nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2012‒08‒23
24 papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Bounded rationality: psychology, economics and the financial crisis By Schilirò, Daniele
  2. Social Relations and Relational Incentives By Robert Dur; Jan Tichem
  3. Learning, Forecasting and Optimizing: An Experimental Study By Te Bao; John Duffy; Cars Hommes
  4. Measuring, Explaining, and Controlling Tax Evasion: Lessons from Theory, Experiments, and Field Studies By James Alm
  5. Motives of Sanctioning: Equity and Emotions in a Public Good Experiment with Punishment By Paolo Crosetto; Werner Güth; Luigi Mittone; Matteo Ploner
  6. Heterogeneity and Cooperation in Privileged Groups: The Role of Capability and Valuation on Public Goods Provision By Felix Koelle
  7. Variation in Risk Seeking Behavior in a Natural Experiment on Large Losses Induced by a Natural Disaster By Lionel Page; David Savage; Benno Torgler
  8. Cooperation in a Risky Environment: Decisions from Experience in a Stochastic Social Dilemma By Florian Artinger; Nadine Fleischhut; M. Vittoria Levati; Jeffrey R. Stevens
  9. Taking, Punishment and Trust By Simon Halliday
  10. Risk and Inequality in a Social Decision Making Experiment By Ingrid M.T. Rohde; Kirsten I.M. Rohde
  11. To See Is To Believe: Common Expectations In Experimental Asset Market s By Cheung, Stephen L.; Hedegaard, Morten; Palan, Stefan
  12. Rethinking the Research Paradigms for Analyzing Tax Compliance Behavior By James Alm; Erich Kirchler; Stephan Muehlbacher; Katharina Gangl; Eva Hofmann; Christoph Kogler; Maria Pollai
  13. Relative pay and labor supply By Anat Bracha; Uri Gneezy
  14. Does good advice come cheap? - On the assessment of risk preferences in the lab and the field By Leuermann, Andrea; Roth, Benjamin
  15. Are efficiency wages equality wages? Exogenously induced fairness norms in working environments By Gary Bolton; Peter Werner
  16. Ethnic Diversity and Team Performance: A Field Experiment By Sander Hoogendoorn; Mirjam van Praag
  17. Individual Expectations, Limited Rationality and Aggregate Outcomes By Te Bao; Cars Hommes; Joep Sonnemans; Jan Tuinstra
  18. Backward induction or forward reasoning? An experiment of stochastic alternating offer bargaining By Berninghaus, Siegfried K.; Güth, Werner; Schosser, Stephan
  19. Social- and Self-Image Concerns in Fair-Trade Consumption: Evidence from Experimental Auctions for Chocolate By Sabrina Teyssier; Fabrice Etilé; Pierre Combris
  20. A Test Of Social Preferences Theory By Ioannou, Christos A.; Qi, Shi; Rustichini, Aldo
  21. Stereotypes and Risk Attitudes: Evidence from the Lab and the Field By Leuermann, Andrea; Roth, Benjamin
  22. The Influence of Wages on Public Officials' Corruptibility: A Laboratory Investigation By Roel van Veldhuizen
  23. Toward the Integration of Personality Theory and Decision Theory in the Explanation of Economic and Health Behavior By Rustichini, Aldo; DeYoung, Colin G.; Anderson, Jon; Burks, Stephen V.
  24. Level-k Reasoning and Incentives By Larbi Alaoui; Antonio Penta

  1. By: Schilirò, Daniele
    Abstract: Classical mathematical algorithms often fail to identify in time when the international financial crises occur although, as the classical theory of choice would suggest, the economic agents are rational and the markets are or should be efficient and behave also rationally. This contribution does not pretend to give a complete answer to these questions, but it will highlight some well-known limits of the classical theory of rational choice. In particular, the present paper will focus on the concept of bounded rationality. The work also makes some references to behavioral economics and to the literature of behavioral finance which has given important contributions in explaining the behavior and the anomalies of financial markets. Finally, following the approch of Simon, the paper proposes an analytical model to describe the behaviour of agents which are rationally bounded, risk averse and loss averse, emphasizing the relationship between psychology and economics which helps to explain the crisis in financial markets.
    Keywords: Bounded rationality; rational choice; cognitive economics; behavioral finance; risk aversion
    JEL: D81 B52 D83 C60
    Date: 2012–07
  2. By: Robert Dur (Erasmus University Rotterdam, CESifo, and IZA); Jan Tichem (Erasmus University Rotterdam)
    Abstract: This paper studies how social relationships between managers and employees affect relational incentive contracts. To this end we develop a simple dynamic principal-agent model where both players may have feelings of altruism or spite toward each other. The contract may contain two types of incentives for the agent to work hard: a bonus and a threat of dismissal. We find that good social relationships undermine the credibility of a threat of dismissal but strengthen the credibility of a bonus. Among others, these two mechanisms imply that better social relationships sometimes lead to higher bonuses, while worse social relationships may increase productivity and players' utility in equilibrium.
    Keywords: Altruism; spite; social relations; incentives; relational contracts; efficiency wages; subjective performance evaluation; Nash bargaining
    JEL: D23 J33 M52 M55
    Date: 2012–05–16
  3. By: Te Bao (University of Amsterdam); John Duffy (University of Pittsburgh); Cars Hommes (University of Amsterdam)
    Abstract: Rational Expectations (RE) models have two crucial dimensions: 1) agents correctly forecast future prices given all available information, and 2) given expectations, agents solve optimization problems and these solutions in turn determine actual price realizations. Experimental testing of such models typically focuses on only one of these two dimensions. In this paper we consider both forecasting and optimization decisions in an experimental cobweb economy. We report results from four experimental treatments: 1) subjects form forecasts only, 2) subjects determine quantity only (solve an optimization problem), 3) they do both and 4) they are paired in teams and one member is assigned the forecasting role while the other is assigned the optimization task. All treatments converge to Rational Expectation Equilibrium (REE), but at very different speeds. We observe that performance is the best in treatment 1) and worst in the treatment 3). Most forecasters use a n adaptive expectations rule. Subjects are less likely to make conditionally optimal production decision for given forecasts in treatment 3) where the forecast is made by themselves, than in treatment 4) where the forecast is made by the other member of their team, which suggests that "two heads are better than one" in finding REE.
    Keywords: Learning; Rational Expectations; Optimization; Experimental Economics; Bounded Rationality
    JEL: C91 C92 D83 D84
    Date: 2012–02–17
  4. By: James Alm (Department of Economics, Tulane University)
    Abstract: In this paper, I assess what we have learned about tax evasion since Michael Allingham and Agnar Sandmo launched the modern analysis of tax evasion in 1972. I focus on three specific questions and the answers to these questions that have emerged over the years. First, how do we measure the extent of evasion? Second, how can we explain these patterns of behavior? Third, how can we use these insights to control evasion? In the process, I illustrate my own answers to these questions by highlighting various specific examples of research. My main conclusion is that we have learned many things but that we also still have many gaps in our understanding of how to measure, explain, and control tax evasion. I also give some suggestions – and some predictions – about where promising avenues of future research may lie.
    Keywords: tax evasion, behavioral economics, experimental economics
    JEL: H2 H26 D03 C9
    Date: 2012–07
  5. By: Paolo Crosetto (Max Planck Institute of Economics, Strategic Interaction Group, Jena, Germany); Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group, Jena, Germany); Luigi Mittone (Department of Economics - CEEL, University of Trento, Italy); Matteo Ploner (Department of Economics - CEEL, University of Trento, Italy)
    Abstract: We study conditional cooperation based on a sequential two-person linear public good game in which a trusting first contributor can be exploited by a second contributor. After playing this game the first contributor is allowed to punish the second contributor. The consequences of sanctioning depend on the treatment: whereas punishment can reduce inequality in one treatment, it only creates another inequality in the other. To capture the effect of delay on punishment both treatments are run once with immediate and once with delayed punishment. Moreover, to investigate the effect of pure voice, all four treatments are also run in a virtual condition with no monetary consequences of punishment. Results show the emergence across all conditions of a strong norm of conditional cooperation. Punishment is generally low, it is higher when not delayed and it is not used to reduce inequality in payoffs. The main motive of sanctioning appears to be the need to punish a violation of the reciprocity norm, irrespective of monetary consequences.
    Keywords: Public good games, Punishment, Experiments, Conditional cooperation
    JEL: C70 C72 C92 H41
    Date: 2012–08–20
  6. By: Felix Koelle (CGS, University of Cologne)
    Abstract: We experimentally investigate cooperation in privileged groups which according to Olson (1965) are groups in which at least one member has an incentive to supply a positive amount of the public good. More specifically, we analyze group member heterogeneity with respect to two dimensions: capability and valuation. Our results reveal that with and without punishment opportunities, heterogeneity crucially affects cooperation and coordination within groups. Compared to non-privileged groups, asymmetric valuations for the public good have negative effects, and asymmetric capabilities in providing the public good have positive effects on voluntary contributions. The main reason for these results are the different externalities contributions have on the other group members' payoffs affecting individuals' willingness to cooperate. Hence, whether heterogeneity facilitates or impedes collective action, and whether privileged groups are as privileged as they initially seem is subject to the nature of their asymmetry.
    Keywords: Public goods, heterogeneity, privileged groups, inequality, cooperation, punishment
    JEL: H41 D63 C92
    Date: 2012–07
  7. By: Lionel Page (Queensland University of Technology); David Savage (Queensland University of Technology); Benno Torgler (Queensland University of Technology)
    Abstract: This study explores people's risk attitudes after having suffered large real-world losses following a natural disaster. Using the margins of the 2011 Australian floods (Brisbane) as a natural experimental setting, we find that homeowners who were victims of the floods and face large losses in property values are 50% more likely to opt for a risky gamble {a scratch card giving a small chance of a large gain ($500,000) {than for a sure amount of comparable value ($10). This finding is consistent with prospect theory predictions of the adoption of a risk-seeking attitude after a loss.
    Keywords: Decision under Risk, Large Losses, Natural Experiment
    JEL: D03 D81 C93
    Date: 2012–07
  8. By: Florian Artinger (Max Planck Institute for Human Development, Berlin); Nadine Fleischhut (Max Planck Institute for Human Development, Berlin); M. Vittoria Levati (Max Planck Institute of Economics, Jena, and Department of Economics, University of Verona); Jeffrey R. Stevens (Department of Psychology, Nebraska)
    Abstract: Often in cooperative situations, many aspects of the decision-making environment are uncertain. We investigate how cooperation is shaped by the way information about risk is presented (from description or from experience) and by differences in risky environments. Drawing on research from risky choice, we compare choices in stochastic social dilemmas to those in lotteries with equivalent levels of risk. Cooperation rates in games vary with different levels of risk across decision situations with the same expected outcomes, thereby mimicking behavior in lotteries. Risk presentation, however, only affected choices in lotteries, not in stochastic games. Process data suggests that people respond less to probabilities in the stochastic social dilemmas than in the lotteries. The findings highlight how an uncertain environment shapes cooperation and call for models of the underlying decision processes.
    Keywords: Decisions from Experience, Social Dilemma, Cooperation, Risky Choice, Public Good.
    JEL: C72 C73 C92 D81
    Date: 2012–08–20
  9. By: Simon Halliday
    Abstract: Is a trusting person more or less likely to steal? Is a trusting person more or less likely to punish someone who steals? A great deal of research has examined how trust and social capital correlate with altruistic, reciprocal and punishing behaviours, but less research has been dedicated to understanding the roles of trust and social capital in peoples' choices between a strictly antisocial behaviour - like stealing - and generosity, or in a third party's choice to punish taking behaviour. Using a series of dictator games with third-party punishment and an option for a dictator to take, we show that trust plays a strong role in dictator behaviour and third-party behaviour. For dictators, trust correlates with the probability that the dictator refrains from self-interested behaviour and it correlates with the amount the dictator offers to their partner. For third parties, trust correlates with a third party's choice to punish self-interested behaviour and it correlates with the amount a third party spends on punishment. Social capital does not produce any such robust results.
    Keywords: Social Norms, Punishment, Reciprocity, Social Preferences, Trust, Social Capital.
    JEL: C72 C91
    Date: 2012–08
  10. By: Ingrid M.T. Rohde (Maastricht University, Bilgi Economics Lab of Istanbul); Kirsten I.M. Rohde (Erasmus School of Economics, Erasmus University Rotterdam)
    Abstract: As societies are increasingly concerned with social risks, it is important to evaluate risks not only from an individual perspective, but also from a societal one. Many increases in social risk involve a simultaneous increase in risk and inequality. This paper presents an experiment which disentangles concerns for risk and inequality in a social risk context. Subjects choose between different types of allocations of risks over 10 other participants. The allocations differ only in terms of dispersion. We disentangle four types of dispersion: ex ante inequality, ex post inequality, individual risk, and collective risk. The results show that people are averse towards ex ante inequality and individual risk, whereas they are ex post inequality and collective risk seeking.
    Keywords: inequality; risk; experiment
    JEL: D03 D63
    Date: 2012–04–26
  11. By: Cheung, Stephen L.; Hedegaard, Morten; Palan, Stefan
    Abstract: Experimental asset markets of the type introduced by Smith, Suchanek and Williams (1988) are known to produce price bubbles and crashes with inexperienced subjects. We investigate whether this phenomenon may be explained by trader uncertainty about the behavior of others. In particular, we induce individual rationality by requiring participants to correctly answer an extensive set of control questions. With this in place, common expectations are then manipulated by varying the knowledge that traders have regarding the fact that all other market participants are also required to answer these questions. We find that markets in which this common knowledge is absent do not differ significantly from baseline markets in which traders do not answer control questions. However, when it is common knowledge that all must answer the questions correctly, we find that mispricing is essentially eliminated in four out of six markets and is small in the remaining two.
    Keywords: common knowledge of rationality; price bubbles; asset market experimen t
    Date: 2012–05
  12. By: James Alm (Department of Economics, Tulane University); Erich Kirchler (Department of Applied Psychology: Work, Education and Economy, University of Vienna); Stephan Muehlbacher (Department of Applied Psychology: Work, Education and Economy, University of Vienna); Katharina Gangl (Department of Applied Psychology: Work, Education and Economy, University of Vienna); Eva Hofmann (Department of Applied Psychology: Work, Education and Economy, University of Vienna); Christoph Kogler (Department of Applied Psychology: Work, Education and Economy, University of Vienna); Maria Pollai (Department of Applied Psychology: Work, Education and Economy, University of Vienna)
    Abstract: In this paper we give our perspective on the different paradigms that have shaped – and seem likely to shape in the future – research in the field of tax compliance behavior. These research paradigms include viewing tax evasion as a decision under risk made by a single taxpayer, as a social dilemma in which there is a tension between individual interests (e.g., cheating on one's taxes) and collective goals (e.g., providing public goods), as a series of decisions made by many different types of taxpayers, and as a psychological contract between tax authorities and taxpayers. We argue that these different paradigms require that particular attention be paid to the main "actors in the field", which involves going beyond a focus on a single taxpayer to consider other taxpayers, tax accountants, the tax authorities, and the government. The ways in which these actors interact in different climates, especially the dynamics of power and trust between the actors, must also be considered. We conclude with a discussion of a framework – the "slippery slope framework" – that attempts to synthesize these different research paradigms. Throughout, we illustrate our arguments by reference to research that focuses especially on the European experience.
    Keywords: tax evasion, behavioral economics, social norms, "slippery slope"
    JEL: H26 D03
    Date: 2012–07
  13. By: Anat Bracha; Uri Gneezy
    Abstract: The authors use a labor supply; relative pay; experimental economics laboratory experiment to examine the impact of relative wages on labor supply. They test the hypothesis that, ceteris paribus, making a given wage high (low) relative to other wage levels will lead to an increase (decrease) in labor supply. They find that labor supply does respond significantly to relative pay, and in the expected direction. However, when a strong enough reason is given for the relative low pay, this difference disappears.
    Keywords: Labor supply ; Wages
    Date: 2012
  14. By: Leuermann, Andrea; Roth, Benjamin
    Abstract: Advice is important for decision making, especially in the financial sector. We investigate how individuals assess risk preferences of others given sociodemographic information or pictures. Both non-professionals and financial professionals participate in this artefactual field experiment. Subjects mainly rely on the other's self-assessment of risk preferences and on gender when forming the belief about someone else's risk preferences. On average, subjects consider themselves to be more risk-tolerant than the person they evaluate. Subjects use their own risk attitude as a reference point for predicting others' risk preferences. This false consensus effect is less pronounced for young professionals than for senior and non-professionals. Furthermore, financial professionals predict risk preferences more accurately compared to non-professionals.
    Keywords: Risk Preferences; Financial Advice; Artefactual Field Experiment; Behavioral Finance
    JEL: D81 C91
    Date: 2012–08–03
  15. By: Gary Bolton; Peter Werner
    Abstract: We investigate how the introduction of a salient norm for pay differentiation influences wage offers and effort exertion in a gift exchange experiment. Exogenously induced claims indeed lead to substantial differentiation in wages. At the same time, unequal wage schemes do not crowd out effort exertion. In particular, we do not observe strong detrimental effects resulting from disadvantageous relative wage positions. Finally, we find that specific communication patterns have a significant impact on effort exertion.
    Keywords: Communication, entitlements, fairness norms, gift exchange, relative wages
    JEL: J31 M52 D63 C92
    Date: 2012–08–03
  16. By: Sander Hoogendoorn (University of Amsterdam); Mirjam van Praag (University of Amsterdam)
    Abstract: One of the most salient and relevant dimensions of team heterogeneity is ethnicity. We measure the causal impact of ethnic diversity on the performance of business teams using a randomized field experiment. We follow 550 students who set up 45 real companies as part of their curriculum in an international business program in the Netherlands. We exploit the fact that companies are set up in realistic though similar circumstances and that we, as outside researchers, had the unique opportunity to exogenously vary the ethnic composition of otherwise randomly composed teams. The student population consists of 55% students with a non-Dutch ethnicity from 53 different countries of origin. We find that a moderate level of ethnic diversity has no effect on team performance in terms of business outcomes (sales, profits and profits per share). However, if at least the majority of team members is ethnically diverse then more ethnic diversity has a positive impact on the performance of teams. In line with theoretical predictions, our data suggest that this positive effect could be related to the more diverse pool of relevant knowledge facilitating (mutual) learning within ethnically diverse teams.
    Keywords: Ethnic diversity; team performance; field experiment; entrepreneurship; (mutual) learning
    JEL: J15 L25 C93 L26 M13 D83
    Date: 2012–07–13
  17. By: Te Bao (University of Amsterdam); Cars Hommes (University of Amsterdam); Joep Sonnemans (University of Amsterdam); Jan Tuinstra (University of Amsterdam)
    Abstract: Recent studies suggest that the type of strategic environment or expectation feedback can have a large impact on whether the market can learn the rational fundamental price. We present an experiment where the fundamental price experiences large unexpected shocks. Markets with negative expectation feedback (strategic substitutes) quickly converge to the new fundamental, while markets with positive expectation feedback (strategic complements) do not converge, but show under-reaction in the short run and over-reaction in the long run. A simple evolutionary selection model of individual learning explains these differences in aggregate outcomes.
    Keywords: Expectation feedback; under- and overreaction; strategic substitutes and strategic complements; heuristic switching model; experimental economics
    JEL: C92 G14 D84 D83 E37
    Date: 2012–02–17
  18. By: Berninghaus, Siegfried K.; Güth, Werner; Schosser, Stephan
    Abstract: Bounded rationality questions backward induction, which however, does not exclude such reasoning when anticipation is easy. In our stochastic (alternating offer) bargaining experiment, there is a certain first-period pie and a known finite deadline. What is uncertain (except for the final period) is whether there is a further period. Whereas backward induction requires information about all later pie sizes and probabilities, forward reasoning is expected to consider only the immediate prospects. Rather than relying only on decision data, we try to assess the cognitive approach such as forward reasoning of backward induction by control of information retrieval. We find that participants who begin with the shortest games before playing possibly longer games, initially resort to backward induction before switching to forward-looking behavior. --
    Keywords: backward induction,forward reasoning,bargaining
    JEL: C70 C72 C91
    Date: 2012
  19. By: Sabrina Teyssier (ALISS - Alimentation et sciences sociales - INRA : UR1303); Fabrice Etilé (ALISS - Alimentation et sciences sociales - INRA : UR1303, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA); Pierre Combris (ALISS - Alimentation et sciences sociales - INRA : UR1303)
    Abstract: Can social interactions be used to encourage the consumption of fair-trade products? Social interactions may alter purchase behavior by triggering either self-image concerns (when one sees others' decisions without being seen) or social-image concerns (when everybody sees everyone else). A laboratory experiment is designed to identify separately these concerns, using real auctions for normal and fair-trade chocolate, controlling for taste and packaging differences. The analysis of the willingness-to-pay (WTP) for both types of chocolate reveals that both social- and self-image matter: subjects pay a higher premium for fair-trade chocolate when their decisions are made public. This premium is sensitive to information received about the premia paid by other subjects, even when decisions are private. The higher premium in public auctions results from a lower WTP for normal chocolate, rather than a higher WTP for fair-trade chocolate. Subjects are also much more sensitive to information about others' choices that relaxes the moral or social norm constraining their own choice. We thus conclude that social interactions cannot be used to nudge consumers into fair-trade consumption, at least for ordinary products such as chocolate.
    Keywords: Fair-trade ; Image Motivations ; Willingness-to-pay ; Experiment ; Chocolate
    Date: 2012–08
  20. By: Ioannou, Christos A.; Qi, Shi; Rustichini, Aldo
    Abstract: Theories of social preferences assume that individuals have a utility over monetary outcome profiles, that depends on their and other players' payments. Behavior in strategic interactions is explained as a Nash equilibrium of the game where final payoffs are paid in these utility units. These theories predict the estimated preferences to be independent of the subject's position in the game if in the experiment the allocation to a role is randomly determined, since subjects in each role have the same preferences ex-ante. We test and reject this hypothesis. We use the Quantal Response Equilibrium (QRE) of McKelvey and Palfrey (1995) to study first mover behavior in the Trust game. As standard in this literature we assume that first mover beliefs are consistent with the observed probability distribution of actions of the second movers. On the other hand, second mover behavior can be extrapolated without any a priori rational expectation assumptions. Our results show that the estimated preferences of first movers attach a significantly higher weight to their own payoff compared to the weight attached by second movers on their own payoff. This finding is inconsistent with the assumption that subjects approach a game with the same (that is, independent of the allocation to roles in the game) ex-ante preferences over monetary outcome profiles.
    Date: 2012–06–08
  21. By: Leuermann, Andrea; Roth, Benjamin
    Abstract: Recent studies have found correlations between risk attitudes and several sociodemographic characteristics. In this paper, we deploy an artefactual field experiment and study whether subjects - non-professionals and financial professionals - are aware of these correlations. This is largely confirmed by our results for all subject groups. We show that the subjects attach informational value to sociodemographic information when assessing others' risk attitudes. This provides external validity to the correlations found between risk preferences and sociodemographics. A person's self-assessment of risk attitudes is the most helpful device for the subjects' assessments of others, although experienced professionals make use of it to a minor extent than all other subjects.
    Keywords: Risk Preferences; Financial Advice; Artefactual Field Experiment; Behavioral Finance
    JEL: D81
    Date: 2012–08–03
  22. By: Roel van Veldhuizen (University of Amsterdam)
    Abstract: Previous studies have proposed a link between corruption and wages in the public sector. This paper investigates this link using a laboratory experiment. In the experiment, public officials have the opportunity to accept a bribe and can then decide between a neutral and a corrupt action. The corrupt action benefits the briber but poses a large negative externality on a charity. The results show that increasing public officials' wages greatly reduces their corruptibility. In particular, experienced low wage public officials accept 91% of bribes on average, whereas high wage public officials accept 38%. Moreover, high wage public officials are less likely to choose the corrupt option.
    Keywords: bribery; corruption; experimental economics; laboratory experiment
    JEL: D73 C91 K42
    Date: 2012–04–13
  23. By: Rustichini, Aldo (University of Minnesota); DeYoung, Colin G. (University of Minnesota); Anderson, Jon (University of Minnesota, Morris); Burks, Stephen V. (University of Minnesota, Morris)
    Abstract: Trait-based personality psychology and economics have taken different approaches to understanding individual differences, with the former emphasizing variables derived from the factor analysis of trait assessments, and the latter emphasizing variables derived from formal decision theory. In a data set on trainee truckers in a large US company, we provide a systematic initial assessment of the empirical pattern of relationships between the elements from these two approaches by comparing the predictive power of measurements derived from personality theory and decision theory for several individual characteristics and outcomes, and relating the two sets of measurements to each other. We show that personality traits have a comparable or stronger predictive power than do economic preferences for several dependent variables, including credit score, job persistence, and heavy truck accidents. They also have strong predictive power for Body Mass Index (BMI) and smoking status. Further, decision theory and personality variables are meaningfully related. For example, we confirm that cognitive ability explains a substantial part of time preferences, and find that Neuroticism and cognitive ability together explain attitudes toward risk. In addition, Agreeableness and cognitive ability explain aspects of other-regarding behavior in a strategic setting.
    Keywords: personality theory, decision theory, strategic behavior, credit score, smoking, obesity, prisoners' dilemma, job performance, heavy truck accident, truckload, turnover, trucker
    JEL: D83 C72 C93
    Date: 2012–07
  24. By: Larbi Alaoui; Antonio Penta
    Abstract: Level-k theories are agnostic over whether individuals stop the iterated reasoning because of their own cognitive constraints, or because of their beliefs over the cognitive constraints of their opponents. In practice, individual level of play may be a function both of their own constraints and their beliefs over their opponents' reasoning process. Moreover, the rounds of introspection that players perform may depend on their incentives to think more deeply. We develop a theory which explicitly models players' reasoning procedure. The rounds of introspection that individuals perform and their actual level of play both follow endogenously. This model delivers testable implications as payoff s and opponents change, and it allows for comparisons across games. It also disentangles the cognitive bound of players for a given game from their beliefs about the play of their opponents. In conjunction with the framework, we present an experiment designed to test its predictions. We modify the Arad and Rubinstein (2012) '11-20' game to serve this precise purpose, and administer different treatments which vary beliefs over payoff s and opponents. The results of this experiment are consistent with the model, and appear to lend support to our theory. This experiment also confirms the central premise that individuals change their level of play as incentives to think more and beliefs over opponents vary.
    Keywords: beliefs, bounded rationality, cognitive cost, higher order beliefs, incentives, level-k reasoning, value of reasoning
    JEL: C72 C92 D80 D83
    Date: 2012–07

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