activity were overconfidence dependent. Even small variations in miscalibration among players of the same “type”, comprising each of the asset markets, were sufficient to cause this effect. In the second part of experiment, post hoc assessment of risk aversion was implemented in a sample of former participants of the asset market experiment (32 persons). The presented evidence suggests that risk aversion was not among the factors that had influence on individual engagement in trade activity or performance. It was concluded that in the sample, for which risk aversion measurements were obtained, experimental market outcomes were overconfidence and not risk aversion driven. |
| Keywords: | overconfidence; individual behavior; experiment. |
| JEL: | D81 G11 C90 C91 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26390&r=cbe |
| By: | Michailova, Julija |
| Abstract: | In this paper relationship between the market overconfidence and occurrence of the stock-prices’ bubbles is investigated. Sixty participants traded in ten experimental markets of the two types: rational and overconfident. Markets are constructed on the basis of subjects’ overconfidence, measured in the administered pre-experimental psychological test sessions. The most overconfident subjects form overconfident markets, and the least overconfident – rational markets. Empirical evidence presented in the paper refines differences between market outcomes in the experimental treatments and suggests the connection between market overconfidence and market outcomes. Prices in rational markets tend to track the fundamental asset value more accurately than prices in overconfident markets, and are significantly lower and less volatile than the average overconfident prices. Strong positive correlation between market outcomes and overconfidence measures draws conclusion, that an increase in market overconfidence is associated with the increase in average price and trading activity. Large and significant correlation between bubble measures and measures of overconfidence provide additional evidence that overconfidence has significant effect on price and trading behavior in experimental asset markets. |
| Keywords: | overconfidence; price bubbles; experimental asset market. |
| JEL: | G12 C92 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26388&r=cbe |
| By: | Piatek, Rémi (University of Konstanz); Pinger, Pia (University of Mannheim) |
| Abstract: | This paper demonstrates that locus of control, i.e. whether individuals believe that reinforcement in life comes from their own actions instead of being determined by luck or destiny, is an important predictor of the decision to obtain higher education. Furthermore, the authors find that premarket locus of control, defined as locus of control measured at the time of schooling – before the individual enters the labor market – does not significantly affect later wages after controlling for education decisions. In light of the existing literature, which finds mostly positive effects of contemporaneous locus of control measures on wages, this indicates that it is important to distinguish between premarket skills and those that are already influenced by labor market experience and age. Last, simulation of the model shows that moving individuals from the first to the last decile of the locus of control distribution significantly shifts the distribution of schooling choices, thus indirectly affecting later wages. The paper conveys important policy implications. If some personality traits, such as locus of control, influence the cost of education but not outcomes directly, these individual characteristics may keep individuals from studying who, once they reach the labor market, are no less successful than other individuals. If these individuals are at high risk of dropping out of school, early personality tests and targeted mentoring of students with an external locus of control are a means to countervail skill shortages in society. |
| Keywords: | data set combination, locus of control, wages, latent factor model |
| JEL: | C31 J24 J31 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5289&r=cbe |
| By: | Michael Fritsch (School of Economics and Business Administration, Friedrich-Schiller-University Jena); Alina Rusakova (School of Economics and Business Administration, Friedrich-Schiller-University Jena) |
| Abstract: | We investigate the effect of broad personality traits-the Big Five-on an individual's decision to become self- employed. In particular, we test an overall indicator of the entrepreneurial personality. Since we find that the level of self-employment varies considerably across professions, we also perform the analysis for different types of professions, namely, those classified as being in the "creative class" as compared to the noncreative class. The analysis is based on micro data for individuals of the German Socio Economic Panel (SOEP). We find a significant association between personality traits and the propensity be become self-employed. However, the strength of this link is fairly weak and differs across professions, indicating an important effect of an individual's profession on his or her decision to run an own business. |
| Keywords: | Entrepreneurship, self-employment, personality traits, the Big Five, professions |
| JEL: | L26 Z1 |
| Date: | 2010–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2010-075&r=cbe |
| By: | Alpízar, Francisco; Carlsson, Fredrik; Naranjo, Maria A. |
| Abstract: | The risk of losing income and productive means due to adverse weather can differ significantly among farmers sharing a productive landscape and is, of course, hard to estimate or even “guesstimate” empirically. Moreover, the costs associated with investments in adaptation to climate are likely to exhibit economies of scope. We explore the implications of these characteristics on Costa Rican coffee farmers’ decisions to adapt to climate change, using a framed field experiment. Despite having a baseline of high levels of risk aversion, we still found that farmers more frequently chose the safe options when the setting is characterized by unknown risk (that is, poor or unreliable risk information). Second, we found that farmers, to a large extent, coordinated their decisions to secure a lower adaptation cost and that communication among farmers strongly facilitated coordination. |
| Keywords: | risk, ambiguity, technology adoption, climate change, field experiment |
| JEL: | C93 D81 H41 Q16 Q54 |
| Date: | 2010–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:rff:dpaper:dp-09-18-rev-efd&r=cbe |
| By: | James, Simon |
| Abstract: | This paper extends previous work presented at the SABE/IAREP conference at St Mary’s University, Halifax (James, 2009). In the earlier paper it was shown that conventional economic theory is used to make the case for tax reform but does not always adequately incorporate all the relevant factors. However, an approach based on behavioral economics can make the difference between success and failure. In this paper the contributions of other social sciences are also included. Taxation is a particularly appropriate subject to explore the integration of the social sciences since they have all devoted considerable attention to it. It can be seen that different social sciences suggest a range of variables that might be taken into account in addition to those included in mainstream economics. Other social sciences also offer different methodological approaches and consider the possibility of different outcomes of the fiscal process. The paper concludes that it is not easy to integrate the social sciences in a single approach to the study of tax and tax policy. There may also be the risk of encouraging inappropriate integration - researchers operating outside their expertise can produce results that are not helpful. However, comparing the contribution of behavioral economics with those of the social sciences more generally, it can be seen that behavioral economics can offer a framework within which these areas can be examined. Indeed, it may be a useful channel to add the contributions of other social sciences to mainstream economic research. |
| Keywords: | behavioral economics; social sciences; taxation; tax reform |
| JEL: | H20 H30 H71 H3 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26289&r=cbe |
| By: | Berg, Nathan; Hoffrage, Ulrich |
| Abstract: | Given free information and unlimited processing power, should decision algorithms use as much information as possible? A formal model of the decision making environment is developed to address this question and provide conditions under which informationally frugal algorithms, without any information or processing costs whatsoever, are optimal. One cause of compression that allows optimal algorithms to rationally ignore information is inverse movement of payoffs and probabilities (e.g., high payoffs occur with low probably and low payoffs occur with high probability). If inversely related payoffs and probabilities cancel out, then predictors that correlate with payoffs and consequently condition the probabilities associated with different payoffs will drop out of the expected-payoff objective function, severing the link between information and optimal action rules. Stochastic payoff processes in which rational ignoring occurs are referred to as compressed environments, because optimal action depends on a reduced-dimension subset of the environmental parameters. This paper considers benefits and limitations of economic models versus other methods for studying links between environmental structure and the real-world success of simple decision procedures. Different methods converge on the normative proposition of ecological rationality, as opposed to axiomatic rationality based on informational efficiency and internal consistency axioms, as a superior framework for comparing the effectiveness of decision strategies and prescribing decision algorithms in application. |
| Keywords: | Ecological rationality; Bounded rationality; Frugality; Simplicity |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26372&r=cbe |
| By: | Philomena M. Bacon (University of East Anglia); Peter Moffatt (School of Economics, University of East Anglia) |
| Abstract: | Microdata from the UK Survey of Mortgage Lenders is used to model borrowers’ choices between variable and fixed rate mortgages. The data is treated as a large-scale “natural experiment” on risky choice, with the choice of a fixed rate corresponding to the “safe choice” in a more conventional experimental setting. The choice is assumed to depend partly on risk attitude, and partly on expectations of future movements in interest rates. Approximately 280,000 choices, made by borrowers between 1992 and 2001, appear in the sample. The ordered probit model is used for estimation, while taking account of a number of econometric issues including missing counterfactuals, selectivity, and endogeneity. Explanatory variables are divided into three groups: mortgage price variables; interest rate expectations; and borrower characteristics. A large number of strong effects are found, including: fixing is more likely when agents expect interest rates to increase; the presence of female borrowers increases the propensity to fix; older borrowers are less likely to fix; high-income borrowers are less likely to fix, particularly so if income is “self-certified”; those with higher loan-to-value ratios are less likely to fix. These findings amount to new insights in the modelling of choice under risk.Series: AEP UEA Working Papers in Economics |
| Keywords: | risky choice, fixed and variable rate mortgages, counterfactuals, interest rate expectations; ordered probit. |
| JEL: | G20 M13 |
| Date: | 2010–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:uea:aepppr:2010_20&r=cbe |
| By: | Thomas J. Miceli (University of Connecticut) |
| Abstract: | Law and economics scholars argue that the common law evolves toward efficiency. Invisible hand theories suggest that the law is primarily driven by a selection process whereby inefficient laws are litigated more frequently than efficient laws, and hence are more likely to be overturned. But the preferences of judges also necessarily affect legal change. This paper models the interaction of these two forces to evaluate the efficiency claim, and then applies the conclusions to the evolution of accident law in the U.S. Specifically, it attributes the persistence of negligence to its efficiency properties, despite its having been initially selected by judges for a different reason. |
| Keywords: | Accident law, legal change, judicial decision-making, natural selection |
| JEL: | B52 K13 K41 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2010-27&r=cbe |
| By: | Chatterjee, Swarn; Palmer, Lance; Goetz, Joseph |
| Abstract: | This study uses data from the Panel Study of Income Dynamics to examine whether self-regulation, proxied by regularly dining together with family, is associated with better financial preparedness and greater wealth accumulation across time among households. Findings reveal that individuals who had sufficient self-regulation to regularly eat meals together with their family, increased wealth at a faster rate than others between 1994 and 2004. Moreover, those who exhibited self-regulation by frequently spending mealtime with their family showed greater preference for investment portfolio diversification. Consistent with other studies, results indicate that wealth accumulation increased with age, income, and educational attainment. |
| Keywords: | Individual wealth; Financial behavior; Portfolio allocation; Self regulation |
| JEL: | Z1 D14 |
| Date: | 2010–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26334&r=cbe |