nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2011‒09‒16
thirteen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Eliciting risk and time preferences under induced mood states By Drichoutis, Andreas; Nayga, Rodolfo
  2. Dynamic coordination via organizational routines By Andreas Blume; April M. Franco; Paul Heidhues
  3. Trust, Reciprocity and Rules By Thomas A. Rietz; Eric Schniter; Roman M. Sheremeta; Timothy W. Shields
  4. Delegating to a Powerless Intermediary: Does It Reduce Punishment? By Grossman, Zachary; Oexl, Regine
  5. Bad News: An Experimental Study on the Informational Effects of Rewards By Andrei Bremzeny; Elena Khokhlovaz; Anton Suvorov; Jeroen van de Ven
  6. Individual rationality, model-consistent expectations and learning By Liam Graham
  7. False Consensus in Economic Agents By Proto, Eugenio; Sgroi, Daniel
  8. Impacts of parental health on children's development of personality traits and problem behavior: Evidence from parental health shocks By Morefield, Brant; Mühlenweg, Andrea M.; Westermaier, Franz
  9. Behavioural Characteristics and Financial Distress By Yvonne McCarthy
  10. The Effects of Individual Judgments about Selection Procedures: Results from a Power-to-Resist Game By Vanessa Mertins; Henrik Egbert; Tanja Koenen
  11. Search, Effort, and Locus of Control By McGee, Andrew; McGee, Peter
  12. Overconfidence and Bubbles in Experimental Asset Markets By Julija Michailova; Ulrich Schmidt
  13. Should economists listen to educational psychologists? Some economics of student motivation By Jocelyn Donze and Trude Gunnes

  1. By: Drichoutis, Andreas; Nayga, Rodolfo
    Abstract: We test whether induced mood states have an effect on elicited risk and time preferences in a conventional laboratory experiment. We jointly estimate risk and time preferences and use a mixture specification that allows choices to be consistent with Expected Utility theory or with probability weighting. Time preferences between subjects in the control, positive mood, and negative mood treatments are not statistically significantly different. However, for choices consistent with Expected Utility Theory, we find that subjects induced into a negative mood exhibit higher risk aversion than those in either the control treatment or the positive mood treatment. For choices that are consistent with probability weighting, we find that positive mood increases risk aversion. Results also suggest that risk preferences are affected by whether a cognitively demanding task precedes a risk preference elicitation task or whether subjects were placed in a gender-specific session rather than a mixed-gender session.
    Keywords: discount rates; risk aversion; lab experiment; mood; affect
    JEL: D81 D00 C91
    Date: 2010–12
  2. By: Andreas Blume (University of Pittsburgh); April M. Franco (Rotman School of Management, University of Toronto); Paul Heidhues (ESMT European School of Management and Technology)
    Abstract: We investigate dynamic coordination among members of a problem-solving team who receive private signals about which of their actions are required for a (static) coordinated solution and who have repeated opportunities to explore different action combinations. In this environment ordinal equilibria, in which agents condition only on how their signals rank their actions and not on signal strength, lead to simple patterns of behavior that have a natural interpretation as routines. These routines partially solve the team's coordination problem by synchronizing the team's search efforts and prove to be resilient to changes in the environment by being ex post equilibria, to agents having only a coarse understanding of other agents' strategies by being fully cursed, and to natural forms of agents' overconfidence. The price of this resilience is that optimal routines are frequently suboptimal equilibria.
    Keywords: coordination games, organizational routines, decentralized information, ex-post equilibria, cursed equilibria, multi-agent learning, rational learning
    JEL: C73 D23
    Date: 2011–09–06
  3. By: Thomas A. Rietz (Henry B. Tippie College of Business, University of Iowa); Eric Schniter (Economic Science Institute, Chapman University); Roman M. Sheremeta (Argyros School of Business and Economics, Chapman University); Timothy W. Shields (Argyros School of Business and Economics, Chapman University)
    Abstract: In the absence of enforceable contracts, many economic and personal interactions rely on trust and reciprocity. Research shows that although this reliance often works well, sometimes it breaks down. Simple rules mandating minimum standards on reciprocation prevent the most egregious trust violations, but may also undermine behavior that would have otherwise produced higher overall economic welfare. We test the efficacy of exogenously imposed minimum return rules using experimental trust games. We find that rules fail to increase trust and trustworthiness. Thus low minimum standards significantly decrease economic welfare. Although sufficiently restrictive rules restore welfare, trust and trustworthy behavior never returns.
    Keywords: trust games, experiments, reputation, information, reciprocity
    JEL: C72 C91 D72
    Date: 2011
  4. By: Grossman, Zachary; Oexl, Regine
    Abstract: Beyond the classical reasons of efficiency, commitment, the distribution of information, or incentive provision, a person may also delegate decision rights so as to avoid blame for an unpopular or immoral decision. We show that by delegating to an intermediary, a dictator facing an allocation decision can effectively shift moral responsibility onto the delegee even when doing so necessarily eliminates the possibility of a fair outcome. Dictators who choose selfishly via an intermediary are punished less and earn greater profits than those who directly choose a selfish outcome, while the intermediary is punished more.
    Keywords: intermediation, delegation, punishment, responsibility, attribution, blame shifting, experimental economics, behavioral economics, Behavioral Economics, Economic Theory
    Date: 2011–08–30
  5. By: Andrei Bremzeny (CEFIR and New Economic School); Elena Khokhlovaz (McKinsey&Company); Anton Suvorov (CEFIR and New Economic School); Jeroen van de Ven (University of Amsterdam)
    Abstract: Both psychologists and economists have argued that rewards often have hidden costs. One possible reason is that the principal may have incentives to offer higher rewards when she knows the task to be dificult. Our experiment tests if high rewards embody such bad news and if this is perceived by their recipients. Our design allows us to decompose the overall effect of rewards on effort into a direct incentive and an informational effect. The results show that most participants correctly interpret high rewards as bad news. In accordance with theory, the negative informational effect co-exists with the direct positive effect.
    Keywords: reward, bonus, informational content, motivation, crowdingout, laboratory experiment
    JEL: D82 D83 J33
    Date: 2011–09
  6. By: Liam Graham
    Abstract: To isolate the impact of the assumption of model-consistent expectations, this paper proposes a baseline case in which households are individually rational, have full information and learn using forecast rules specified as in the minimum state variable representation of the economy. Applying this to the benchmark stochastic growth model shows that the economy with learning converges quickly to an equi-librium very similar to that with model-consistent expectations. In other words, if households are individually rational, the assumption that they can also form model-consistent expectations does not seem a strong one. The mechanism by which learning affects the model is considered in detail and the implications of relaxing the assumptions of the baseline case are explored.
    Keywords: adaptive learning; rational expectations; bounded rationality; expectations formation.
    JEL: D83 C62 E30
    Date: 2011–08–20
  7. By: Proto, Eugenio (Department of Economics, University of Warwick); Sgroi, Daniel (Department of Economics, University of Warwick)
    Abstract: In an incentivized experiment we identify a powerful and ubiquitous bias: individuals regard their own characteristics and choices as more common than is the case. We establish this "false consensus" bias in terms of happiness, political stance, mobile phone brand and on the attitude to deference in a hypothetical restaurant choice, and show that it is not limited to the distribution of hard to observe characteristics and choices but also to weight and height. We also show that the bias is not driven by the fact that the tallest, happiest, most left/right-wing, etc. are more salient. Key words: false consensus ; saliency ; biased beliefs ; happiness ; politics ; height, weight. JEL classification: D03 ; C83 ; D84
    Date: 2011
  8. By: Morefield, Brant; Mühlenweg, Andrea M.; Westermaier, Franz
    Abstract: In this paper, we examine how parental health affects children's development of personality traits and problem behavior. Based on a German mother-and-child data base, we draw on observed parental health shocks as a more exogenous source of health variation to identify these effects and control for child and family characteristics including variables reflecting initial endowments observed at birth. At the age of six, we observe that maternal health shocks in early childhood have significant impacts on children's emotional symptoms, hyperactivity and neuroticism. Paternal health seems to be less relevant for the development of these non-cognitive characteristics. However, we observe that paternal health shocks cause children to be more extraverted. --
    Keywords: Human capital,health,personality traits,non-cognitive skills
    JEL: I00 J24 I10
    Date: 2011
  9. By: Yvonne McCarthy
    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.
    Keywords: Personal Finance, Financial Strain, Debt, Behaviour, Financial Literacy
    JEL: C25 D14
    Date: 2011–02
  10. By: Vanessa Mertins; Henrik Egbert; Tanja Koenen (Institute for Labour Law and Industrial Relations in the EC, University of Trier)
    Abstract: We use a power-to-resist game to find out the effects of individuals‘ judgments about a proposer‘s selection procedure on the willingness to offer resistance against proposed outcomes. In the experiment, one individual is selected on the grounds of a particular procedure. This individual is allowed to propose how to allocate a pie among five group members: herself and four responders. After that each responder in the group can decide whether to offer costly resistance against the proposed allocation. Resistance is modeled as a threshold public good. If resistance is successful, the proposer receives nothing. If resistance is unsuccessful, the pie is distributed according to the proposer‘s decision. We find that resistance increases with (a) the size of the proposal, with (b) subjectively perceived unfairness of the selection procedure of the proposer‘s role, and with (c) the individual procedural preferences being unsatisfied. Surprisingly, resistance is not affected by the fact whether or not the group‘s majority vote on the selection procedure is respected. We check for robustness of our results and find that results are stable over two countries. The presented evidence suggests that procedural effects over and above outcomes are relevant in strategic interaction.
    Keywords: selection procedure, favored process effect, fair process effect, procedural fairness, legitimacy
    JEL: C91 D23 D63 D72 H41 O57
    Date: 2011–08
  11. By: McGee, Andrew (Simon Fraser University); McGee, Peter (National University of Singapore)
    Abstract: We test the hypothesis that locus of control – one's perception of control over events in life – influences search by affecting beliefs about the efficacy of search effort in a laboratory experiment. We find that reservation offers and effort are increasing in the belief that one's efforts influence outcomes when subjects exert effort without knowing how effort influences the generation of offers but are unrelated to locus of control beliefs when subjects are informed about the relationship between effort and offers. These effects cannot be explained by locus of control's correlation with unmeasured human capital, personality traits, and the costs of search – alternative explanations for the relationships between locus of control and search behavior that cannot be ruled out using survey data – as the search task does not vary across treatments, which leads us to conclude that locus of control influences search through beliefs about the efficacy of search effort. Our findings provide evidence that locus of control measures can be used to identify job seekers at risk of becoming "discouraged" and abandoning search.
    Keywords: locus of control, reservation wages, labor market search, experiment
    JEL: J64 D83 C91
    Date: 2011–08
  12. By: Julija Michailova; Ulrich Schmidt
    Abstract: This paper investigates the relationship between market overconfidence and occurrence of stock-price bubbles. Sixty participants traded stocks in ten experimental asset markets. Markets were constructed on the basis of subjects’ overconfidence, measured in pre-experimental sessions. The most overconfident subjects form “overconfident markets”, and the least overconfident subjects “rational markets”. 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. Additionally we observe significantly higher bubble measures and trading volume on overconfident markets. Altogether, our data provide evidence that overconfidence has strong effects on prices and trading behavior in experimental asset markets
    Keywords: overconfidence, price bubbles, experimental asset market
    JEL: C92 G12
    Date: 2011–09
  13. By: Jocelyn Donze and Trude Gunnes (Statistics Norway)
    Abstract: This paper sheds light on the role of student motivation in the success of schooling. We develop a model in which a teacher engages in the management of student motivation through the choice of the classroom environment. We show that the teacher is able to motivate high-ability students, at least in the short run, by designing a competitive environment. For students with low ability, risk aversion, or when engaged in a long term relationship, the teacher designs a classroom environment that is more focused on mastery and self-referenced standards. In doing so, the teacher helps to develop the intrinsic motivation of students and their capacity to overcome failures.
    Keywords: Education; Student Achievement; Intrinsic and Extrinsic Motivation; Effort; Goal Theory.
    JEL: I21
    Date: 2011–09

This nep-cbe issue is ©2011 by Marco Novarese. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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