nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2012‒01‒18
fifteen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Time lags in processing market-sensitive information. A case study By Alessandro Innocenti; Pier Malpenga; Lorenzo Menconi; Alessandro Santoni
  2. Hidden information, bargaining power, and efficiency: an experiment. By Cabrales, Antonio; Charness, Gary; Villeval, Marie Claire
  3. Status Quo Effects in Fairness Games: Acts of Commission vs. Acts of Omission By James C. Cox; Maroš Servátka; Radovan Vadovič
  4. Crossing the Point of No Return: A Public Goods Experiment By Urs Fischbacher; Werner GŸth; M. Vittoria Levati
  5. The Causal Effect of Cognitive Abilities on Economic Behavior: Evidence from a Forecasting Task with Varying Cognitive Load By Ondrej Rydval
  6. An experimental analysis of bounded rationality: Applying insights from behavioral economics to information systems By Franziska Brecht; Oliver Günther; Werner Güth; Ksenia Koroleva
  7. Leading by Words in Privileged Groups By Johannes Weisser
  8. Leading by example in intergroup competition: An experimental approach By Johannes Weisser
  9. Students’ Perceptions of Teacher Biases: Experimental Economics in Schools By Amine Ouazad; Lionel Page
  10. Full agreement and the provision of threshold public goods By Federica Alberti; Edward J. Cartwright
  11. Reinforcement learning in professional basketball players By Tal Neiman; Yonatan Loewenstein
  12. Why Satisfy Preferences? By Daniel M. Hausman
  13. Network Cognition By Dessi, Roberta; Gallo, Edoardo; Goyal, Sanjeev
  14. Insurance Demand and Prospect Theory By Ulrich Schmidt
  15. Self-discrimination: A field experiment on obesity. By Pablo Brañas-Garza; Antonios Proestakis

  1. By: Alessandro Innocenti; Pier Malpenga; Lorenzo Menconi; Alessandro Santoni
    Abstract: The paper analyses a case study of time lag in processing market-sensitive information with intraday data. On February 2011, the Italian Parliament approved the so called Milleproroghe decree issued by the Government which included, among others, a new important rule for banks transforming the deferred tax assets into tax credits. Although information on the approval of the law had been available since February 8, on February 15 the market took twelve minutes to react to the news and almost an hour to fully absorb it. This delay created significant arbitrage opportunities that can be explained with traders’ inability to process immediately technical and complex matters. Failure to comply with these cognitive limitations prevents traders from incorporating promptly new information in market prices.
    Keywords: financial trading, arbitrage, information processing, cognitive limitations.
    JEL: F36 G14 G15
    Date: 2011–12
  2. By: Cabrales, Antonio; Charness, Gary; Villeval, Marie Claire
    Abstract: We devise an experiment to explore the effect of different degrees of bargaining power on the design and the selection of contracts in a hidden-information context. In our benchmark case, each principal is matched with one agent of unknown type. In our second treatment, a principal can select one of three agents, while in a third treatment an agent may choose between the contract menus offered by two principals. We first show theoretically how different ratios of principals and agents affect outcomes and efficiency. Informational asymmetries generate inefficiency. In an environment where principals compete against each other to hire agents, these inefficiencies may disappear, but they are insensitive to the number of principals. In contrast, when agents compete to be hired, efficiency improves dramatically, and it increases in the relative number of agents because competition reduces the agents’ informational monopoly power. However, this environment also generates a high inequality level and is characterized by multiple equilibria. In general, there is a fairly high degree of correspondence between the theoretical predictions and the contract
    Keywords: Experiment; Hidden information; Bargaining power; Competition; Efficiency;
    JEL: A13 B49 C92 D21 J41
    Date: 2011
  3. By: James C. Cox; Maroš Servátka (University of Canterbury); Radovan Vadovič
    Abstract: Intent to help or harm is revealed more clearly by acts of commission that overturn the status quo than by acts of omission that uphold it. Both the law and culture make a central distinction between the two types of acts. Acts of commission elicit stronger reciprocal responses than do acts of omission. In this paper we compare reciprocal responses to both types of acts and ask whether behavior of subjects in two experiments is consistent with existing theory. The design of the experiments focuses on the axioms of revealed altruism theory (Cox, Friedman, and Sadiraj, 2008) that make it observationally distinct from other theories, Axiom R (for reciprocity) and Axiom S (for status quo). We find support for this theory in both experiments.
    Date: 2012–01–01
  4. By: Urs Fischbacher; Werner GŸth; M. Vittoria Levati
    Abstract: Participants in a public goods experiment receive private or common signals regarding the so-called 'point of no return', meaning that if the groupÕs total contribution falls below this point, all payoffs are reduced. An individual faces the usual conflict between private and collective interests above the point of no return, while he incurs the risk of damaging everyone by not surpassing the point. Our data reveal that contributions are higher if the cost of not reaching the threshold is high. In particular if the signal is private, many subjects are not willing to provide the necessary contribution.
    Keywords: Public goods, provision point mechanism, experiments, reduction factor, signal
    Date: 2011
  5. By: Ondrej Rydval (Max Planck Institute of Economics, Jena, and CERGE-EI, Charles University Prague and Academy of Sciences of the Czech Republic)
    Abstract: We identify the causal effect of cognitive abilities on economic behavior in an experimental setting. Using a forecasting task with varying cognitive load, we identify the causal effect of working memory on subjects' forecasting performance, while also accounting for the effect of other cognitive, personality and demographic characteristics. Addressing the causality is important for understanding the nature of various decision-making errors, as well as for providing reliable policy implications in contexts such as student placement, personnel assignment, and public policy programs designed to augment abilities of the disadvantaged. We further argue that establishing the causality of cognitive abilities is a prerequisite for studying their interaction with financial incentives, with implications for the design of efficient incentive schemes.
    Keywords: Cognitive ability, Causality, Experiment, Financial incentives, Performance, Working memory
    JEL: C81 C91 D80 D83 J24
    Date: 2012–01–06
  6. By: Franziska Brecht; Oliver Günther; Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group); Ksenia Koroleva
    Abstract: The paradigm of bounded rationality considers the limited ability of individuals to make consistent and rational choices. Due to the scarcity of research on this phenomenon in information systems, we conducted an experimental study investigating decision-making regarding risk preferences and social preferences. Moreover, we explored the stability of these preferences under different conditions and uncovered the role of information retrieval in individual decision-making. We find that although individuals are generally risk-averse and egoistic, none of these preferences is stable under the conditions tested which provides indices of boundedly rational decision-making. Although the information retrieved by participants generally allows to infer their preferences, the increasing amount and complexity of this information again often results in boundedly rational behavior.
    Keywords: bounded rationality, experimental design, information retrieval, stability of attitudes and behavior, cognitive tracing, behavioral economics, behavioral information systems
    JEL: C18 C91 D03 D81
    Date: 2012–01–06
  7. By: Johannes Weisser (IMPRS Uncertainty, MPI for Economics, Jena)
    Abstract: Koukoumelis et al. (2010, 2012) have shown that one-way communication enhances contributions to public goods. We investigate the effectiveness of one-way communication, when the benefits from the public good are asymmetric and the sender of a message is the main beneficiary of cooperation. Our results show that, in the absence of communication opportunities, contribution behavior may be inversely related to other group members' marginal benefits from the public good. The effectiveness of one-way communication, however, remains unaffected even though compliance with a sender's suggestion to cooperate generates unfavorable payoff inequalities for message receivers. The results also indicate that one-way messages have to relate to the experimental game to enhance cooperation. Merely "giving someone a voice" is not sufficient.
    Keywords: Public goods, One-way communication, Privileged groups, Asymmetric marginal benefit
    JEL: C72 C91 C92 D74 H41
    Date: 2012–01–06
  8. By: Johannes Weisser (IMPRS Uncertainty, MPI for Economics, Jena)
    Abstract: We investigate leading by example in a public goods game in scenarios with and without intergroup competition. Leading by example is implemented via a sequential decision protocol. We examine both one-shot and repeated interaction and make use of the strategy method to characterize followers' conditional responses to the leader's contribution. The results show that only follower but not leader behavior is affected by the introduction of intergroup competition. The change in follower behavior is best described as an increase in cooperation which is not conditional on the leader's decision. When groups interact repeatedly, we do not find that leading by example is able to foster cooperation by itself. It only significantly improves contributions when it is accompanied by intergroup competition.
    Keywords: Public goods, Leading by example, Intergroup competition, Strategy method
    JEL: C72 C91 C92 D74 H41
    Date: 2012–01–06
  9. By: Amine Ouazad; Lionel Page
    Abstract: We put forward a new experimental economics design with monetary incentives to estimate students' perceptions of grading discrimination. We use this design in a large field experiment which involved 1,200 British students in grade 8 classrooms across 29 schools. In this design, students are given an endowment they can invest on a task where payoff depends on performance. The task is a written verbal test which is graded non anonymously by their teacher, in a random half of the classrooms, and graded anonymously by an external examiner in the other random half of the classrooms. We find significant evidence that students' choices reflect perceptions of biases in teachers' grading practices. Our results show systematic gender interaction effects: male students invest less with female teachers than with male teachers while female students invest more with male teachers than with female teachers. Interestingly, female students' perceptions are not in line with actual discrimination: Teachers tend to give better grades to students of their own gender. Results do not suggest that ethnicity and socioeconomic status play a role.
    Keywords: Teacher biases, educational achievement
    Date: 2012–01
  10. By: Federica Alberti (Max Planck Institute of Economics, Strategic Interaction Group, Jena); Edward J. Cartwright (School of Economics, University of Kent, Canterbury)
    Abstract: We report threshold public good experiments in which group members not only need to be individually willing to contribute enough to provide the public good but also have to agree with each other on what every group members should contribute. We find strong support to the hypothesis that full agreement increases successful provision, although it takes a few repetitions before group members can successfully coordinate. This is consistent with our theoretical results that full agreement works because it increases criticality of each individual decision. The existence of a focal point makes it possible for the group members to successfully coordinate.
    Keywords: Public good, threshold, full agreement, focal point, experiment, coordination
    JEL: C72 H41
    Date: 2012–01–06
  11. By: Tal Neiman; Yonatan Loewenstein
    Abstract: Reinforcement learning in complex natural environments is a challenging task because the agent should generalize from the outcomes of actions taken in one state of the world to future actions in different states of the world. The extent to which human experts find the proper level of generalization is unclear. Here we show, using the sequences of field goal attempts made by professional basketball players, that the outcome of even a single field goal attempt has a considerable effect on the rate of subsequent 3 point shot attempts, in line with standard models of reinforcement learning. However, this change in behaviour is associated with negative correlations between the outcomes of successive field goal attempts. These results indicate that despite years of experience and high motivation, professional players overgeneralize from the outcomes of their most recent actions, which leads to decreased performance.
    Date: 2011–12
  12. By: Daniel M. Hausman
    Abstract: Contemporary mainstream normative economists assess policies in terms of their capacities to satisfy preferences, though most would concede that other factors such as freedom, rights, and justice are also relevant. Why should policy be responsive to preferences? This essay argues that the best reason is that people's preferences are in some circumstances good evidence of what will benefit them. When those circumstances do not obtain and preferences are not good evidence of welfare, there is little reason to satisfy preferences.
    Date: 2012–01–05
  13. By: Dessi, Roberta (Toulouse School of Economics (IDEI and GREMAQ), and CEPR); Gallo, Edoardo (University of Oxford); Goyal, Sanjeev (University of Cambridge)
    Date: 2011–10
  14. By: Ulrich Schmidt
    Abstract: Empirical evidence has shown that people are unwilling to insure rare losses at subsidized premiums and at the same time take-up insurance for moderate risks at highly loaded premiums. This paper explores whether prospect theory, in particular diminishing sensitivity and loss aversion, can accommodate this evidence. A crucial factor for applying prospect theory to insurance problems is the choice of the reference point. We motivate and explore two possible reference points, state-dependent initial wealth and final wealth after buying full insurance. It turns out that particularly the latter reference point seems to provide a realistic explanation of the empirical evidence
    Keywords: insurance demand, prospect theory, flood insurance, diminishing sensitivity, loss aversion
    JEL: D14 D81 G21
    Date: 2012–01
  15. By: Pablo Brañas-Garza (Universidad de Granada, Spain); Antonios Proestakis (Universidad de Granada, Spain)
    Abstract: While it is well-established in the literature that obese people are discriminated against in the working environment, little is known about their own actual behavior. Our experimental setting investigates whether these potentially discriminated people respond in a different way when faced with the opportunity of earning a positive amount of money. Significant lower money requests by people who are self-reported as obese confirm our self-discrimination hypothesis, offering an additional explanation for the wage gap; Thus, it seems that these obese people earn less not only because of discrimination against them but also because they themselves are less demanding. Interestingly, results are more robust for females, especially for those who "feel", but they are not actually, obese.
    Keywords: Discrimination, obesity, field experiment, gender, self-perception
    JEL: C93 J16
    Date: 2011

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