nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2010‒12‒11
fifteen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Self-Esteem, Shame and Personal Motivation By Dessi, Roberta; Zhao, Xiaojian
  2. Salience theory of choice under risk By Pedro Bordado; Nicola Gennaioli; Andrei Shleifer
  3. Fairness in Risky Environments: Theory and Evidence By Vitezslav Babicky; Andreas Ortmann; Silvester Van Koten
  4. Is Regulation by Milestones Efficiency Enhancing? - An Experimental Study of Environmental Protection - By Andreas Freytag; Werner Güth; Hannes Koppel; Leo Wangler
  5. On the construction of social preferences in lab experiments By Borgloh, Sarah; Dannenberg, Astrid; Aretz, Bodo
  6. A simulation approach to a world with learning By Andreu, Rafael; Riverola, Josep; Rosanas, Josep M.; de Santiago, Rafael
  7. Handedness predicts Social Preferences: Evidence connecting the Lab to the Field By Thomas Buser
  8. It pays to pay - Big Five personality influences on co-operative behaviour in an incentivized and hypothetical prisoner's dilemma game By Jan-Erik Lönnqvist; Markku Verkasalo; Gari Walkowitz
  9. Why Consumers Pay Voluntarily: Evidence from Online Music By Tobias Regner
  10. Risk Preferences Under Extreme Poverty: A Field Experiment By Gustavo Adolfo Caballero Orozco
  11. Overcoming Consumer Biases in the Choice of Pricing Schemes: A Lab Experiment By Natalia Shestakova
  12. How Expectations Affect Managerial Change By Egon Franck; Stephan Nüesch; Jan Pieper
  13. Maintaining (Locus of) Control?: Assessing the Impact of Locus of Control on Education Decisions and Wages By Rémi Piatek; Pia Pinger
  14. Consumer Confidence in Financial Markets By Md. Kabir Ahmed Chowdhury; G.M. Abul Kalam Azad
  15. Aging and decision making: How aging affects decisions under uncertainty By Sproten, Alec; Diener, Carsten; Fiebach, Christian; Schwieren, Christiane

  1. By: Dessi, Roberta (Toulouse School of Economics (GREMAQ and IDEI) and CEPR); Zhao, Xiaojian (Hong Kong University)
    Abstract: The available evidence from numerous studies in psychology suggests that overconfidence is a much more important phenomenon in North America than in Japan. Relatedly, North Americans appear to view high self-esteem much more positively than Japanese. The pattern is reversed when it comes to shame, a social emotion which appears to play a much more important role among Japanese than North Americans. We develop an economic model that endogenizes these observed differences, and relates them to differences in economic opportunities. A crucial tradeoff arises in the model between the benefits of encouraging self-improvement and the benefits of promoting initiative and new investments. In this context, self-esteem maintenance (self-enhancement) and high sensitivity to shame emerge as substitute mechanisms to induce efficient effort and investment decisions, generating a "North American" equilibrium with overconfidence and low sensitivity to shame, and a "Japanese" equilibrium with high sensitivity to shame and no overconfidence. The analysis identifies the key equilibrium costs as well as the benefits of reliance on each mechanism, and the implications for welfare.
    JEL: D82 D83 Z13
    Date: 2010–09–15
  2. By: Pedro Bordado; Nicola Gennaioli; Andrei Shleifer
    Abstract: We present a theory of choice among lotteries in which the decision maker's attention is drawn to (precisely defined) salient payoffs. This leads the decision maker to a context-dependent representation of lotteries in which true probabilities are replaced by decision weights distorted in favor of salient payoffs. By endogenizing decision weights as a function of payoffs, our model provides a novel and unified account of many empirical phenomena, including frequent risk-seeking behavior, invariance failures such as the Allais paradox, and preference reversals. It also yields new predictions, including some that distinguish it from Prospect Theory, which we test.
    Date: 2010–04
  3. By: Vitezslav Babicky; Andreas Ortmann; Silvester Van Koten
    Abstract: Theories of fairness have typically used the assumption of ex-ante known pie size. Pie size, however, is rarely known ex ante. Using three simple allocation problems generally known as dictator, ultimatum and trust games, we explore the influence of ex-ante unknown pie size of varying degrees of risk on individual behavior. We derive theoretical predictions for two of these games using utility functions that capture additively separable constant relative risk aversion and inequity aversion. We test the theoretical predictions experimentally on two different subject pools: students of Czech Technical University and employees of Prague City Hall. We control for the risk attitude of our subjects through a variant of the Holt-Laury assessment instrument. We find statistically significant differences in giving behavior as a function of the degree of risk, and the degree of risk aversion, across individuals. We also find differences across the two subject pools but show that, once we control for various socio-demographic and cognitive characteristics, these differences evaporate. We discuss the policy and methodological implications of the results of our artefactual field experiment, as well as the implications for theories of fairness of reciprocity and their experimental test.
    Keywords: fairness, risk aversion, subject pool effects, economics experiments.
    JEL: C90 C91 C92 D81
    Date: 2010–10
  4. By: Andreas Freytag (School of Economics and Business Administration, Friedrich-Schiller-University Jena); Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group); Hannes Koppel (Max Planck Institute of Economics, Jena); Leo Wangler (School of Economics and Business Administration, Friedrich-Schiller-University Jena)
    Abstract: Viewing individual contributions as investments in emission reduction we rely on the familiar linear public goods- game to set global reduction targets which, if missed, imply that all payoffs are destroyed with a certain probability. Regulation by milestones does not only impose a final reduction target but also intermediate ones. In our leading example the regulating agency is Mother Nature but our analysis can, of course, be applied to other regulating agencies as well. We are mainly testing for milestone effects by varying the size of milestones in addition to changing the marginal productivity of individual contributions and the probability to lose.
    Keywords: Cumulative Public Goods, Milestones, Climate Change, Experiment.
    JEL: C92 D78 H41 Q54
    Date: 2010–12–02
  5. By: Borgloh, Sarah; Dannenberg, Astrid; Aretz, Bodo
    Abstract: This paper studies the construction of social preferences in the lab. Experimental subjects have the opportunity to donate to a charity and to allocate money in a conventional dictator game. The results show that charitable donations and dictator game allocations are positively correlated. The correlation is only significant, however, if the dictator game follows the donation decision. Furthermore, while donation behavior is independent from the order of play, dictator game behavior is not. In line with the constructive-preference approach, we argue that preferences are instable and sensitive to outside influences when subjects are confronted with a new decision situation, while in a well-known situation preferences are more stable. --
    Keywords: social preferences,charitable donations,dictator game,experiment
    JEL: C91 C93 D01 D64
    Date: 2010
  6. By: Andreu, Rafael (IESE Business School); Riverola, Josep (IESE Business School); Rosanas, Josep M. (IESE Business School); de Santiago, Rafael (IESE Business School)
    Abstract: The main objective of the firm in economics-based models is to maximize profit. Dropping this objective in order to make the models more realistic complicates the analysis and is seldom done, thus leaving management action out of the picture. In this paper we try to understand how management decisions give rise to aggregate results. In particular, we develop a simulation model of an economy in which emphasis is placed on managers' decision-making criteria. The key decision managers have to make is which projects their firms will undertake. Project selection has an impact on the firm, as the firm's profile may change through learning.
    Keywords: Management; Economics; Learning; Simulation;
    Date: 2010–10–13
  7. By: Thomas Buser (University of Amsterdam)
    Abstract: It is now generally accepted that some people are more altruistic, more trusting, or more reciprocal than others, but it is still unclear whether these differences are innate or a consequence of nurture. We analyse the correlation between handedness and social preferences in the lab and find that left-handed men are significantly more generous when recipients have the possibility to reciprocate and exhibit stronger positive reciprocity themselves. Left-handed women are significantly less altruistic. We test the external validity of these findings by connecting them to large-scale survey data from the Netherlands and the US covering altruistic behaviour and reciprocity outside the lab. The results largely carry over. We argue that our findings demonstrate that social preferences are at least partially determined by nature and help to shed light on their neural origins.
    Keywords: social preferences; handedness; external validity of lab experiments
    JEL: D87 C91
    Date: 2010–11–30
  8. By: Jan-Erik Lönnqvist (Faculty of Behavioural Sciences, University of Helsinki, Finland); Markku Verkasalo (Faculty of Behavioural Sciences, University of Helsinki, Finland); Gari Walkowitz (Department of Management, University of Cologne, Germany)
    Abstract: The authors investigated how the presence or absence of monetary incentives in a prisoner's dilemma game may influence research outcomes. Specifically, the predictive power of the Big Five personality traits on decisions in an incentivized (N = 60) or hypothetical (N = 60) prisoner's dilemma game was investigated. Participants were less generous in the incentivized game. More importantly, personality predicted decisions only in the incentivized game, with low Neuroticism and high Openness to Experience predicting more cooperative transfers. The influence of Neuroticism on behaviour in the incentivized game was mediated by risk attitude. The results are consistent with other results suggesting that the Big Five are relevant predictors of moral behaviour, and with results suggesting that the determinants of hypothetical decisions are different from the determinants of real decisions, with the latter being more revealing of one's true preferences. The authors argue that psychologists, contrary to prevailing praxis, should consider making their participants' decisions more real. This could allow psychologists to more convincingly generalize laboratory findings into contexts outside of the laboratory.
    Keywords: Big Five, Prisoner's dilemma, Social dilemma, Moral behaviour, Incentives, Stake size
    Date: 2010–11
  9. By: Tobias Regner (Max Planck Institute of Economics, Jena)
    Abstract: Customers at the online music label Magnatune can pay what they want for albums, as long as the payment is within a given price range ($5-$18). Magnatune recommends to pay $8, and on average customers paid $8.20 (Regner and Barria, 2009). We ran an online survey and collected responses from 227 frequent Magnatune customers to gain insights about the underlying motivations to pay more than necessary. We control for individual response- and sample selection-bias, and find that reciprocity and guilt appear to be the major drivers for generous voluntary payments. Being inclined to follow social norms is a positive determinant for payments around the recommended price.
    Keywords: social preferences, other-regarding behaviour, music industry, reciprocity, guilt, social norms, altruism, fairness, social-image concerns, survey
    JEL: D82 M21 L82 L86
    Date: 2010–11–30
  10. By: Gustavo Adolfo Caballero Orozco
    Abstract: Until now, the dominant belief concerning the relationship between poverty and risk aversion is that the poor are more risk averse. If the poor are more risk averse, then they will choose “low risk–low return” activities that trap them in poverty. However, both empirical and experimental evidence show no clear pattern such as would suggest that the poor are somehowmore averse to risk than others; at times, they even seem to embrace risk, while at other times, there seems to be no difference. Focus has tended to be on extreme behaviors, as these are related to sub-optimal decisions such as have even raised questions whether an individual can be simultaneously both poor and rational. Amongst all the available empirical evidence, there is one bit of evidence of special interest—changes in behavior whenever subsistence is at risk. This paper emerges from the fact that recent experimental evidence in both psychology and economics suggests that certain decisions made under risk respond to reference points.We develop a theory within the traditional streamof rational choices, whereby the references are set by only observable variables, such as prices and family size. According to this theory, extremely poor individuals respond to the income reference that guarantees the consumption of the necessary calories so as to ensure a healthy and longer life. Being in the neighborhood of this reference can incentivize both the seeking of high risk, whenever below the reference, and an aversion to high risk, when above. An experimental exercise was conducted involving 92 individuals from households living in poverty and extreme poverty wherein they participated in a baseline risk experiment that was the one we analyzed. Inasmuch as the treatment was not randomly assigned, but instead was determined based on households’ per-capita incomes, a quasi-experimental approach was used to analyze the results. We use a regression discontinuity design, andfind evidence suggesting that being presented with the opportunity of avoiding undernourishmentsignificantly decreases a household’s risk aversion.
    Date: 2010–11–15
  11. By: Natalia Shestakova
    Abstract: This paper uses experimental data to investigate possible biases in consumers' choice of pricing schemes when their demand is perfectly inelastic but uncertain. I consider threepart pricing schemes (i.e. fixed fee, included units, extra-unit price). The analysis suggests a strong bias towards the pricing scheme with the number of included units equal to the expected demand. I interpret this bias as an “anchoring effect” of the expected demand on consumer decisions. Interestingly, subjects invest less effort into the choice problem when the opportunity cost of a mistake is higher. Still, the higher opportunity cost of a mistake helps subjects overcome the bias.
    Keywords: heuristics; price discrimination; experiment.
    JEL: D42 D83
    Date: 2010–09
  12. By: Egon Franck (Institute for Strategy and Business Economics, University of Zurich); Stephan Nüesch (Institute for Strategy and Business Economics, University of Zurich); Jan Pieper (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: This study addresses the question how performance expectations affect involuntary managerial change. As we measure performance expectations based on highly efficient bookmaker odds, our specification is less subject to manipulations than the analyst forecasts employed in prior studies. Using match-level data from the German Bundesliga, we empirically investigate to which extent deviations from rational performance expectations affect the probability of involuntary coach dismissal, even after controlling for various measures of actual team performance. We find that coaches who face higher performance expectations are more likely to be fired than peers with similar performance records but lower expectations.
    Keywords: Expectations, managerial change, aspiration level, betting odds
    Date: 2010–12
  13. By: Rémi Piatek; Pia Pinger
    Abstract: This paper establishes that individuals with an internal locus of control, i.e., who believe that reinforcement in life comes from their own actions instead of being determined by luck or destiny, earn higher wages. However, this positive effect only translates into labor income via the channel of education. Factor structure models are implemented on an augmented data set coming from two different samples. By so doing, we are able to correct for potential biases that arise due to reverse causality and spurious correlation, and to investigate the impact of premarket locus of control on later outcomes.
    Keywords: locus of control, wages, latent factor model, data set combination
    JEL: C31 J24 J31
    Date: 2010
  14. By: Md. Kabir Ahmed Chowdhury; G.M. Abul Kalam Azad
    Abstract: This paper makes an attempt to identify major factors, like currency forfeiting, loan default, capital shortfall, capital flight, etc which undermine consumer confidence in the financial services sector of Bangladesh. The paper also provides a review of different legislative and regulatory measures introduced by the authorities over the past years to strengthen consumer confidence in the financial markets, such as enhancing the security features of currency notes, deposit insurance, capital adequacy requirement, loan classification and provisioning, credit rating for raising capital and putting in place a mechanism for prevention of money laundering. [BB WP No. 0606].
    Keywords: financial services sector, Bangladesh, consumer confidence,
    Date: 2010
  15. By: Sproten, Alec; Diener, Carsten; Fiebach, Christian; Schwieren, Christiane
    Abstract: In an aging society, it becomes more and more important to understand how aging affects decision making. Older adults have to face many situations that require consequential financial decisions. In the present study, we examined the effects of aging on decisions in two domains of uncertainty: risk and ambiguity. For this purpose, a group of young and older adults played a card game which was composed of risky and ambiguous conditions. In the risk condition, participants knew the probabilities to win or loose the game (i.e. full information), whereas in the ambiguous condition, these probabilities were unknown (thus, there was lack of information). When confronted with risky decisions, the behaviour of older and young adults (measured by the number of times participants chose a gamble instead of a sure amount of money) did not differ. In contrast, under ambiguity, there were significant age-effects in decision making: older people were less ambiguity-averse than young subjects. We conclude that there exist differences in uncertainty-processing between young and older adults, and discuss possible explanations of these differences.
    Keywords: Age differences; experiment; risk and uncertainty
    JEL: J14 C91
    Date: 2010–12–03

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