nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2011‒04‒16
nine papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. The Role of Intuition and Reasoning in Driving Aversion to Risk and Ambiguity By Jeffrey V. Butler; Luigi Guiso; Tullio Jappelli
  2. Tax Evasion, Welfare Fraud, and "The Broken Windows" Effect: An Experiment in Belgium, France and the Netherlands By Lefèbvre, Mathieu; Pestieau, Pierre; Riedl, Arno; Villeval, Marie Claire
  3. Cooperation in Partnerships: The Role of Breakups and Reputation By Ralph-C Bayer
  4. An Experimental Study on the Relevance and Scope of Culture as a Focal Point By Olga Bogach; Andreas Leibbrandt
  5. Decision Making under Ecological Regime Shift: An Experimental Economic Approach By Kawata, Yukichika
  6. Group Identity and Coalition Formation: Experiments in a three?player divide the dollar Game By Tremewan, James
  7. Incentives and Cooperation in Firms: Field Evidence By Berger, Johannes; Herbertz, Claus; Sliwka, Dirk
  8. Learning as a rational foundation for macroeconomics and finance By Evans, George W; Honkapohja, Seppo
  9. Mental accounting in the housing market By Johan Almenberg; Artashes Karapetyan

  1. By: Jeffrey V. Butler (Einaudi Institute for Economics and Finance (EIEF)); Luigi Guiso (European University Institute and EIEF); Tullio Jappelli (University of Naples Federico II, CSEF and CEPR)
    Abstract: Using information on a large sample of retail investors and experimental data we find that risk aversion and risk ambiguity are correlated: individuals who dislike risk also dislike ambiguity. We show that what links these traits is the way people handle decisions. Intuitive thinkers are less averse to risk and less averse to ambiguity than individuals who base their decisions on effortful reasoning. We confirm this finding in a series of experiments. One interpretation of our results is that the high-speed of intuitive thinking puts intuitive thinkers at a comparative advantage in situations involving high risk and ambiguity, making them less averse to both. Consistent with this view we show evidence from the field and from the lab that intuitive thinkers perform better than deliberative thinkers when making decisions in highly ambiguous and risky environments. We also find that attitudes toward risk and ambiguity are related to different individual characteristics and wealth. While the wealthy are less averse to risk, they dislike ambiguity more, a finding that has implications for financial puzzles.
    Keywords: Risk Aversion, Risk Ambiguity, Decision Theory, Dual Systems, Intuitive Thinking
    JEL: D81 D83
    Date: 2011–04–05
  2. By: Lefèbvre, Mathieu (CREPP, Université de Liège); Pestieau, Pierre (CREPP, Université de Liège); Riedl, Arno (Maastricht University); Villeval, Marie Claire (CNRS, GATE)
    Abstract: In a series of experiments conducted in Belgium (Wallonia and Flanders), France and the Netherlands, we compare behavior regarding tax evasion and welfare dodging, with and without information about others' behavior. Subjects have to decide between a 'registered' income, the realization of which will be known to the tax authority for sure, and an 'unregistered' income that will only be known with some probability. This unregistered income comes from self-employment in the Tax treatment and from black labor supplementing some unemployment compensation in the Welfare treatment. Subjects have then to decide on whether reporting their income or not, knowing the risk of detection. The results show that (i) individuals evade more in the Welfare treatment than in the Tax treatment; (ii) many subjects choose an option that allows for tax evasion or welfare fraud but report their income honestly anyway; (iii) examples of low compliance tend to increase tax evasion while examples of high compliance exert no influence; (iv) tax evasion is more frequent in France and the Netherlands; Walloons evade taxes less than the Flemish. There is no cross-country difference in welfare dodging.
    Keywords: tax evasion, social fraud, social comparisons, cross-country comparisons, experiments
    JEL: H26 H31 I38 C91
    Date: 2011–03
  3. By: Ralph-C Bayer (School of Economics, University of Adelaide)
    Abstract: We investigate experimentally if endogenous partnership formation can improve efficiency in social dilemma situations. Subjects play multiple two-player public goods games, where they can break up with their current partner after every fourth game. Subjects without a partner provide rankings of the available other singles regarding their preferred subject to be matched with. A stable marriage mechanism determines the new matches. We vary the information subjects have when they express their preferences for their future matches and also if staying in a partnership leads to a cost or a bonus. We find that endogenous group formation can increase efficiency. Both the provision of contribution history at the time of re-matching and bonuses for staying in a partnership have positive effects. At least one of the two positive factors has to be present for an efficiency improvement. The presence of both leads to the best results.
    Keywords: Social Dilemma, Endogenous Group Formation, Public Goods
    JEL: D83 H41
    Date: 2011–04
  4. By: Olga Bogach (Department of Economics, University of Hawaii at Manoa); Andreas Leibbrandt (Department of Economics, University of Chicago)
    Abstract: This paper uses an experimental approach to study whether nationality serves as a focal point. We let subjects from Japan, Korea, and China play stag-hunt coordination games in which we vary information about their partner. The results show that subjects are more likely to try to coordinate on the payoff-dominant equilibrium if the only piece of information they have about their partner is that they have the same nationality. However, if subjects receive additional information about their partner, subjects are not more likely to try to coordinate on the payoff dominant equilibrium. We also do not find that subjects are less likely to try to coordinate on the payoff-dominant equilibrium when their partner has a different nationality as compared to when the partner’s nationality is unknown. In addition, we observe that giving subjects information about their partner in general increases the risk of miscoordination. Thus, our findings suggest that nationality can serve as a coordination device but also that the scope of this device is limited.
    Keywords: Coordination, Focal points, Cultural economics, Inter-cultural lab experiments, In-group behavior.
    JEL: C91 C92 Z1 Z13
    Date: 2011–04–01
  5. By: Kawata, Yukichika
    Abstract: Environmental economics postulates the assumption of homo economicus and presumes that externality occurs as a result of the rational economic activities of economic agents. This paper examines this assumption using an experimental economic approach in the context of regime shift, which has been receiving increasing attention. We observe that when externality does not exist, economic agents (subjects of experimemt) act economically rationally, but when externality exists, economic agents avoid the risk of a regime shift that would have negative consequences for others. Our results suggest that environmental economics may have to reconsider the assumption of homo economicus.
    Keywords: homo economicus; unboundedly rational economic agents; regime shift; experimental economics
    JEL: C90 D64 Q57
    Date: 2011–04–01
  6. By: Tremewan, James
    Abstract: This paper is an experimental study on the effect of group identity on the formation of coalitions and the resulting distribution of resources. After inducing group identity based on preferences over paintings, subjects play symmetric three-player _divide the dollar_ games with a majority rule decision process. The main finding is that where two players are from one group and one from the other, those in the minority earn significantly less than majority players. This is largely a result of a two-way split between majority players occurring more frequently, either because of the increased salience of this outcome, or a shift in social preferences.
    Date: 2010–06
  7. By: Berger, Johannes (University of Cologne); Herbertz, Claus (University of Cologne); Sliwka, Dirk (University of Cologne)
    Abstract: We empirically investigate the impact of incentive scheme structure on the degree of cooperation in firms using a unique and representative data set. Combining employee survey data with detailed firm level information on the relative importance of individual, team, and company performance for compensation, we find a significant positive relation between the intensity of team incentives and several survey measures of cooperation. Moreover, higher powered team incentives are associated with lower degrees of absenteeism while this is not the case for individual incentives.
    Keywords: incentives, cooperation, teams, helping effort
    JEL: D23 J33 M52 M54
    Date: 2011–04
  8. By: Evans, George W (University of Oregon and University of Saint Andrews); Honkapohja, Seppo (Bank of Finland)
    Abstract: Expectations play a central role in modern macroeconomics. The econometric learning approach, in line with the cognitive consistency principle, models agents as forming expectations by estimating and updating subjective forecasting models in real time. This approach provides a stability test for RE equilibria and a selection criterion in models with multiple equilibria. Further features of learning – such as discounting of older data, use of misspecified models or heterogeneous choice by agents between competing models – generate novel learning dynamics. Empirical applications are reviewed and the roles of the planning horizon and structural knowledge are discussed. We develop several applications of learning with relevance to macroeconomic policy: the scope of Ricardian equivalence, appropriate specification of interest-rate rules, implementation of price-level targeting to achieve learning stability of the optimal RE equilibrium and whether, under learning, price-level targeting can rule out the deflation trap at the zero lower bound.
    Keywords: cognitive consistency; E-stability; least-squares; persistent learning dynamics; business cycles; monetary policy; asset prices
    JEL: C62 D83 D84 E32
    Date: 2011–03–24
  9. By: Johan Almenberg (Swedish Ministry of Finance); Artashes Karapetyan (Norges Bank (Central Bank of Norway))
    Abstract: We report evidence that salience may have economically significant effects on homeowners' borrowing behavior, through a bias in favour of less salient but more costly loans. We outline a simple model in which some consumers are biased. Under plausible assumptions, the bias may affect prices in equilibrium. Market data support the predictions of the model.
    Keywords: salience, housing market, household finance, co-op, capital structure
    JEL: D12 G14 G21 G32
    Date: 2010–11–16

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