nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2012‒04‒03
twenty papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Image and Misreporting By Ewers, Mara; Zimmermann, Florian
  2. Congested Observational Learning By Erik Eyster; Andrea Galeotti; Navin Kartik; Matthew Rabin
  3. Testing a Forgotten Aspect of Akerlof's Gift Exchange Hypothesis: Relational Contracts with Individual and Uniform Wages By Kocher, Martin G.; Luhan, Wolfgang J.; Sutter, Matthias
  4. The Coevolution of Behavior and Normative Expectations. Customary Law in the Lab By Christoph Engel; Michael Kurschilgen
  5. Judicial Error by Groups and Individuals By Frans van Dijk; Joep H. Sonnemans; Ed Bauw
  6. Towards a Purely Behavioral Definition of Loss Aversion By Ghossoub, Mario
  7. Follow the Leader or Follow Anyone - Evidence from a Natural Field Experiment By Felix Ebeling; Christoph Feldhaus; Johannes Fendrich
  8. Insurance Demand under Prospect Theory:A Graphical Analysis By Ulrich Schmidt
  9. Social Identity and Inequality: The Impact of China's Hukou System By Afridi, Farzana; Li, Sherry Xin; Ren, Yufei
  10. Do voluntary payments to advisors improve the quality of financial advice? An experimental sender-receiver game By Vera Angelova; Tobias Regner
  11. Myopic preferences or subsistence income? Why do rickshaw cyclists rent the cycle? By Magnus Hatlebakk
  12. Warm-Glow Giving and Freedom to be Selfish By Özgür Evren; Stefania Minardi
  13. The Power of Sunspots: An Experimental Analysis By Dietmar Fehr; Frank Heinemann; Aniol Llorente-Saguer
  14. Information and Competition Entry By Ewers, Mara
  15. The Multi-Dimensional Effects of Reciprocity on Worker Effort: Evidence from a Hybrid Field-Laboratory Labor Market Experiment By Kim, Min-Taec; Slonim, Robert
  16. The Joint Benefits of Observed and Unobserved Punishment: Comment to Unobserved Punishment Supports Cooperation By Andreas Glöckner; Sebastian Kube; Andreas Nicklisch
  17. A Dynamic Ellsberg Urn Experiment. By Lefort, Jean-Philippe; Dominiak, Adam; Dürsch, Peter
  18. Risk Aversion and Effort in an Incentive Pay Scheme with Multiplicative Noise: Theory and Experimental Evidence By Zubanov, N.V.
  19. What can the Big Five Personality Factors contribute to explain Small-Scale Economic Behavior? By Julia Muller; Christiane Schwieren
  20. Income Comparisons and Non-Cognitive Skills By Budría, Santiago; Ferrer-i-Carbonell, Ada

  1. By: Ewers, Mara (University of Bonn); Zimmermann, Florian (University of Bonn)
    Abstract: In this paper we ask if reports of private information about skills, abilities or achievements are affected by image concerns. We develop a simple model that illustrates how image utility can lead to misreporting of private information in contexts where truthful reports maximize monetary outcomes. In addition, we test the model's predictions in a controlled lab experiment. In the experiment, all subjects go through a series of quiz questions and subsequently report a performance measure. We vary if reports are made to an audience or not and find evidence for image effects. In the audience treatment, stated reports are significantly higher than in the private treatment. This suggests that overconfident appearance might be a consequence of social approval seeking. We also find that men state higher self-assessments than women. This gender difference seems to be driven by men responding more strongly to the presence of an audience.
    Keywords: image concerns, self-assessment, overconfidence, experiment
    JEL: C91 D03 D82
    Date: 2012–03
  2. By: Erik Eyster; Andrea Galeotti; Navin Kartik; Matthew Rabin
    Abstract: We study observational learning in environments with congestion costs: as more of one's predecessors choose an action, the payoff from choosing that action decreases. If congestion on either action can get so large that an agent would prefer to take the other action no matter his beliefs about the state, then herds cannot occur. To the extent that \switching" away from the more popular action also reveals some private information, social learning is improved. The absence of herding is not enough to guarantee complete learning, however, as information cascades can occur through perpetual but uninformative switching between actions. For bounded private beliefs, we provide conditions that guarantee complete learning and conditions that guarantee bounded learning. Congestion costs have ambiguous effects on welfare as measured by the proportion of agents who choose the superior action. We apply our results to markets where congestion costs arise through responsive pricing and to queuing problems where agents dislike waiting for service.
    Date: 2012–03–01
  3. By: Kocher, Martin G. (University of Munich); Luhan, Wolfgang J. (Ruhr University Bochum); Sutter, Matthias (University of Innsbruck)
    Abstract: Empirical work on Akerlof's theory of gift exchange in labor markets has concentrated on the fair wage-effort hypothesis. In fact, however, the theory also contains a social component that stipulates that homogenous agents that are employed for the same wage level will exert more effort, resulting in higher rents and higher market efficiency, than agents that receive different wages. We present the first test of this component, which we call the fair uniform-wage hypothesis. In our laboratory experiment, we establish the existence of a significant efficiency premium of uniform wages. However, it is not the consequence of a stronger level of reciprocity by agents, but of the retrenchment of sanctioning options on the side of principals with uniform wages. Hence, implementing limitations to contractual freedom can have efficiency-enhancing effects.
    Keywords: gift exchange, multiple agents, uniform contracts, collective wage, experiment
    JEL: C72 C91 C92 D21 J31 J50
    Date: 2012–03
  4. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn); Michael Kurschilgen (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Customary law has been criticized from very different angles. Rational choice theorists claim that what looks like custom is nothing but self-interest. Positivists doubt that anything beyond consent assumes the force of law. In this paper, we adopt an experimental approach to test these claims. We show that the willingness to overcome a dilemma transcends self-interest. Cooperation is significantly higher in the presence of a meta-rule for the formation of customary law. Yet only if it is backed up by sanctions, law is significantly more effective than mere comity. Customary law guides behaviour into the normatively desired direction as normative expectations and behavioural patterns coevolve.
    Keywords: experiment, Public Good, Customary Law, Normativity, Crowding Outs
    JEL: H41 D63 C91 D62 K10 D03 C14
    Date: 2011–12
  5. By: Frans van Dijk (Netherlands Council for the judiciary); Joep H. Sonnemans (University of Amsterdam); Ed Bauw (University of Amsterdam, Netherlands Council for the judiciary)
    Abstract: In criminal cases judges evaluate and combine probabilistic evidence to reach verdicts. Unavoidably, errors are made, resulting in unwarranted conviction or acquittal of defendants. This paper addresses the questions (1) whether hearing cases by teams of three persons leads to less error than hearing cases alone; (2) whether deliberation leads to better decisions than mechanical aggregation of individual opinions; and (3) whether participating in deliberations improves future individual decisions. We find that having more than one judge consider cases reduces error effectively. This does not mean that it is necessary to deliberate about all cases. In simple cases many errors can be avoided by mechanical aggregation of independent opinions, and deliberation has no added value. In difficult cases discussion leads to less error. The advantage of deliberation goes beyond the case at hand: although we provide no feedback about the quality of verdicts, it improves individual decisions in subsequent cases.
    Keywords: judicial decision making; experiment; law and economics
    JEL: C91 C92 K14
    Date: 2012–03–27
  6. By: Ghossoub, Mario
    Abstract: This paper suggests a behavioral, preference-based definition of loss aversion for decision under risk. This definition is based on the initial intuition of Markowitz [30] and Kahneman and Tversky [19] that most individuals dislike symmetric bets, and that the aversion to such bets increases with the size of the stake. A natural interpretation of this intuition leads to defining loss aversion as a particular kind of risk aversion. The notions of weak loss aversion and strong loss aversion are introduced, by analogy to the notions of weak and strong risk aversion. I then show how the proposed definitions naturally extend those of Kahneman and Tversky [19], Schmidt and Zank [48], and Zank [54]. The implications of these definitions under Cumulative Prospect Theory (PT) and Expected-Utility Theory (EUT) are examined. In particular, I show that in EUT loss aversion is not equivalent to the utility function having an S shape: loss aversion in EUT holds for a class of utility functions that includes S-shaped functions, but is strictly larger than the collection of these functions. This class also includes utility functions that are of the Friedman-Savage [14] type over both gains and losses, and utility functions such as the one postulated by Markowitz [30]. Finally, I discuss possible ways in which one can define an index of loss aversion for preferences that satisfy certain conditions. These conditions are satisfied by preferences having a PT-representation or an EUT-representation. Under PT, the proposed index is shown to coincide with Kobberling and Wakker’s [22] index of loss aversion only when the probability weights for gains and losses are equal. In Appendix B, I consider some extensions of the study done in this paper, one of which is an extension to situations of decision under uncertainty with probabilistically sophisticated preferences, in the sense of Machina and Schmeidler [27].
    Keywords: Loss Aversion; Risk Aversion; Mean-Preserving Increase in Risk; Prospect Theory; Probability Weights; S-Shaped Utility
    JEL: D03 D81
    Date: 2011–08–11
  7. By: Felix Ebeling (University of Cologne); Christoph Feldhaus (University of Cologne); Johannes Fendrich (University of Cologne)
    Abstract: In a fundraising field experiment we show that individuals are not only conditionally cooperative, but that they are also more prone to donate to a homeless individual when the previous donor has a higher social status. We trailed a homeless person asking for donations within Cologne's metro trains for two weeks. Thereby we systematically varied the status of the first giver in the train. In the control treatment we did not intervene. In the low status treatment the first giver was always a (poor looking) low status person from our team and correspondingly in the high status treatment a (rich looking) high status person. In our experiment the probability to receive a donation in a train is 65% higher in the low status treatment than in the control treatment. Additionally, in comparison to the low status treatment, the probability increases by 22% in the high status treatment. To our best knowledge this is the first study providing field evidence for the particular influence of high status individuals on others' economic activities.
    Keywords: status, fundraising, field experiment
    JEL: C93 D64 H41
    Date: 2012–03–10
  8. By: Ulrich Schmidt
    Abstract: This paper analyzes insurance demand under prospect theory in a simple model with two states of the world and fair insurance contracts. We argue that two different reference points are reasonable in this framework, state-dependent initial wealth or final wealth after buying full insurance. Applying the value function of Tversky and Kahneman (1992), we find that for both reference points subjects will either demand full insurance or no insurance at all. Moreover, this decision depends on the probability of the loss: the higher the probability of the loss, the higher is the propensity to take up insurance. This result can explain empirical evidence which 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
    Keywords: insurance demand, prospect theory, flood insurance, diminishing sensitivity, loss, aversion
    JEL: D14 D81 G21
    Date: 2012–03
  9. By: Afridi, Farzana (Indian Statistical Institute); Li, Sherry Xin (University of Texas at Dallas); Ren, Yufei (Union College)
    Abstract: We conduct an experimental study to investigate the causal impact of social identity on individuals' response to economic incentives. We focus on China's household registration (hukou) system which favors urban residents and discriminates against rural residents in resource allocation. Our results indicate that making individuals' hukou status salient and public significantly reduces the performance of rural migrant students on an incentivized cognitive task by 10 percent, which leads to a significant leftward shift of their earnings distribution. The results demonstrate the impact of institutionally imposed social identity on individuals' intrinsic response to incentives, and consequently on widening income inequality.
    Keywords: social identity, inequality, field experiment, hukou, China
    JEL: C93 D03 O15 P36
    Date: 2012–03
  10. By: Vera Angelova (Max Planck Institute of Economics, Jena); Tobias Regner (Max Planck Institute of Economics, Jena)
    Abstract: The market for retail financial products (e.g. investment funds or insurances) is marred by information asymmetries. Clients are not well informed about the quality of these products. They have to rely on the recommendations of advisors. Incentives of advisors and clients may not be aligned, when fees are used by financial institutions to steer advice. We experimentally investigate whether voluntary contract components can reduce the conflict of interest and increase truth telling of advisors. We compare a voluntary payment upfront, an obligatory payment upfront, a voluntary bonus afterwards, and a three-stage design with a voluntary payment upfront and a bonus after. Across treatments, there is significantly more truthful advice when both clients and advisors have opportunities to reciprocate. Within treatments, the frequency of truthful advice is significantly higher when the voluntary payment is large.
    Keywords: financial advisors, asymmetric information, principal-agent, sender-receiver game, reciprocity, experiments, voluntary payment
    JEL: C91 D03 D82 G20 L15 M52
    Date: 2012–03–28
  11. By: Magnus Hatlebakk
    Abstract: One year rent is sufficient to buy a rickshaw in the plains of Nepal, while a rickshaw will last many years, so purchase appears very profitable. Still most cyclists rent the rickshaw. Based on choices made by rickshaw pullers between hypothetical financing schemes for rickshaws we investigate whether the explanation is a high time-preference rate or a high elasticity of the marginal utility of consumption, which in turn can be explained by preferences that are formed by consumption near a subsistence level. We find that subsistence constraints are more important than myopic preferences.
    Keywords: Investment behavior, Poverty, Time-preferences
    Date: 2012
  12. By: Özgür Evren (New Economic School); Stefania Minardi (Department of Economics, New York University)
    Abstract: Warm-glow refers to other-serving behavior that is valuable for the actor per se, apart from its social implications. We provide axiomatic foundations for warm-glow by viewing it as a form of preference for larger choice sets, in the sense of the literature on freedom of choice. Specically, an individual who experiences warm-glow prefers the freedom to be sel…sh: she values the availability of sel…sh options even if she plans to act unsel…shly. Our theory also provides foundations for empirically distinguishing between warm-glow and other motivations for prosocial behavior. The implied choice behavior subsumes Riker and Ordeshook (1968) and Andreoni (1990).
    Keywords: Altruism, Warm-Glow, Freedom of Choice, Philanthropy, Charitable Giving, Public Goods
    JEL: D11 D64 D81
    Date: 2011–12
  13. By: Dietmar Fehr (Social Science Research Center, Berlin (WZB)); Frank Heinemann (Technische Universität Berlin); Aniol Llorente-Saguer (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: We present an experiment in which extrinsic information (signals) may generate sunspot equilibria. The underlying coordination game has a unique symmetric non-sunspot equilibrium, which is also risk-dominant. Other equilibria can be ordered according to risk dominance. We introduce salient but extrinsic signals on which subjects may condition their actions. By varying the number of signals and the likelihood that different subjects receive the same signal, we measure how strong these signals affect behavior. Sunspot equilibria emerge naturally if there are salient public signals. Highly correlated private signals may also cause sunspot-driven behavior, even though this is no equilibrium. The higher the correlation of signals and the easier they can be aggregated, the more powerful they are in dragging behavior away from the risk-dominant to risk-dominated strategies. Sunspot-driven behavior may lead to welfare losses and exert negative externalities on agents, who do not receive extrinsic signals.
    Keywords: coordination games, strategic uncertainty, sunspot equilibria, irrelevant information
    JEL: C92 C72 D84
    Date: 2011–12
  14. By: Ewers, Mara (University of Bonn)
    Abstract: This paper studies the influence of information on entry choices in a competition with a controlled laboratory experiment. We investigate whether information provision attracts mainly high productivity individuals and reduces competition failure, where competition failure occurs when a subject loses the competition because the opponent holds a higher productivity. Information on the opponent is a promising nudge to raise individuals' awareness towards the complexity of the decision problem and to update beliefs about success. In the experiment, subjects face the choice between a competition game and a safe outside option. We analyze subjects' entry behavior with a benchmark treatment without information and three treatments, where we exogenously manipulate the information on the opponents. Our results are, (1) information on the productivity distribution of all potential opponents reduces competition failures by more than 50%, (2) information on the distribution is sufficient, i.e. precise information on the matched opponent's type does not further diminish failure rates.
    Keywords: competition, experiment, information, overconfidence, self-assessment, self-selection, tournament
    JEL: C91 D03 D61 D81 D82 M13 M51
    Date: 2012–03
  15. By: Kim, Min-Taec (University of Sydney); Slonim, Robert (University of Sydney)
    Abstract: We examine the gift exchange hypothesis on both the quantity and quality of output using a hybrid field-laboratory labor market experiment. We recruited participants to enter survey data for a well-known charitable organization. Workers were paid either a high or low wage. We find that although the total number of surveys entered did not vary with the wage, high wage workers made fewer errors and entered more surveys after controlling for errors. We further find that for low costs associated with errors, offering the low wage maximizes profits, but for higher costs paying the higher "gift exchange" wage maximizes profits.
    Keywords: laboratory and field experiments, multi-tasking, reciprocity, gift exchange
    JEL: C91 C93 J33 J41 D03
    Date: 2012–03
  16. By: Andreas Glöckner (Max Planck Institute for Research on Collective Goods, Bonn); Sebastian Kube (Max Planck Institute for Research on Collective Goods, Bonn); Andreas Nicklisch (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Laboratory experiments by Fudenberg and Pathak (2010), and Vyrastekova, Funaki and Takeuch (2008) show that punishment is able to sustain cooperation in groups even when it is observed only in the end of the interaction sequence. Our results demonstrate that the real power of unobserved punishment is unleashed when combined with observable punishment. Providing both unobserved and observed punishment strongly enhances cooperation within groups – strikingly, even with less intense sanctioning. This surprising result underlines the importance of the coexistence of observed and unobserved sanctioning mechanisms in social dilemmas.
    Keywords: Public Goods, Unobserved Punishment, Sanctioning Effectiveness
    JEL: H41 C92 H40
    Date: 2011–11
  17. By: Lefort, Jean-Philippe; Dominiak, Adam; Dürsch, Peter
    Abstract: Two rationality arguments are used to justify the link between conditional and unconditional preferences in decision theory : dynamic consistency and consequentialism. Dynamic consistency requires that ex ante contingent choices are respected by up dated preferences. Consequentialism states that only those outcomes which are still possible can matter for up dated preferences. We test the descriptive validity of these rationality arguments with a dynamic version of Ellsberg's three color experiment and that subjects act more often in line with consequentialism than with dynamic consistency.
    Keywords: experiment; consequentialism; dynamic consistency; updating; ambiguity; Non expected utility preferences;
    JEL: D81 C91
    Date: 2012–01
  18. By: Zubanov, N.V.
    Abstract: The application of the classical "linear" model of incentive pay to the case when the noise is multiplicative to effort generates two predictions for a given strength of incentives: 1) more risk-averse workers will put in less effort, and 2) setting a performance target will weaken the negative risk aversion--effort link. The data from a real-effort laboratory experiment involving 85 student participants support both these predictions. Implications of the model and empirical findings to the literature on, and practice of, personnel management are discussed.
    Keywords: risk aversion;incentive pay;performance targets
    Date: 2012–03–20
  19. By: Julia Muller (Erasmus University Rotterdam); Christiane Schwieren (University of Heidelberg)
    Abstract: Growing interest in using personality variables in economic research leads to the question whether personality as measured by psychology is useful to predict economic behavior. Is it reasonable to expect values on personality scales to be predictive of behavior in economic games? It is undoubted that personality can influence large-scale economic outcomes. Whether personality variables can also be used to understand micro-behavior in economic games is however less clear. We discuss reasons in favor and against this assumption and test in our own experiment, whether and which personality factors are useful in predicting behavior in the trust or investment game. We can also use the trust game to understand how personality measures fare relatively in predicting behavior when situational constraints vary in strength. This approach can help economists to better understand what to expect from the inclusion of personality variables in their models and experiments, and where further research might be useful and needed.
    Keywords: Personality; Big Five; Five Factor Model; Incentives; Experiment; Trust Game
    JEL: C72 C91 D03
    Date: 2012–03–26
  20. By: Budría, Santiago (University of Madeira); Ferrer-i-Carbonell, Ada (IAE Barcelona (CSIC))
    Abstract: People gain utility from occupying a higher ranked position in the income distribution of the reference group. This paper investigates whether these gains depend on an individual's set of non-cognitive skills. Using the 2000-2008 waves of the German Socioeconomic Panel dataset (SOEP), a subjective question on Life Satisfaction, and three different sets of non-cognitive skills indicators, we find significant and robust differences across skills groups. People who are more neurotic, extravert and have low external locus of control and low negative reciprocity are more sensitive to their individual position in the economic ladder. By contrast, the Life Satisfaction reaction to changes in economic status is significantly lower among individuals who score high (low) in negative (positive) reciprocity, and are at the bottom of the distribution of neuroticism, extraversion. The heterogeneity on the importance of income comparisons needs to be taken into account when, for example, introducing them into economic models, predicting individuals' behaviour, or making welfare judgments.
    Keywords: life satisfaction, income comparisons, personality traits
    JEL: D62 I31
    Date: 2012–03

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