nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2011‒04‒30
eleven papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Institutions, distributed cognition and agency: rule-following as performative action By Herrmann-Pillath, Carsten
  2. Experimental Methods and the Welfare Evaluation of Policy Lotteries By Glenn W. Harrison
  3. Mixing the Carrots with the Sticks: Are Punishment and Reward Substitutes By Helen Mitchell; Nikos Nikiforakis
  4. Normative Conflict & Feuds: The Limits of Self-Enforcement By Nikos Nikiforakis; Charles N. Noussair; Tom Wilkening
  5. Tempus Fugit: Time Pressure in Risky Decisions By Kocher, Martin G.; Pahlke, Julius; Trautmann, Stefan T.
  6. An Unlucky Feeling: Persistent Overestimation of Absolute Performance with Noisy Feedback By Grossman, Zachary
  7. Gambling for the Upper Hand - Settlement Negotiations in the Lab By Topi Miettinen; Olli Ropponen; Pekka Sääskilahti
  8. Money talks? An Experimental Investigation of Cheap Talk and Burned Money By Thomas de Haan; Theo Offerman; Randolph Sloof
  9. Culture and Diversity in Knowledge Creation By Marcus BERLIANT; FUJITA Masahisa
  10. Revisiting the Gaia hypothesis: Maximum Entropy, Kauffman's 'Fourth Law' and physiosemeiosis By Herrmann-Pillath, Carsten
  11. Agent-based macroeconomics - a baseline model By Lengnick, Matthias

  1. By: Herrmann-Pillath, Carsten
    Abstract: Recently, Aoki proposed the concept of substantive institutions which relates outcomes of strategic interaction with public representations of equilibrium states of games. I argue that the Aoki model can be grounded in theories of distributed cognition and performativity, which I put into the context of Searle's philosophical account of institutions. Substantive institutions build on regularized causal interactions between internal neuronal mechanisms and external facts, which are shared in a population of agents. Following Searle's proposal to conceive rule following as a neuronally anchored behavioral disposition, I show that his corresponding notion of collective intentionality can be grounded in recent neuroscience theories about imitation as the primordial process in human learning. I relate this with Searle's concept of status function and the neuronal theory of metaphors, resulting in a precise definition of rule-following as performative action. I present two empirical examples, the institution of money and status hierarchies in markets. --
    Keywords: Aoki's concept of substantive institutions,Searle,collective intentionality,emotions,imitation,performativity,sign systems
    JEL: B52 D02 D87
    Date: 2011
  2. By: Glenn W. Harrison
    Abstract: Policies impose lotteries of outcomes on individuals, since we never know exactly what the effects of the policy will be. In order to evaluate alternative policies, we therefore need to make some assumptions about individual preferences, even before social welfare functions are applied. Instead of making a priori assumptions about those preferences that are likely to be wrong, there are two broad ways in which experimental methods are used to evaluate policy. One is to use experiments to estimate individual preferences, valuations and beliefs, and use those estimates as priors in the evaluation of policy. The other approach is to undertake deliberate randomization, or exploit accidental or natural randomization, to infer the effects of policy. The strengths and weaknesses of these approaches are reviewed, and their complementarities identified.
    Date: 2011–04
  3. By: Helen Mitchell; Nikos Nikiforakis
    Abstract: This paper presents evidence that the demand for costly norm enforcement can be affected by the availability of the means for enforcing the norm. Participants in a laboratory experiment can reward or punish to enforce a distribution norm. Controlling for the extent of norm violation, we find that demand for costly punishment is lower when participants also have the opportunity to reward norm adherence. Similarly, demand for costly reward is lower when participants can punish norm violations, controlling for the extent of norm adherence. The reason is that participants use reward and punishment to signal their approval and disapproval. The availability of reward opportunities allows them to signal their disapproval by withholding reward. Similarly, the availability of punishment opportunities allows them to signal their approval by withholding punishment. This suggests that individuals consider reward and punishment to be substitutes. The resultant reduction in costly enforcement does not affect adherence to the norm, but has a significant impact on earnings in the experiment.
    Keywords: punishment; reward; social norms; norm enforcement; third party
    JEL: C91 D63 H41
    Date: 2011
  4. By: Nikos Nikiforakis; Charles N. Noussair; Tom Wilkening
    Abstract: A normative conflict arises when there exist multiple plausible norms of behavior. In such cases, norm enforcement can lead to a sequence of mutual retaliatory sanctions, which we refer to as a feud. We investigate the hypothesis that normative conflict enhances the likelihood of a feud in a public-good experiment. We find that punishment is much more likely to trigger counter-punishment and start a feud when there is a normative conflict, than in a setting in which no conflict exists. While the possibility of a feud sustains cooperation,the cost of feuding fully offsets the efficiency gains from increased cooperation.
    Keywords: normative conflict; peer punishment; feuds; counter-punishment; social norms
    JEL: C92 D70 H41
    Date: 2011
  5. By: Kocher, Martin G.; Pahlke, Julius; Trautmann, Stefan T.
    Abstract: We study the effects of time pressure on risky decisions for pure gain prospects, pure loss prospects, and mixed prospects involving both gains and losses. In an experiment we find that risk aversion for gains is robust under time pressure whereas risk seeking for losses turns into risk aversion under time pressure. For mixed prospects, subjects become more loss averse and more gain seeking under time pressure, depending on the framing of the prospects. The results suggest the importance of aspiration levels under time pressure. We discuss the implications of our findings for decision making situations that involve time pressure.
    Keywords: time pressure; risky decisions; risk aversion; loss aversion; gain seeking; aspiration level
    JEL: C91 D81
    Date: 2011–04
  6. By: Grossman, Zachary
    Abstract: How does overconfidence arise and persist in the face of experience and feedback? We examine experimentally how individuals' beliefs about their absolute, as opposed to relative, performance on a quiz react to noisy, but unbiased, feedback. Participants believe themselves to have received `unlucky' feedback and they overestimate their own scores, but they exhibit no overconfidence in non-ego-relevant beliefs---in this case, about others' scores. Unlike previous studies of relative performance estimates, we find this to be driven by overconfident priors, as opposed to biased updating, which suggests that social comparisons contribute to biased information processing. While feedback improves performance estimates, this learning does not translate into improved estimates of subsequent performances. This suggests that people use performance feedback to update their beliefs about their ability differently than they do to update their beliefs about their performance, contributing to the persistence of overconfidence.
    Keywords: overconfidence, feedback, overestimation, absolute performance, Bayesian updating, biased updating, information processing, learning transfer, cross-game learning, quadratic scoring rule, behavioral economics, experimental economics, Behavioral Economics
    Date: 2011–04–11
  7. By: Topi Miettinen (Hanken School of Economics, Dept of Economics, Helsinki; and SITE, Stockholm School of Economics); Olli Ropponen (Government Institute for Economic Research, Helsinki); Pekka Sääskilahti (Nokia Corporation)
    Abstract: We exploit a controlled frameless laboratory experiment to study settlement negotiations and the plainti' decision to raise a lawsuit in case of an impasse. We find that greater variance in court outcomes increases the litigation rate and lowers the settlement rate. This latter finding goes against the received wisdom and earlier experimental evidence (Ashenfelter et al. 1992) that greater risk in arbitration outcomes increases the settlement rate. We find that self-serving biases about the protagonist' course of action are accountable for the lower settlement rate, while an impasse payo inferior to that of the defendant induces the plaintis to excessive risk-taking in an attempt to narrow the gap.
    Keywords: bargaining, litigation, loss aversion, self-serving bias, settlement
    JEL: C72 C9 K41
    Date: 2011–04–19
  8. By: Thomas de Haan (University of Amsterdam); Theo Offerman (University of Amsterdam); Randolph Sloof (University of Amsterdam)
    Abstract: We experimentally study the strategic transmission of information in a setting where both cheap talk and money can be used for communication purposes. Theoretically a large number of equilibria exist side by side, in which senders either use costless messages, money, or a combination of the two. We find that senders prefer to communicate through costless messages. Only when the interest disalignment between sender and receiver increases, cheap talk tends to break down and high sender types start burning money to enhance the credibility of their costless messages. A behavioral model due to Kartik (2009) assuming that sellers bear a cost of lying fits the data best.
    Keywords: cheap talk; burning money; lying costs; experiment
    JEL: C91 D82
    Date: 2011–04–18
  9. By: Marcus BERLIANT; FUJITA Masahisa
    Abstract: Is the paradise of effortless communication the ideal environment for knowledge creation? Or, can the development of local culture in regions raise knowledge productivity compared to a single region with a unitary culture? In other words, can a real technological increase in the cost of collaboration and the cost of public knowledge flow between regions, resulting in cultural differentiation between regions, increase welfare? In our framework, a culture is a set of ideas held exclusively by residents of a location. In general in our model, the equilibrium path generates separate cultures in different regions. When we compare this to the situation where all workers are resident in one region, R&D workers become too homogeneous and there is only one culture. As a result, equilibrium productivity in the creation of new knowledge is lower relative to the situation when there are multiple cultures and workers are more diverse.
    Date: 2011–04
  10. By: Herrmann-Pillath, Carsten
    Abstract: Recently, Kleidon suggested a restatement of the Gaia hypothesis based on Maximum Entropy approaches to the Earth system. Refuting conceptions of Gaia as a homeostatic system, Gaia is seen as a non-equilibrium thermodynamic system which continuously moves away from equilibrium, driven by maximum entropy production which materializes in hierarchically coupled mechanisms of energetic flows via dissipation and physical work. I propose to relate this view with Kauffman's 'Fourth Law of Thermodynamics', which I interprete as a proposition about the accumulation of information in evolutionary processes. Then, beyond its use in the Kleidon model, the concept of physical work is expanded to including work directed at the capacity to work: I offer a twofold specification of Kauffman's concept of an 'autonomous agent', one as a 'self-referential heat engine', and the other in terms of physiosemeiosis, which is a naturalized application of Peirce's theory of signs emerging from recent biosemiotic research. I argue that the conjunction of these three theoretical sources, Maximum Entropy, Kauffman's Fourth Law, and physiosemeiosis, allows to show that the Kleidon restatement of the Gaia hypothesis is equivalent to the proposition that the biosphere is a system of generating, processing and storing information, thus directly treating information as a physical phenomenon. I substantiate this argument by proposing a more detailed analysis of the notion of hierarchy in the Kleidon model. In this view, there is a fundamental ontological continuity between the biological processes and the human economy, as both are seen as information processing and entropy producing systems. As with other previous transitions in evolution, the human economy leverages the mechanisms by which Gaia moves further away from equilibrium. This implies that information and natural resources or energy are not substitutes, i.e. the knowledge economy continues to build on the same physical principles as the biosphere, with energy and information being two aspects of the same underlying physical process. --
    Keywords: Gaia,non-equilibrium systems,Fourth Law,work,Peirce,triadism,hierarchy,economic growth
    JEL: Q40 Q57
    Date: 2011
  11. By: Lengnick, Matthias
    Abstract: This paper develops a baseline agent-based macroeconomic model and contrasts it with the common dynamic stochastic general equilibrium approach. Although simple, the model can reproduce a lot of the stylized facts of business cycles. The author argues that agent-based modeling is an adequate response to the recently expressed criticism of macroeconomic methodology. It does not depend on the strict assumption of rationality and allows for aggregate behavior that is more than simply a replication of microeconomic optimization decisions. At the same time it allows for absolutely consistent micro foundations. Most importantly, it does not depend on equilibrium assumptions or fictitious auctioneers and does therefore not rule out coordination failures, instability and crisis by definition. --
    Keywords: agent-based modeling,complex adaptive systems,microfoundations of macroeconomics
    JEL: B4 E1 E50
    Date: 2011

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