nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2011‒03‒12
eighteen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. La Dolce Vita: Hedonic Estimates of Quality of Life in Italian Cities By Emilio Colombo; Alessandra Michelangeli; Luca Stanca
  2. Social Comparison in the Workplace: Evidence from a Field Experiment By Cohn, Alain; Fehr, Ernst; Herrmann, Benedikt; Schneider, Frédéric
  3. Temptation at work By Alessandro Bucciol; Daniel Houser; Marco Piovesan
  4. Economic Decision-making in Poverty Depletes Behavioral Control By Dean Spears
  5. Decision-making Strategies and Performance among Seniors By Sudipta Sarangi; Tibor Besedes; Cary Deck; Mikhael Shor
  6. Behavioural characteristics and financial distress By Yvonne McCarthy
  7. Who lost the most? Financial literacy, cognitive abilities, and the financial crisis By Tabea Bucher-Koenen; Michael Ziegelmeyer
  8. Disgust Promotes Disposal: Souring the Status Quo By Han, Seunghee; Lerner, Jennifer S.; Zeckhauser, Richard
  9. Trust and financial trades By Radu Vranceanu; Angela Sutan; Delphine Dubart
  10. Managerial Incentives and Favoritism in Promotion Decisions: Theory and Field Evidence By Berger, Johannes; Herbertz, Claus; Sliwka, Dirk
  11. Behavioral Economics and the Conduct of Benefit-Cost Analysis: Towards Principles and Standards By Hammitt, James; Robinson, Lisa
  12. Priors and Desires: A Model of Payoff-Dependent Beliefs By Guy Mayraz
  13. Pro-social preferences and self-selection into the public health sector: evidence from economic experiments By Kolstad, Julie Riise; Lindkvist, Ida
  14. Are We Wasting Our Children's Time by Giving Them More Homework? By Eren, Ozkan; Henderson, Daniel J.
  15. Quantity versus Quality: What’s in a (Journal) Name? By David E. Giles
  16. Who Is (More) Rational? By Syngjoo Choi; Shachar Kariv; Wieland Mueller; Dan Silverman
  17. Adaptive social learning By Christoph March
  18. Evolutionary Foundations of Mathematics By Tuncer, Ruhi

  1. By: Emilio Colombo; Alessandra Michelangeli; Luca Stanca
    Abstract: This paper provides an assessment of quality of life in Italian cities using the hedonic approach. We analyze micro-level data for housing and labor markets to estimate compensating differentials for local amenities within five domains: climate, environment, services, society and economy. The estimated implicit prices are used to construct overall and domain-specific quality of life indices. We find that differences in amenities are re°ected in substantial compensating differentials in housing prices, whereas the effects on wages are relatively small. Quality of life varies substantially across space and is strongly related to differences in public services and economic conditions. Overall, quality of life is highest in medium-sized cities of the Center-North, displaying relatively high scores in all the domains considered. Northern cities fare better with respect to services, social and economic conditions, while relatively worse for climate and environmental conditions.
    Keywords: quality of life, hedonic prices, housing markets
    JEL: C4 D5 H4 J3 J6 P2 P3 Q2 R2
    Date: 2010–12
  2. By: Cohn, Alain (University of Zurich); Fehr, Ernst (University of Zurich); Herrmann, Benedikt (University of Nottingham); Schneider, Frédéric (University of Zurich)
    Abstract: We conducted a randomized field experiment to examine how workers respond to wage cuts, and whether their response depends on the wages paid to coworkers. Workers were assigned to teams of two, performed identical individual tasks, and received the same performance – independent hourly wage. Cutting both team members' wages caused a substantial decrease in performance. When only one team member's wage was cut, the performance decrease for the workers who received the cut was more than twice as large as the individual performance decrease when both workers' wages were cut. This finding indicates that social comparison processes among workers affect effort provision because the only difference between the two wage cut conditions is the other team member's wage level. In contrast, workers whose wage was not cut but who witnessed their team member's pay being cut displayed no change in performance relative to the baseline treatment in which both workers' wages remained unchanged, indicating that social comparison exerts asymmetric effects on effort.
    Keywords: compensation, fairness, field experiment, social comparison
    JEL: C93 J33 M53
    Date: 2011–03
  3. By: Alessandro Bucciol (University of Verona); Daniel Houser (George Mason University, Interdisciplinary Center for Economic Science.); Marco Piovesan (Harvard Business School)
    Abstract: To encourage worker productivity offices prohibit Internet use. Consequently, many employees delay Internet activity to the end of the workday. Recent work in social psychology, however, suggests that using willpower to delay gratification can negatively impact performance. We report data from an experiment where subjects in a Willpower Treatment are asked to resist the temptation to join others in watching a humorous video for 10 minutes. In relation to a baseline treatment that does not require willpower, we show that resisting this temptation detrimentally impacts economic productivity on a subsequent task.
    Keywords: temptation, willpower, lab experiment.
    JEL: C93 D01
    Date: 2011–02
  4. By: Dean Spears (Princeton University)
    Abstract: Economic theory and common sense suggest that time preference can cause or per- petuate poverty. Might poverty also or instead cause impatient or impulsive behavior? This paper reports a randomized lab experiment and a partially randomized field ex- periment, both in India, and analysis of the American Time Use Survey. In all three studies, poverty is associated with diminished behavioral control. The primary contri- bution is to isolate the direction of causality from poverty to behavior; three theoretical mechanisms from psychology cannot be deffinitively separated. One supported expla- nation is that poverty, by making economic decision-making more difficult for the poor, depletes cognitive control.
    Keywords: impatient, impulsive behavior, poverty, psychology, cognative control
    JEL: D19 D63 I39 J19
    Date: 2010–12
  5. By: Sudipta Sarangi; Tibor Besedes; Cary Deck; Mikhael Shor
    Abstract: Using paper and pencil experiments administered in senior centers, we examine decision-making performance in multi-attribute decision problems. We find a significant decline in performance with age due to reduced reliance on common heuristics among our oldest subjects. Subjects in their early sixties incorporate a wide array of heuristics, septuagenarians employ progressively fewer strategies, and subjects in their 80s make nearly random selections. However, we find that increasing the number of options in a decision problem increases the number of heuristics brought to the task. This challenges the choice overload view that people give up when confronted with too much choice.
  6. By: Yvonne McCarthy (Central Bank of Ireland.)
    Abstract: Using a new nationally representative survey of financial capability and experience in the UK and Ireland, I investigate the key factors that cause individuals to experience financial distress. In this context, a key area that I focus on is whether individuals’ behavioural traits, such as their capacities for self-control, planning, and patience, affect their ability to stay out of financial trouble. I find that the variables that proxy for these behavioural characteristics are both statistically significant and economically important for predicting both mild and extreme forms of financial distress, in a regression controlling for demographic and socio-economic factors. Furthermore, behavioural traits emerge as having a stronger impact on the incidence of financial distress than education or financial literacy. The results raise questions about whether policy can be oriented towards improving financial habits and mitigating the impact of behavioural characteristics on personal finances. JEL Classification: C25, D14.
    Keywords: Personal Finance, Financial Strain, Debt, Behaviour, Financial Literacy.
    Date: 2011–02
  7. By: Tabea Bucher-Koenen (MEA and University of Mannheim, 68131 Mannheim, Germany.); Michael Ziegelmeyer (Economics and Research Department, Banque centrale du Luxembourg.)
    Abstract: We study how and to what extent private households are affected by the recent financial crisis and how their financial decisions are influenced by this shock. Our analysis reveals that individuals with low levels of financial literacy are less likely to have invested in the stock market and thus are less likely to report losses in wealth. Yet, individuals with low financial literacy are more likely to sell their assets which lost in value (realize losses). This reaction to short-term losses has potential long-term consequences if individuals do not participate in markets' recovery and face lower returns in the long run. JEL Classification: D91, D14, G11.
    Keywords: financial literacy, cognitive ability, financial crisis, life-cycle savings, saving behavior, portfolio choice
    Date: 2011–02
  8. By: Han, Seunghee (Carnegie Mellon University); Lerner, Jennifer S. (Harvard University); Zeckhauser, Richard (Harvard University)
    Abstract: Humans naturally dispose of objects that disgust them. Is this phenomenon so deeply embedded that even incidental disgust--i.e., where the source of disgust is unrelated to a possessed object--triggers disposal? Two experiments were designed to answer this question. Two film clips served as disgust and neutral primes; the objects were routine commodities (boxes of office supplies). Results revealed that the incidental disgust condition powerfully increased the frequency with which decision makers traded away a commodity they owned for a new commodity (more than doubling the probability in each condition), thereby countering otherwise robust status quo bias (Samuelson & Zeckhauser, 1988). Decision makers were unaware of disgust's impact. Even when warned to correct for it, they failed to do so. These studies presented real choices with tangible rewards. Their findings thus have implications not only for theories of affect and choice, but also for practical improvements in everyday decisions.
    Date: 2010–06
  9. By: Radu Vranceanu (Economics Department - ESSEC Business School); Angela Sutan (ESC Dijon Bourgogne - ESC Dijon Bourgogne); Delphine Dubart (ESSEC Business School - ESSEC Business School)
    Abstract: In this paper we show that if a very small, exogenously given probability of terminating the exchange is introduced in an elementary investment game, reciprocators play more often the defection strategy. Everything happens as if they "hide behind probabilities" in order to break the trust relationship. Investors do no not seem able to internalize the reciprocators' change in behavior. This could explain why trades involving an exogenous risk of value destruction, such as financial transactions, provide an unfavorable environment for trust-building.
    Keywords: Experimental Economics ; Financial Transactions ; Investment Game ; Objective Risk ; Trust
    Date: 2010–05
  10. By: Berger, Johannes (University of Cologne); Herbertz, Claus (University of Cologne); Sliwka, Dirk (University of Cologne)
    Abstract: This paper investigates the effects of managerial incentives on favoritism in promotion decisions. First, we theoretically show that favoritism leads to a lower quality of promotion decisions and in turn lower efforts. But the effect can be mitigated by pay-for-performance incentives for managers who decide upon promotion. Second, we analyze matched employer-employee survey data with detailed firm level information on managerial incentive schemes and find that perceived promotion quality is indeed substantially higher when managers receive performance-related pay or participate in gain sharing plans.
    Keywords: incentives, favoritism, nepotism, tournaments
    JEL: J33 M51 M52 M54 J71
    Date: 2011–03
  11. By: Hammitt, James; Robinson, Lisa
    Date: 2010–10
  12. By: Guy Mayraz
    Abstract: This paper introduces an axiomatic model of decision making where a person's subjective judgment as to the likelihood of different states of nature depends upon her anticipated payoff in those states. In the resulting representation the payoff consequences of an event affect beliefs as if they were part of the evidence about its likelihood. A parameter determines both the direction and weight of this `evidence', with positive values corresponding to optimism, and negative values to pessimism. Changes to the expected payoff consequences of an event amount to new `evidence', and can affect beliefs even in the absence of new information. The magnitude of the bias is greatest in situations that combine high stakes and great uncertainty, and is only indirectly related to the cost in poor decisions. If uncertainty cannot be readily reduced a substantial bias may remain regardless of its consequences. The model can account for a wide range of psychology evidence, including wishful thinking, cognitive dissonance, and unrealistic pessimism. Economic consequences are explored in various settings, such as the economics of crime, where increased punishment may fail to deter crime.
    Keywords: Optimism, pessimism, cognitive-dissonance, wishful thinking, self-servingbeliefs, payoff-dependent beliefs, deterrence
    JEL: D01 D80 D81 D83 D84
    Date: 2011–03
  13. By: Kolstad, Julie Riise (University of Bergen); Lindkvist, Ida (CMI (Chr. Michelsen Institute)
    Abstract: There is growing interest in the role of pro-social motivation in public service delivery. In general, economists no longer question whether people have social preferences, but ask how and when such preferences will influence their economic and social decisions. Apart from revealing that individuals on average share and cooperate even when such actions lower their own material pay-off, economic experiments have documented substantial individual heterogeneity in the strength and structure of social preferences. In this paper we study the extent to which these differences are related to career choices, by testing whether preferences vary systematically between Tanzanian health worker students who prefer to work in the private health sector and those who prefer to work in the public health sector. Despite its important policy implications, this issue has received hardly any attention to date. By combining data from a questionnaire and two economic experiments, we find that students who prefer to work in the public health sector have stronger pro-social preferences than those who prefer to work in the private sector. We also show that the extent to which these students care about others can be conditional and linked to inequality aversion. A systematic selfselection of pro-socially motivated health workers into the public sector suggests that it is a good idea to have two sectors providing health services: this can ensure efficient matching of individuals and sectors by allowing employers in the two sectors to use different payment mechanisms tailored to attract and promote good performance from different types of health workers.
    Keywords: pro-social preferences; career choice; economic experiments; health workers
    JEL: H40 I18 J33 J45
    Date: 2010–04–01
  14. By: Eren, Ozkan (University of Nevada, Las Vegas); Henderson, Daniel J. (Binghamton University, New York)
    Abstract: Following an identification strategy that allows us to largely eliminate unobserved student and teacher traits, we examine the effect of homework on math, science, English and history test scores for eighth grade students in the United States. Noting that failure to control for these effects yields selection biases on the estimated effect of homework, we find that math homework has a large and statistically meaningful effect on math test scores throughout our sample. However, additional homework in science, English and history are shown to have little to no impact on their respective test scores.
    Keywords: first differencing, homework, instrumental variable, selection bias, unobserved traits
    JEL: C23 I21 I28
    Date: 2011–03
  15. By: David E. Giles (Department of Economics, University of Victoria)
    Abstract: We consider the relationship between the rankings and the title length of 159 academic economics journals. Although there is no significant association between these two metrics for the full sample of data, we find that a significant “bathtub” relationship between journal quality and title length emerges when the data are subjected to a rank correlation analysis over sub-samples.
    Keywords: Journal rankings; journal titles; impact factors; rank correlation
    JEL: A12 A23 C01 I23
    Date: 2011–02–28
  16. By: Syngjoo Choi; Shachar Kariv; Wieland Mueller; Dan Silverman
    Abstract: Revealed preference theory o¤ers a criterion for decision-making quality: if decisions are high quality then there exists a utility function that the choices maximize. We conduct a large-scale ?eld experiment that enables us to test subjects?choices for consistency with utility maximization and to combine the experimental data with a wide range of individual socioeco-nomic information for the subjects. There is considerable heterogeneity in subjects?consistency scores: high-income and high-education subjects display greater levels of consistency than low- income and low-education subjects, men are more consistent than women, and young subjects are more consistent than older subjects. We also ?nd that consistency with utility maximization is strongly related to wealth: a standard deviation increase in the consistency score is associated with 15-19 percent more wealth. This result conditions on socioeconomic variables including current income, education, and family structure, and is little changed when we add controls for past income, risk tolerance and the results of a standard personality test used by psychologists.
    JEL: C93 D01 D12 D81
    Date: 2011–01
  17. By: Christoph March (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper investigates the learning foundations of economic models of social learning. We pursue the prevalent idea in economics that rational play is the outcome of a dynamic process of adaptation. Our learning approach offers us the possibility to clarify when and why the prevalent rational (equilibrium) view of social learning is likely to capture observed regularities in the field. In particular it enables us to address the issue of individual and interactive knowledge. We argue that knowledge about the private belief distribution is unlikely to be shared in most social learning contexts. Absent this mutual knowledge, we show that the long-run outcome of the adaptive process favors non-Bayesian rational play.
    Keywords: social Learning ; informational herding ; adaptation ; analogies ; non-Bayesian updating
    Date: 2011–02
  18. By: Tuncer, Ruhi (Galatasaray University Economic Research Center)
    Abstract: We propose a simple cognitive model where qualitative and quantitative comparisons enable animals to identify objects, associate them with their properties held in memory and make naive inference. Simple notions like equivalence relations, order relations are used. We then show that such processes are at the root of human mathematical reasoning by showing that the elements of totally ordered sets satisfy the Peano axioms. The process through which children learn counting is then formalized. Finally association is modeled as a Markov process leading to a stationary distribution.
    Keywords: Cognitive system; equivalence relations; order relations; naive logic; Peano axioms; order precedes number; association; Markov chain
    Date: 2011–03–03

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