nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2011‒11‒21
fourteen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Shunning Uncertainty: The Neglect of Learning Opportunities By Trautmann, Stefan T.; Zeckhauser, Richard J.
  2. How Do Informal Agreements and Renegotiation Shape Contractual Reference Points? By Fehr, Ernst; Hart, Oliver; Zehnder, Christian
  3. Economic incentives and social preferences: substitutes or complements? By Samuel Bowles; Sandra Polania-Reyes
  4. Political Leaders’ Socioeconomic Background and Fiscal Performance in Germany By Bernd Hayo; Florian Neumeier
  5. Does Generosity Beget Generosity? Alumni Giving and Undergraduate Financial Aid By Jonathan Meer; Harvey S. Rosen
  6. A Critique and Reframing of Personality in Labour Market Theory: Locus of Control and Labour Market Outcomes By Trzcinski, Eileen; Holst, Elke
  7. Motivating Organizational Search By Oliver Baumann; Nils Stieglitz
  8. Strategic Ignorance in Bargaining By Conrads, Julian; Irlenbusch, Bernd
  9. Belief Elicitation: A Horse Race among Truth Serums By Trautmann, S.T.; Kuilen, G. van de
  10. On Institutional Designs and Corruption by Imitation By Elvio Accinelli; Edgar Sanchez Carrera
  11. Smokers, Smoking Deprivation, and Time Discounting By Shoko Yamane; Hiroyasu Yoneda; Taiki Takahashi; Yoshio Kamijo; Yasuhiro Komori; Fumihiko Hiruma; Yoshiro Tsutsui
  12. No place to hide: When shame causes proselfs to cooperate By Declerck C.H.; Boone Ch.; Kiyonari T.
  13. Risky Political Changes: Rational Choice vs Prospect Theory By Francesco Passarelli
  14. Wishful Thinking By Guy Mayraz

  1. By: Trautmann, Stefan T. (Tilburg University); Zeckhauser, Richard J. (Harvard University)
    Abstract: Financial, managerial, and medical decisions often involve alternatives whose possible outcomes have uncertain probabilities. In contrast to alternatives whose probabilities are known, these uncertain alternatives offer the benefits of learning. In repeat-choice situations, such learning brings value. If probabilities appear favorable (unfavorable), a choice can be repeated (avoided). In a series of experiments involving bets on the colors of poker chips drawn from bags, decision makers often prove to be blind to the learning opportunities offered by uncertain probabilities. Such decision makers violate rational decision making and forgo significant expected payoffs when they shun uncertain alternatives in favor of risky ones. Worse, when information is revealed, many make choices contrary to learning. A range of factors explain these violations. The results indicate that priming with optimal strategies offers little improvement.
    JEL: C91 D81 D83 G11
    Date: 2011–11
  2. By: Fehr, Ernst (University of Zurich); Hart, Oliver (Harvard University); Zehnder, Christian (University of Lausanne)
    Abstract: Previous experimental work provides encouraging support for some of the central assumptions underlying Hart and Moore (2008)’s theory of contractual reference points. However, existing studies ignore realistic aspects of trading relationships such as informal agreements and ex post renegotiation. We investigate the relevance of these features experimentally. Our evidence indicates that the central behavioral mechanism underlying the concept of contractual reference points is robust to the presence of informal agreements and ex post renegotiation. However, our data also reveal new behavioral features that suggest refinements of the theory. In particular, we find that the availability of informal agreements and ex post renegotiation changes how trading parties evaluate ex post outcomes. Interestingly, the availability of these additional options affects ex post evaluations even in situations in which the parties do not use them.
    Keywords: contracts, reference points, fairness, renegotiation, informal agreement
    JEL: C91 D86 J41
    Date: 2011–10
  3. By: Samuel Bowles; Sandra Polania-Reyes
    Abstract: Explicit economic incentives designed to increase contributions to public goods and to promote other pro-social behavior sometimes are counterproductive or less effective than would be predicted among entirely self-interested individuals. This may occur when incentives adversely affect individuals’ altruism, ethical norms, intrinsic motives to serve the public, and other social preferences. In the 50 experimental studies that we survey these effects are common, so that incentives and social preferences may be either substitutes (crowding out) or complements. We provide evidence for four mechanisms that may account for these incentive effects on preferences, based on the fact that incentives may (i) provide information about the person who implemented the incentive, (ii) frame the decision situation so as to suggest appropriate behavior, (iii) compromise a control averse individual’s sense of autonomy and (iv) affect the process by which people learn new preferences. An implication of the fact that incentives affect preferences is that the evaluation of public policy must be restricted to allocations that are supportable as Nash equilibria when account is taken of these crowding effects. We show that well designed fines, subsidies and the like minimize crowding out and may even do the opposite, making incentives and social preferences complements rather than substitutes
    Keywords: Public goods, behavioral experiments, social preferences, endogenous preferences, motivational crowding, explicit incentive
    JEL: A13 C90 D02 D63 D64 H41 D78 E61 Z13
    Date: 2011–10
  4. By: Bernd Hayo (University of Marburg); Florian Neumeier (University of Marburg)
    Abstract: This paper investigates whether the socioeconomic status of the head of government helps explain fiscal performance. Applying sociological research that attributes differences in people’s ways of thinking and acting to their relative standing within society, we test whether the social status of German prime ministers can help explain differences in fiscal performance among the German Laender. Our empirical findings show that the tenures of prime ministers from a poorer socioeconomic background are associated with higher levels of public spending and debt financing.
    Keywords: Leadership, socioeconomic status, fiscal policy, public spending, public deficit
    JEL: E61 E62 H11 H72
    Date: 2011
  5. By: Jonathan Meer (Texas A&M University); Harvey S. Rosen (Princeton University)
    Abstract: We investigate how undergraduates’ financial aid packages affect their subsequent dona-tive behavior as alumni. The empirical work is based upon a rich set of micro data on alumni giving at an anonymous research university, which we call Anon U. We focus on three types of financial aid, scholarships, loans, and campus jobs. A novel aspect of our modeling strategy is that, consistent with the view of some professional fundraisers, we allow the receipt of a given form of aid per se to affect alumni giving. At the same time, our model allows the amount of the support to affect giving behavior nonlinearly. Our main findings are: 1) Individuals who took out student loans are less likely to make a gift, other things being the same. Further, individuals who take out large loans make smaller con-tributions as alumni, conditional on making a gift. This effect is unlikely to be due to the fact that repaying the loan reduces the alumnus’s capacity to give. We conjecture that, rather, it is caused by an “annoyance effect” — alumni resent the fact that they are burdened with loans. 2) Scholar-ship aid reduces the size of a gift, conditional on making a gift, but has little effect on the proba-bility of making a donation. Students who received scholarships are also less likely to be in the top 10 percent of givers in their class in a given year. The negative effect of receiving a scholar-ship on the amount donated decreases in absolute value with the size of the scholarship. Again, we do not find any evidence of income effects, i.e., that scholarship recipients give less because they have relatively low incomes post graduation. 3) Aid in the form of campus jobs does not have a strong effect on donative behavior.
    Keywords: alumni, donations, financial aid, college
    JEL: D02 D63 I20 I23 I22
    Date: 2011–10
  6. By: Trzcinski, Eileen (Wayne State University, Detroit); Holst, Elke (DIW Berlin)
    Abstract: This article critically examines the theoretical arguments that underlie the literature linking personality traits to economic outcomes and provides empirical evidence indicating that labour market outcomes influence personality outcomes. Based on data from the German Socio-Economic Panel, we investigated the extent to which gender differences occur in the processes by which highly positive and negative labour market outcomes are determined and in the processes underlying the development of one particular aspect of personality, locus of control. Gender differences were more pronounced in the results for years in managerial/ leadership positions than for locus of control. Negative labour market states were also marked by gender differences. We conclude by arguing that an explicitly value-laden analysis of the rewards associated with personality within the labour market could expose areas where the gendered nature of rewards by personality serves to perpetuate power relationships within the labour market.
    Keywords: labour market theory, power, gender, personality traits, locus of control, SOEP
    JEL: J01 J16 J24 J71 B54
    Date: 2011–10
  7. By: Oliver Baumann; Nils Stieglitz
    Abstract: This paper investigates the value of high-powered incentives for motivating search for novelty in business organizations. While organizational search critically depends on the individual efforts of employees, motivating search effort is challenged by problems of unobservable behavior and the misalignment of individual and organizational interests. Prior work on organizational design thus suggests that stronger incentives can overcome these problems and make organizations more innovative. To address this conjecture, we develop a computational model of organizational search that rests on two opposing effects of high-powered incentives: On the one hand, they promote higher effort by increasing the potential rewards from search; on the other hand, they increase the competition among ideas, as the ability of an organization to implement and remunerate good ideas is limited by its resource base. Our results indicate that low-powered incentives are effective in generating a sufficient stream of incremental innovations, but that they also result in a shortage of more radical innovations. Stronger incentives, in contrast, do not systematically foster radical innovations either, but instead create a costly oversupply of good ideas. Nonetheless, higher-powered incentives can still be effective in small firms and if strong persistence is required to develop a new idea. Based on the analysis of our model, we develop a set of propositions that appear to be consistent with extant evidence and point to new avenues for empirical research.
    Keywords: Organizational search, incentives, innovation, agent-based simulation
    Date: 2011
  8. By: Conrads, Julian (University of Cologne); Irlenbusch, Bernd (University of Cologne)
    Abstract: In his classic article "An Essay on Bargaining" Schelling (1956) argues that ignorance might actually be strength rather than weakness. We test and confirm Schelling's conjecture in a simple take-it-or-leave bargaining experiment where the proposer can choose between two possible offers. Option A always gives the proposer a higher payoff than option B. The payoff of the responder depends on the (randomly determined) state of nature, i.e., in state s2 payoffs of the two players are aligned while they are not in state s1. The responder is always informed about the actual state. The proposer knows the actual state in our first treatment but not in the second. We find that proposers indeed benefit from ignorance because the responders accept almost all offers (even the unfavorable ones) if the payoffs of the responder have not been transparent for the proposer. In additional treatments we investigate situations where the proposer can deliberately remain ignorant. One could assume that remaining ignorant on purpose would be punished by the responder at least if an unfavorable outcome results. Surprisingly, we find that strategically remaining ignorant tends to be beneficial for the proposer particularly if the responder does not know with certainty whether it was the proposer's intention to remain ignorant or whether it was not her intention.
    Keywords: strategic ignorance, bargaining, intentions, experiment
    JEL: C72 C78 C91 D63 D82 D83
    Date: 2011–10
  9. By: Trautmann, S.T.; Kuilen, G. van de (Tilburg University, Center for Economic Research)
    Abstract: In survey studies, probabilistic expectations about uncertain events are typically elicited by asking respondents for their introspective beliefs. If more complex procedures are feasible, beliefs can be elicited by incentive compatible revealed preference mechanisms (“truth serumsâ€). Various mechanisms have been proposed in the literature, which differ in the degree to which they account for respondents’ deviations from expected value maximization. In this paper, we pit non-incentivized introspection against five truth serums, to elicit beliefs in a simple two-player game. We test the internal validity (additivity and predictive power for own behavior), and the external validity (predictive power for other players’ behavior, or accuracy) of each method. We find no differences among the truth serums. Beliefs from incentivized methods are better predictors of subjects’ own behavior compared to introspection. However, introspection performs equally well as the truth serums in terms of accuracy and additivity.
    Keywords: belief measurement;subjective probability;scoring rules;outcome matching;probability matching;internal validity;external validity.
    JEL: D81 C91
    Date: 2011
  10. By: Elvio Accinelli; Edgar Sanchez Carrera
    Abstract: Imitation is the sincerest form of flattery, and we claim the corruption is driven by imitative behavior for those agents facing an institutional design of corruption. So this paper analyzes an individual level approach and tackles the question of why people engage in corrupt exchange. We show that institutional design determines corruption and that there exists a threshold level in order to imitate the noncorrupt (honest) behavior.
    Keywords: Corrupt behavior; Evolutionary dynamics; Imitative behavior; Institutions and operations
    JEL: C72 C73 D02 K42 P37
    Date: 2011–09
  11. By: Shoko Yamane; Hiroyasu Yoneda; Taiki Takahashi; Yoshio Kamijo; Yasuhiro Komori; Fumihiko Hiruma; Yoshiro Tsutsui
    Abstract: This paper investigates whether smokers exhibit greater time discounting than non-smokers, and how short-term nicotine deprivation affects time discounting. A unique feature of our experiment is that our subjects receive rewards not only of money, but also of actual tobacco. This is done in order to elicit smokersf true preferences. Smokers are more impatient than non-smokers, consistent with previous studies. Additionally, nicotine deprivation makes smokers even more impatient. These results suggest that nicotine concentration has different effects on time preferences in the short and long runs.
    Date: 2011–11
  12. By: Declerck C.H.; Boone Ch.; Kiyonari T.
    Abstract: Shame is often considered a moral emotion with action tendencies shaped by natural selection to elicit socially beneficial behavior. Yet, unlike guilt or other social emotions, prior experimental studies do not indicate that incidental shame boosts prosocial behavior. Based on the affect as information theory, we hypothesize that incidental feelings of shame increase cooperative behavior, but only for self-interested individuals, and only in situations where shame is relevant with regards to its action tendency of avoiding reputation losses. To test this hypothesis, cooperation levels are compared between a classic prisoner’s dilemma (where “defect” may result from multiple motives) and a sequential prisoner’s dilemma (where “defect” is the result of intentional greediness). The results indicate that, as hypothesized, proself individuals cooperate more following incidental shame, but only in a sequential prisoner’s dilemma. Hence ashamed proselfs become inclined to cooperate when they believe they have no way to hide their greediness, and not necessarily because they want to make up for earlier wrong-doing.
    Date: 2011–11
  13. By: Francesco Passarelli
    Abstract: This paper describes policy alternatives as lotteries, and studies how policy preferences are distorted by the cognitive anomalies postulated by Prospect Theory. Loss aversion induces a status quo bias. However, due to the reflection effect, the bias is asymmetric: too moderate attitudes toward a good reform or a good candidate, and too low severity toward bad politics. The reflection effect also determines low loyalty in partisan voting and weak concerns about partisan issues. Preferences about nonpartisan issues are independent of wealth because people use the status quo as a reference point. Ambitious platforms have more chances to pass than incremental and detailed changes because people are risk seeking in the realm of losses. In general, according to Prospect Theory the policy conflict within the society is smoother than under full rationality. Moreover, a pure majority system yields either prolonged conservatism or a radical abandonment of the status quo.
    Keywords: prospect theory, behavioral economics, voting behavior, behavioral political economy
    JEL: C9 D72 D81 H1
    Date: 2011–11
  14. By: Guy Mayraz
    Abstract: An experiment tested whether and in what circumstances people are more likely to believe an event simply because it makes them better off. Subjects observed a financial asset's historical price chart, and received both an accuracy bonus for predicting the price at some future point, and an unconditional award that was either increasing or decreasing in this price. Despite incentives for hedging, subjects gaining from high prices made significantly higher predictions than those gaining from low prices. The magnitude of the bias was smaller in charts with less subjective uncertainty, but was independent of the amount paid for accurate predictions.
    Keywords: Wishful-thinking, optimal expectations, priors and desires, payoff-dependent beliefs, asset prices
    JEL: D01 D81 D84 G11
    Date: 2011–11

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