|
on Cognitive and Behavioural Economics |
| By: | Andreu, Rafael (IESE Business School); Riverola, Josep (IESE Business School); Rosanas, Josep M. (IESE Business School); de Santiago, Rafael (IESE Business School) |
| Abstract: | Economics-based models typically overlook management decisions and firms' capabilities. We develop a model that puts firms at center stage by simulating the aggregate behavior of a population of firms resulting from specific management decisions. The model features a learning process that produces changes in companies' capabilities. Decisions are made under imperfect information and bounded rationality, and managers may sacrifice short-term performance in exchange for qualitative variables that affect their firm's future potential. The model provides a structured setting in which these issues-often discussed only in an informal way-can be more rigorously analyzed. The simulations produce a variety of hard-to-anticipate emergent behaviors. Economic performance appears to be quite sensitive to managers' estimates of the true capabilities of their own firms. Also, companies that are willing to accept sacrifices in the short run in order to increase future potential appear to be more stable than the rest. |
| Keywords: | Capability building vs. economic performance; imperfect information; learning: bounded rationality; |
| Date: | 2012–03–05 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0952&r=cbe |
| By: | Nicolas Gérard Vaillant (LEM - Lille - Economie et Management - CNRS : UMR8179 - Université Lille 1 - Sciences et Technologies - Fédération Universitaire et Polytechnique de Lille, Université Catholique de Lille - Université Catholique de Lille); François-Charles Wolff (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272, INED - Institut National d'Etudes Démographiques Paris - INED) |
| Abstract: | Using data from whisky tastings and fixed effect regressions, we find that net of any composition effect, experts report different tasting scores on average. This indicates that consumers have little to learn from absolute scores. |
| Keywords: | expert opinion; tasting score |
| Date: | 2012–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00695723&r=cbe |
| By: | Duffy, Sean; Smith, John |
| Abstract: | We find that differences in the ability to devote cognitive resources to a strategic interaction imply differences in strategic behavior. In our experiment, we manipulate the availability of cognitive resources by applying a differential cognitive load. In cognitive load experiments, subjects are directed to perform a task which occupies cognitive resources, in addition to making a choice in another domain. The greater the cognitive resources required for the task implies that fewer such resources will be available for deliberation on the choice. Although much is known about how subjects make decisions under a cognitive load, little is known about how this affects behavior in strategic games. We run an experiment in which subjects play a repeated multi-player prisoner's dilemma game under two cognitive load treatments. In one treatment, subjects are placed under a high cognitive load (given a 7 digit number to recall) and subjects in the other are placed under a low cognitive load (given a 2 digit number). According to two different measures, we find evidence that the low load subjects behave more strategically. First, the behavior of the low load subjects converged to the Subgame Perfect Nash Equilibrium prediction at a faster rate than the high load subjects. Second, we find evidence that low load subjects were better able to condition their behavior on the outcomes of previous periods. |
| Keywords: | bounded rationality; experimental economics; experimental game theory; public goods game; strategic sophistication; rational inattention |
| JEL: | C72 C91 |
| Date: | 2012–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:38825&r=cbe |
| By: | Morone, Andrea; Ozdemir, Ozlem |
| Abstract: | This experimental study investigates insurance decisions in low-probability, high-loss risk situations. Results indicate that subjects consider the probability of loss (loss size) when they make buying decisions (paying decisions). Most individuals are risk averse with no specific threshold probability. |
| Keywords: | Black swan; Risk; Insurance; Low probability; High loss; Experiment |
| JEL: | D81 C91 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:38842&r=cbe |
| By: | M. Bigoni; S. Bortolotti; M. Casari; D. Gambetta |
| Abstract: | Social life offers innumerable instances in which trust relations involve multiple agents. In an experiment, we study a new setting called Collective Trust Game where there are multiple trustees, who may have an incentive to coordinate their actions. Trustworthiness has also a strategic motivation, and the trusters' decision depends upon their beliefs about the predominant convention with regard to trustworthiness. In this respect, the Collective Trust Games offers a richer pattern of behavior than dyadic games. We report that the levels of trustworthiness are almost thirty percentage points higher when strategic motivations are present rather than not. Higher levels of trustworthiness also led to higher levels of trust. Moreover, strategic motives appear as a major drive for trustees, comparable in size to positive reciprocity, and more important than concerns for equality. |
| JEL: | C92 C72 D03 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp827&r=cbe |
| By: | Jacob K. Goeree; Jingjing Zhang |
| Abstract: | Charness and Dufwenberg (American Economic Review, June 2011, 1211-1237) have recently demonstrated that cheap-talk communication raises efficiency in bilateral contracting situations with adverse selection. We replicate their finding and check its robustness by introducing competition between agents. We find that communication and competition act as "substitutes:" communication raises efficiency in the absence of competition but lowers efficiency with competition, and competition raises efficiency without communication but lowers efficiency with communication. We briefly review some behavioral theories that have been proposed in this context and show that each can explain some but not all features of the observed data patterns. Our findings highlight the fragility of cheap-talk communication and may serve as a guide to refine existing behavioral theories. |
| Keywords: | Cheap talk, adverse selection, competition, guilt aversion, lie aversion, inequality aversion, reciprocity |
| JEL: | C92 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:074&r=cbe |
| By: | Luca Corazzini, Christopher Cotton, Paola Valbonesi |
| Abstract: | We present results from a multiple public goods experiment, where each public good produces benefits only if total contributions to it reach a minimum threshold. The experiment allows us to compare subjects' behavior in a benchmark treatment with a single public good and in treatments with more public goods than can be funded. We show how the availability of additional, more-efficient public goods may not make subjects better off. This is because additional options decrease the probability of coordination and discourage contributions. Introducing additional, less-efficient options does not alter coordination and contributions relative to the benchmark. |
| Keywords: | threshold public goods, multiple public goods, salience, efficiency, laboratory experiment |
| JEL: | C91 C92 H40 H41 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:slp:islawp:islawp44&r=cbe |
| By: | Björn Bartling; Leif Brandes; Daniel Schunk |
| Abstract: | We show that professional soccer players exhibit reference-dependent behavior during matches. Controlling for the state of the match and for unobserved heterogeneity, we show on a minute-by-minute basis that a player breaches the rules of the game, measured by the referee’s assignment of cards, with a significantly higher probability if his team is behind the expected match outcome, measured by pre-play betting odds of large professional bookmakers. We derive these results in two independent data sets, one from ten seasons of the German Bundesliga, the other from eight seasons the English Premier League, each with more than half a million minutes of play. |
| Keywords: | Reference points, expectations, experience, high stakes, competition |
| JEL: | D03 D81 D84 L83 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:073&r=cbe |
| By: | Giuseppe De Marco (Università di Napoli Parthenope and CSEF); Giovanni Immordino (Università di Salerno and CSEF) |
| Abstract: | This paper studies how incentives are affected by intention-based reciprocity preferences when the principal hires many agents. Our results describe the agents' psychological attitudes required to sustain a given strategy profile. We also show that hiring reciprocal agents to implement a first or a second-best contract will always benefit the principal if the strategy profile is symmetric. When instead the profile (first or second-best) is asymmetric the principal's best interest might be better served by self-interested agents. We conclude the paper by clarifying when symmetric profiles are most likely to arise. |
| Keywords: | reciprocity, many agents, psychological games |
| JEL: | C72 D03 D86 |
| Date: | 2012–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:314&r=cbe |
| By: | Shoko Yamane; Hiroyasu Yoneda; Yoshiro Tsutsui |
| Abstract: | This paper investigates the individual outcomes of irrational thinking, including paranormality and non-scientific thinking. These modes of thinking are identified by factor analysis from a 2008 survey. Income and happiness are used as measures of performance. Empirical results reveal that non-scientific thinking lowers income, whereas paranormality does not affect it. While non-scientific thinking lowers happiness, paranormality raises it. Extending the model, we find that higher ability and self-control result in higher income and happiness. Selfishness raises income, but diminishes happiness. These results suggest that Homo economicus generally achieves higher individual performance, except that belief in paranormality raises happiness. |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0844&r=cbe |
| By: | Dean Karlan; Jonathan Zinman |
| Abstract: | Mounting evidence suggests that behavioral factors depress wealth accumulation. Although much research and policy focuses on asset accumulation, for many households debt decumulation is more efficient. Yet the mass market for debt reduction services is thin. So we develop and pilot test Borrow Less Tomorrow (BoLT), a behavioral approach to debt reduction that combines a simple decision aid, social commitment, and reminders. Results from a sample of free tax-preparation clients with eligible debt in Tulsa (N=465) indicate strong demand for debt reduction: 41% of those offered BoLT used it to make a plan to accelerate debt repayment. Using random assignment to BoLT offers, we find weak evidence that the BoLT package offered reduces credit card debt. |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:crr:crrwps:wp2012-17&r=cbe |
| By: | Ji\v{r}\'i Kuka\v{c}ka; Jozef Barunik |
| Abstract: | The main aim of this work is to incorporate selected findings from behavioural finance into a Heterogeneous Agent Model using the Brock and Hommes (1998) framework. In particular, we analyse the dynamics of the model around the so-called `Break Point Date', when behavioural elements are injected into the system and compare it to our empirical benchmark sample. Behavioural patterns are thus embedded into an asset pricing framework, which allows to examine their direct impact. Price behaviour of 30 Dow Jones Industrial Average constituents covering five particularly turbulent U.S. stock market periods reveals interesting pattern. To replicate it, we apply numerical analysis using the Heterogeneous Agent Model extended with the selected findings from behavioural finance: herding, overconfidence, and market sentiment. We show that these behavioural breaks can be well modelled via the Heterogeneous Agent Model framework and they extend the original model considerably. Various modifications lead to significantly different results and model with behavioural breaks is also able to partially replicate price behaviour found in the data during turbulent stock market periods. |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1205.3763&r=cbe |