nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2012‒03‒28
eleven papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Identification of Animal Spirits in a Bounded Rationality Model: An Application to the Euro Area By Jang, Tae-Seok; Sacht, Stephen
  2. Reduction of Compound Lotteries with Objective Probabilities: Theory and Evidence By Glenn W. Harrison; Jimmy Martínez-Correa; J. Todd Swarthout
  3. Crossing the Point of No Return: A Public Goods Experiment By Urs Fischbacher; Sabrina Teyssier; Simeon Schudy
  4. Strategic Reasoning in Hide-and-Seek Games: A Note By Timo Heinrich; Irenaeus Wolff
  5. Retaliation and the role for punishment in the evolution of cooperation By Irenaeus Wolff
  6. An Unlucky Feeling: Persistent Overestimation of Absolute Performance with Noisy Feedback By Grossman, Zachary; Owens, David
  7. A status-enhancement account of overconfidence By Anderson, Cameron; Brion, Sebastien; Moore, Don A.; Kennedy, Jessica A.
  8. Social Reactions to Overconfidence: Do the Costs of Overconfidence Outweigh the Benefits? By Kennedy, Jessica A.; Anderson, Cameron; Moore, Don A.
  9. Do risk communication methods perform to generate rationality? By Marielle Brunette
  10. Optimal Prizes in Dynamic Elimination Contests: An Experimental Analysis By Stracke, Rudi; Höchtl, Wolfgang; Kerschbamer, Rudolf; Sunde, Uwe
  11. An agent-based "proof of principle" for Walrasian macroeconomic theory By Edoardo Gaffeo; Mauro Gallegati; Umberto Gostoli

  1. By: Jang, Tae-Seok; Sacht, Stephen
    Abstract: In this paper, we empirically examine a heterogenous bounded rationality version of a hybrid New-Keynesian model. The model is estimated via the simulated method of moments using Euro Area data from 1975Q1 to 2009Q4. It is generally assumed that agents' beliefs display waves of optimism and pessimism - so called animal spirits - on future movements in the output and inflation gap. Our main empirical findings show that a bounded rationality model with cognitive limitation provides fits for auto- and cross-covariances of the data which are slightly better than or equal to a model where rational expectations are assumed. This implies that the bounded rationality model provides some structural insights on the expectation formation process at the macro-level for the Euro Area. First, over the whole time interval the agents had expected moderate deviations of the future output gap from its steady state value with low uncertainty. Second, we find strong evidence for an autoregressive expectation formation process regarding the inflation gap. Both observations explain a high degree of persistence in the output gap and the inflation gap.
    Keywords: Animal Spirits; Bounded Rationality; Euro Area; New-Keynesian Model; Simulated Method of Moments
    JEL: E12 C53 E32 D83
    Date: 2012–03–16
  2. By: Glenn W. Harrison; Jimmy Martínez-Correa; J. Todd Swarthout
    Abstract: The reduction of compound lotteries (ROCL) has assumed a central role in the evaluation of behavior towards risk and uncertainty. We present experimental evidence on its validity in the domain of objective probabilities. Our experiment explicitly recognizes the impact that the random lottery incentive mechanism payment procedure may have on preferences, and so we collect data using both "1-in-1" and "1-in-K" payment procedures, where K>1. We do not find violations of ROCL when subjects are presented with only one choice that is played for money. However, when individuals are presented with many choices and random lottery incentive mechanism is used to select one choice for payoff, we do find violations of ROCL. These results are supported by both non-parametric analysis of choice patterns, as well as structural estimation of latent preferences. We find evidence that the model that best describes behavior when subjects make only one choice is the Rank-Dependent Utility model. When subjects face many choices, their behavior is better characterized by our source-dependent version of the Rank-Dependent Utility model which can account for violations of ROCL. We conclude that payment protocols can create distortions in experimental tests of basic axioms of decision theory.
    Date: 2012–03
  3. By: Urs Fischbacher; Sabrina Teyssier; Simeon Schudy
    Abstract: In many cases individuals benefit differently from the provision of a public good. We study in a laboratory experiment how heterogeneity in returns and uncertainty affects unconditional and conditional contribution behavior in a linear public goods game. The elicitation of conditional contributions in combination with a within subject design allows us to investigate belief-independent and type-specific reactions to heterogeneity. We find that, on average, heterogeneity in returns decreases unconditional contributions but does not affects conditional contributions only weakly. Uncertainty in addition to heterogeneity reduces conditional contributions slightly. Individual reactions to heterogeneity differ systematically. Selfish subjects and one third of conditional cooperators do not react to heterogeneity whereas the reactions of the remaining conditional cooperators vary. A substantial part of heterogeneity in reactions can be explained by inequity aversion which accounts for different reference groups subjects compare to.
    Keywords: public goods, social preferences, conditional cooperation, heterogeneity
    Date: 2012
  4. By: Timo Heinrich; Irenaeus Wolff
    Abstract: Aggregate behavior in two-player hide-and-seek games deviates systematically from the mixed-strategy equilibrium prediction of assigning all actions equal probabilities (Rubinstein and Tversky, 1993, Rubinstein et al., 1996, Rubinstein, 1999). As Crawford and Iriberri (2007) point out, this deviation can be explained by strategic level-k reasoning. Here we provide empirical evidence that, indeed, it is non-equilibrium beliefs that lead to the behavior observed in the earlier studies: when a player's opponent is forced to play the equilibrium strategy, the player's choices are uniformly spread over the action space. At the same time, we find robust evidence of an unexpected framing effect.
    Keywords: Salience, level-k reasoning, cognitive hierarchy, hide-and-seek game, framing effect
    Date: 2012
  5. By: Irenaeus Wolff
    Abstract: Models of evolutionary game theory have shown that punishment may be an adaptive behaviour in environments characterised by a social-dilemma situation. Experimental evidence closely corresponds to this finding but questions the cooperation-enhancing effect of punishment if players are allowed to retaliate against their punishers. This study provides a theoretical explanation for the existence of retaliating behaviour in the context of repeated social dilemmas and analyses the role punishment can play in the evolution of cooperation under these conditions. We show a punishing strategy can pave the way for a partially-cooperative equilibrium of conditional cooperators and de- fecting types and, under positive mutation rates, foster the cooperation level in this equilibrium by prompting reluctant cooperators to cooperate. How- ever, when rare mutations occur, it cannot sustain cooperation by itself as punishment costs favour the spread of non-punishing cooperators.
    Keywords: Public goods, Prisoner's Dilemma, Strong reciprocity, Counter-punishment
    Date: 2012
  6. By: Grossman, Zachary; Owens, David
    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: Anderson, Cameron; Brion, Sebastien; Moore, Don A.; Kennedy, Jessica A.
    Abstract: In explaining the prevalence of the overconfident belief that one is better than others, prior work has focused on the motive to maintain high self-esteem, abetted by biases in attention, memory, and cognition.An additional possibility is that overconfidence enhances the person’s social status.We tested this status-enhancing account of overconfidence in six studies. Studies 1 through 3 found overconfidence leads to higher social status in both short and longer-term groups, using naturalistic and experimental designs. Study 4 applied a Brunswikian (1956) lens analysis and found that overconfidence leads to a behavioral signature that makes the individual appear competent to others. Studies 5 and 6 measured and experimentally manipulated the desire for status and found that the status motive promotes overconfidence. Together, these studies suggest that people might so often believe they are better than others because it helps them achieve higher social status.
    Keywords: Business Administration, Management and Operations, Other
    Date: 2012–03–02
  8. By: Kennedy, Jessica A.; Anderson, Cameron; Moore, Don A.
    Abstract: Scholars have recently proposed that overconfidence pervades self-judgment because of the social benefits it provides individuals, such as higher status in groups (Anderson, Brion, & Moore, 2010). A counter-argument to this social-functional account of overconfidence is that the possible social costs of overconfidence could outweigh its benefits. Specifically, individuals could be severely punished by groups if their overconfidence were to become apparent to others. This paper examines social reactions to overconfidence by exploring whether groups in fact punish individuals revealed to be overconfident. In three laboratory studies, we found that groups did not react negatively to individuals revealed to be overconfident and in fact tended to view overconfident individuals as more socially skilled. This research lends further empirical support to the social-functional account of overconfidence by suggesting that the status-related benefits of overconfidence outweigh the possible social costs.
    Keywords: status, overconfidence, self-enhancement, hierarchy, accountability, Organizational Behavior and Theory, Social Psychology
    Date: 2011–03–30
  9. By: Marielle Brunette (Laboratoire d'Economie Forestière, INRA - AgroParisTech)
    Keywords: risk, communication, rational choice, insentivity to scope, gain/loss asymmetry.
    JEL: C91 D01 D81
    Date: 2012–01
  10. By: Stracke, Rudi; Höchtl, Wolfgang; Kerschbamer, Rudolf; Sunde, Uwe
    Abstract: This paper investigates the effects of different prize structures on the effort choices of participants in two-stage elimination contests. A format with a single prize is shown to maximize totaleffort over both stages, but induces low effort in stage 1 and high effort in stage 2. By contrast, a format that allocates the same total amount to multiple prizes in such a way that the predicted effort remains constant across stages yields lower total effort provision. Experimental evidence suggests that (i) total effort is higher in the single prize format, but only for risk-neutral subjects; (ii) effort is constant across stages in the format with multiple prizes, independently of risk-attitudes; and (iii) the runner-up prize in the multiple prize format increases stage-1 and decreases stage-2 efforts in line with the theoretical prediction.
    Keywords: Dynamic Contests, Multiple Prizes, Experiment, Over-provision
    JEL: C72 D72 J33
    Date: 2012–03
  11. By: Edoardo Gaffeo; Mauro Gallegati; Umberto Gostoli
    Abstract: Macroeconomic models are typically solved through the imposition of a top-down general equilibrium solution constraining agents' rational be- havior. This is customarily obtained by recurring, explicitly or not, to the Walrasian auctioneer (WA) artifice. In this paper we aim at contributing to the small but burgeoning literature that deals with the consequences of removing it from the start by means of agent-based techniques. We let the textbook full-employment neoclassical macroeconomic model be populated by a large number of bounded-rational, autonomous agents, who are repeatedly engaged in decentralized transactions in interrelated markets. We set up a computational laboratory to perform several exper- iments, whose designs di¤er as regards the way we treat learning on the one side, and the institutional arrangement determining who - between firms and workers - is bound to bear the risk associated to incomplete markets on the other one. We show that our fully decentralized multi- market system admits the possibility to attain the WA full-employment solution, but also that serious coordination failures emerge endogenously as learning mechanisms and institutional settings are varied.
    Keywords: Agent-based computational economics; Decentralized exchange process; Microfoundations of macroeconomics
    JEL: B40 D51 E17
    Date: 2012

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