nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2012‒04‒10
sixteen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Social Comparison, Aspirations and Priming: When Fiction is as Powerful as Fact By Guillen, Pablo; Wu, Kevin
  2. Behavioral Spillovers in Coordination Games By Timothy N. Cason; Anya C. Savikhin; Roman Sheremeta
  3. Do Liars Believe? Beliefs and Other-Regarding Preferences in Sender-Receiver Games By Roman M. Sheremeta; Timothy Shields
  4. Endowment Origin, Demographic Effects and Individual Preferences in Contests By Curtis R. Price; Roman M. Sheremeta
  5. Testing game theory without the social preference confound By Michał Krawczyk; Fabrice Le Lec
  6. New Insights into Conditional Cooperation and Punishment from a Strategy Method Experiment By Cheung, Stephen L.
  7. An investigation of individual preferences: consistency across incentives and stability over time By Emmanouil Mentzakis; Jingjing Zhang
  8. Evidence on the effects of mandatory disclaimers in advertising By Green, Kesten C.; Armstrong, J. Scott
  9. Estimating risk attitudes in conventional and artefactual lab experiments: The importance of the underlying assumptions By Drichoutis, Andreas C.; Koundouri, Phoebe
  10. Relative Performance of Liability Rules: Experimental Evidence By Vera Angelova; Giuseppe Attanasi; Yolande Hiriart
  11. Risk preference elicitation without the confounding effect of probability weighting By Drichoutis, Andreas; Lusk, Jayson
  12. A Behavioral Defense of Rational Expectations By Kenneth Kasa;
  13. How Can Bill and Melinda Gates Increase Other People's Donations to Fund Public Goods? By Karlan, Dean; List, Jonathan A.
  14. Do non-enforceable contracts matter? Evidence from an international lab experiment. By Cappelen, Alexander W.; Hagen, Rune Jansen; Sørensen, Erik Ø.; Tungodden, Bertil
  15. Naive learning in social networks: Imitating the most successful neighbor By Tsakas, Nikolas
  16. Incentives from stock option grants: a behavioral approach By Hamza Bahaji

  1. By: Guillen, Pablo; Wu, Kevin
    Abstract: This study uses a novel application of priming to provide experimental evidence that aspirations and social comparisons may be influenced by non factual sources. A textual narrative eliciting social comparison is shown to dramatically alter material aspirations. This is despite the narrative not presenting any new information, relying instead on participants' existing knowledge. However the effect of the priming rapidly dissipates when attention is redirected to unrelated tasks. These findings build on literature examining the influence of media, social comparison and aspirations on well-being. The findings build support for the claim that media exposure may distort perceptions of status with implications for satisfaction, education attainment and risk preferences. It also demonstrates that at least in the short run, preferences in general and aspirations in particular are highly suggestible.
    Date: 2012–01
  2. By: Timothy N. Cason (Department of Economics, Krannert School of Management, Purdue University); Anya C. Savikhin (Becker Friedman Institute for Economic Research, The University of Chicago); Roman Sheremeta (Argyros School of Business and Economics, Chapman University)
    Abstract: Motivated by problems of coordination failure observed in weak-link games, we experimentally investigate behavioral spillovers for minimum- and median-effort coordination games. Subjects play these coordination games simultaneously and sequentially. The results show that successful coordination on the Pareto optimal equilibrium in the median game influences behavior in the minimum game when the games are played sequentially. Moreover, this positive, Pareto-improving spillover is present even when group composition changes across games, although the effect is not as strong. We also find that the precedent for uncooperative behavior in the minimum game does not influence play in the median game. These findings suggest guidelines for increasing cooperative behavior within organizations.
    Keywords: coordination, order-statistic games, experiments, cooperation, minimum game, median game, behavioral spillover
    JEL: C72 C91
    Date: 2011
  3. By: Roman M. Sheremeta (Argyros School of Business and Economics, Chapman University); Timothy Shields (Argyros School of Business and Economics, Chapman University)
    Abstract: We examine subjects' behavior in sender-receiver games where there are gains from trade and alignment of interests in one of the two states. We elicit subjects' beliefs, risk and other-regarding preferences. Our design also allows us to examine the behavior of subjects in both roles, to determine whether the behavior in one role is the best response to the subject's own behavior in the other role. The results of the experiment indicate that 60 percent of senders adopt deceptive strategies by sending favorable message when the true state of the nature is unfavorable. Nevertheless, 67 percent of receivers invest conditional upon a favorable message. The investing behavior of receivers cannot be explained by risk preferences or as a best response to subject's own behavior in the sender's role. However, it can be rationalized by accounting for elicited beliefs and other-regarding preferences. Finally, the honest behavior of some senders can be explained by other-regarding preferences. Thus we find liars do believe, and individuals who care about the payoffs of others tend to be honest.
    Keywords: experiment, strategic communication, beliefs, lying, deception, other-regarding preferences
    JEL: C72 C91 D82 D83
    Date: 2012
  4. By: Curtis R. Price (Department of Economics & Marketing, College of Business, University of Southern Indiana); Roman M. Sheremeta (Argyros School of Business and Economics, Chapman University)
    Abstract: In modern firms the use of contests as an incentive device is ubiquitous. Nonetheless, recent experimental research shows that in the laboratory subjects routinely make suboptimal decisions in contests even to the extent of making negative returns. The purpose of this study is to investigate if changing how agents are endowed with resources can increase the efficiency in contests. To this end, we conduct a laboratory experiment in which subjects are asked to allot costly resources (bids) in an effort to attain an award (prize). In line with other laboratory studies of contests, our results show that subjects overbid relative to theoretical predictions and incur substantial losses as a result. Making subjects earn their initial resource endowments mitigates the amount of overbidding and thus increases overall efficiency. Overbidding is also linked to gender with women bidding higher than men and having lower average earnings. Other demographic information such as religiosity and individual preferences towards winning and risk also contribute to excessive bidding.
    Keywords: contest, experiments, overbidding, endowment, gender, religiosity
    JEL: C72 C91 D61 D72 J16
    Date: 2012
  5. By: Michał Krawczyk (University of Warsaw, Faculty of Economic Sciences); Fabrice Le Lec (Catholic University of Lille, Lille Economie & Management UMR CNRS 8179)
    Abstract: We propose an experimental method whose purpose is to induce selfish behavior in games for a broad class of social preferences. It provides a theoretical framework for testing game theoretical predictions by confronting subjects with a commonly known payoff matrix actually representing their preferences. The paper describes the empirical tests of this method based on the comparison of results from several popular experimental games played with and without our methodology. Apart from it being a test of validity of the method, our experiment helps answer the question of how useful social preferences could be in explaining commonly observed deviations from selfish rationality. Results suggest that our method does induce more selfish behaviors: a substantial part of the difference between predictions based on selfishness and observed behaviors seems indeed driven by such preferences. But they also indicate that a considerable share is left untouched, perhaps giving weight to alternative explanations.
    Keywords: social preference, experimental game theory, ultimatum game, public goods game, trust game, prisoner's dilemma, dictator game
    JEL: A13 C65 C72 D63 D03
    Date: 2012
  6. By: Cheung, Stephen L.
    Abstract: Understanding the forces that enhance or erode cooperation in social dilemmas is a fundamental question in social science. Previous experiments have shown that selfish bias is an important source of fragility in conditional cooperation, and that the possibility of punishment can strengthen cooperation, however potential efficiency gains are threatened by antisocial punishment of higher contributors. This paper introduces new experimental designs to examine how these behaviours respond to the full range of variation in the contributions of others. It is shown that selfish bias becomes significantly worse as others contribute more unequally, while punishment increases both with decreasing contributions by the target player and increasing contributions by a third player. Antisocial punishment is seldom directed specifically toward high contributors; rather, it may be motivated by pre-emptive retaliation.
    Keywords: strategy method; punishment; conditional cooperation; selfish bias
    Date: 2012–01
  7. By: Emmanouil Mentzakis; Jingjing Zhang
    Abstract: This study compares individual preferences across incentives (i.e., hypothetical vs. real incentives) and over time (i.e. elicitation at two different points in time) in a choice experiment involving charitable donating decisions. We provide evidence of hypothetical bias but little evidence of instability of individual giving. There is significant heterogeneity in individual preferences, with real incentives either dampening or pronouncing the observed donating behaviour. Neither hypothetical bias nor instability is observed when we examine the propensity of individuals to make internally consistent decisions over identical choices.
    Keywords: Individual preference, hypothetical bias, time inconsistency, discrete choice experiments, charitable donations
    JEL: C91 D11 D91 H40
    Date: 2012–04
  8. By: Green, Kesten C.; Armstrong, J. Scott
    Abstract: We found no evidence that consumers benefit from government-mandated disclaimers in advertising. Experiments and common experience show that admonishments to change or avoid behaviors often have effects opposite to those intended. We found 18 experimental studies that provided evidence relevant to mandatory disclaimers. Mandated messages increased confusion in all, and were ineffective or harmful in the 15 studies that examined perceptions, attitudes, or decisions. We conducted an experiment on the effects of a government-mandated disclaimer for a Florida court case. Two advertisements for dentists offering implant dentistry were shown to 317 subjects. One advertiser had implant dentistry credentials. Subjects exposed to the disclaimer more often recommended the advertiser who lacked credentials. Women and less-educated subjects were particularly prone to this error. In addition, subjects drew false and damaging inferences about the credentialed dentist.
    Keywords: consumer protection; corrective advertising; decision making; government regulation; judgment
    JEL: H11 M37 K23
    Date: 2012–03–30
  9. By: Drichoutis, Andreas C.; Koundouri, Phoebe
    Abstract: In this paper the authors assess the importance of sample type in the estimation of risk preferences. The authors elicit and compare risk preferences from student subjects and subjects drawn from the general population, using the multiple price list method devised by Holt and Laury (Risk aversion and incentive effects, 2002). The authors find evidence suggesting that under Rank Dependent Utility and an expo-power function, students exhibit similar risk attitudes to subjects drawn from the general population. However, when the authors assume an incorrect characterization of risk preferences, in particular they adopt the framework of Expected Utility theory and a Constant Relative Risk Aversion function, their estimation results lead to erroneous inferences. In this case, students are on average risk averse, while subjects drawn from the general population exhibit risk loving preferences. The results have implications for economic policy making under uncertainty. --
    Keywords: Risk aversion,CRRA,expo-power,rank dependent utility,multiple price list
    JEL: C91 D01 D81
    Date: 2012
  10. By: Vera Angelova (Max Planck Institute of Economics, Jena, Germany); Giuseppe Attanasi (Toulouse School of Economics, Toulouse, France); Yolande Hiriart (Universite de Franche-Comte (CRESE), Besancon, France)
    Abstract: We compare the performance of liability rules for managing environmental disasters when third parties are harmed and cannot always be compensated. A firm can invest in safety to reduce the likelihood of accidents. The firm's investment is unobservable to authorities. Externality and asymmetric information call for public intervention to define rules aimed at increasing prevention. We determine the investment in safety under No Liability, Strict Liability and Negligence, and compare it to the first best. Additionally, we investigate how the (dis)ability of the firm to fully cover potential damages affects the firm's behavior. An experiment tests the theoretical predictions. In line with theory, Strict Liability and Negligence are equally effective; both perform better than No Liability; investment in safety is not sensitive to the ability of the firm to compensate potential victims. In contrast with theory, prevention rates absent liability are much higher and liability is much less effective than predicted.
    Keywords: Risk Regulation, Liability Rules, Incentives, Insolvency, Experiment
    JEL: D82 K13 K32 Q58
    Date: 2012–03–30
  11. By: Drichoutis, Andreas; Lusk, Jayson
    Abstract: In this paper we show that the wildly popular Holt and Laury (2002) risk preference elicitation method confounds estimates of the curvature of the utility function, the traditional notion of risk preference, with an estimate of the extent to which an individual weights probabilities non-linearly. We show that a slight modification to their approach can remove the confound while preserving the simplicity of the method which has made it so popular. Data from a laboratory experiment shows that our new method yields significantly different levels of implied risk aversion than the Holt and Laury task even after econometrically controlling for probability weighting in the latter. Implied risk aversion from the traditional Holt and Laury task is relatively insensitive to payout amount, but our new method reveals increasing relative risk aversion and risk neutrality at low payout amounts.
    Keywords: expected utility theory, experiment, probability weighting, rank dependent utility, risk
    JEL: D81 C91
    Date: 2012–03–27
  12. By: Kenneth Kasa (Simon Fraser University);
    Abstract: This paper studies decision making by agents who value optimism, but are unsure of their environment. As in Brunnermeier and Parker (2005), an agent’s optimism is assumed to be tempered by the decision costs it imposes. As in Hansen and Sargent (2008), an agent’s uncertainty about his environment leads him to formulate ‘robust’ decision rules. It is shown that when combined, these two considerations can lead agents to adhere to the Rational Expectations Hypothesis. Rather than being the outcome of the sophisticated statistical calculations of an impassive expected utility maximizer, Rational Expectations can instead be viewed as a useful approximation in environments where agents struggle to strike a balance between doubt and hope.
    Keywords: Rational expectations; robustness
    JEL: D81 D84
    Date: 2012–03
  13. By: Karlan, Dean (Yale University and Innovations for Poverty Action); List, Jonathan A. (University of Chicago)
    Abstract: We develop a simple theory which formally describes how charities can resolve the information asymmetry problems faced by small donors by working with large donors to generate quality signals. To test the model, we conducted two large-scale natural field experiments. In the first experiment, a charity focusing on poverty reduction solicited donations from prior donors and either announced a matching grant from the Bill and Melinda Gates Foundation, or made no mention of a match. In the second field experiment, the same charity sent direct mail solicitations to individuals who had not previously donated to the charity, and tested whether naming the Bill and Melinda Gates Foundation as the matching donor was more effective than not identifying the name of the matching donor. The first experiment demonstrates that the matching grant condition generates more and larger donations relative to no match. The second experiment shows that providing a credible quality signal by identifying the matching donor generates even more and larger donations than not naming the matching donor. Importantly, the treatment effects persist long after the matching period, and the quality signal is quite heterogeneous--the Gates' effect is much larger for prospective donors who had a record of giving to "poverty-oriented" charities. These two pieces of evidence support our model of quality signals as a key mechanism through which matching gifts inspire donors to give.
    JEL: D12 D71 D82 H41 O12
    Date: 2012–03
  14. By: Cappelen, Alexander W. (Dept. of Economics, Norwegian School of Economics and Business Administration); Hagen, Rune Jansen (University of Bergen); Sørensen, Erik Ø. (Dept. of Economics, Norwegian School of Economics and Business Administration); Tungodden, Bertil (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: Many verifiable contracts are impossible or difficult to enforce. This applies to contracts among family and friends, contracts regulating market transactions, and sovereign debt contracts. Do such non-enforceable contracts matter? We use a version of the trust game with participants from Norway and Tanzania to study repayment decisions in the presence of non-enforceable loan contracts. Our main finding is that the specific content of the contract has no effect on loan repayment. Rather, the borrowers seem to be motivated by other moral motives, which contributes to explaining why they partly fulfill non-enforceable contracts. We also show that some borrowers violate the axiom of first order stochastic dominance when rejecting loan offers, which partly may reflect negative reciprocity, but also seems to reflect a fundame tal aversion against uncertainty.
    Keywords: Non-enforceable contracts; Lab experiment.
    JEL: C91 D63 D80 F34
    Date: 2012–02–12
  15. By: Tsakas, Nikolas
    Abstract: This paper considers a model of observational learning in social networks. Every period, the agents observe the actions of their neighbors and their realized outcomes, and they imitate the most successful. First, we study the case where the network has finite population and we show that, regardless of the structure, the population converges to a monomorphic steady state, i.e. where every agent chooses the same action. Subsequently, we extend our analysis to infinitely large networks and we differentiate the cases where agents have bounded neighborhoods, with those where they do not. Under bounded neighborhoods, an action is diffused to the whole population if it is the only one initially chosen by infinitely many agents. If there exist more than one such actions, we provide an additional sufficient condition in the payoff structure, which ensures convergence for any network. Without the assumption of bounded neighborhoods, we show that an action can survive even if it is initially chosen by a single agent and also that a network can be in steady state without this being monomorphic.
    Keywords: Social Networks; Learning; Diffusion; Imitation
    JEL: D03 D83 D85
    Date: 2012–03–23
  16. By: Hamza Bahaji (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine)
    Abstract: This paper examines the incentives from stock options for loss-averse employees subject to probability weighting. Employing the certainty equivalence principle, I built on insights from Cumulative Prospect Theory (CPT) to derive a continuous time model to value options from the perspective of a representative employee. Consistent with a growing body of empirical and experimental studies (Lambert and Larcker, 2001; Hodge et al., 2006), the model predicts that the employee may overestimate the value of his options in-excess of their risk-neutral value. This is nevertheless in stark contrast with a common finding of standard models based on the Expected Utility Theory (EUT) framework that options value to a risk-averse undiversified employee is strictly lower than the value to risk-neutral outside investors. In particular, I proved that loss aversion and probability weighting have countervailing effects on the option subjective value. In addition, for typical setting of preferences parameters around the experimental estimates (Tversky and Kahneman, 1992; Abdellaoui, 2000), and assuming the company is allowed to adjust existing compensation when making new stock option grants, the model predicts that incentives are maximized for strike prices set around the stock price at inception. This finding is consistent with companies' actual compensation practices that standard EUT-based models have difficulties accommodating their existence. The paper also examines the relationship between risk taking incentives and stock options and finds that an executive who is subject to probability weighting may be more prompted than a risk-neutral executive to act in order to increase the firm's assets volatility.
    Keywords: Stock options, Cumulative Prospect Theory, Incentives, Subjective value.
    Date: 2011–05–13

This nep-cbe issue is ©2012 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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.