nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2012‒09‒22
seven papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Availability of Information and Representation Effects in the Centipede Game By Paolo Crosetto; Marco Mantovani
  2. Sequential decision making without independence: a new conceptual approach By Antoine Nebout
  3. Trust and Trustworthiness under the Prospect Theory: A field experiment in Vietnam By Quang Nguyen; Marie-Claire Villeval; Hui Xu
  4. Mediocrity and Induced Reciprocity By Natalia Montinari; Antonio Nicolò; Regine Oexl
  5. How is non-knowledge represented in economic theory? By Ekaterina Svetlova; Henk van Elst
  6. Behavioural economics perspectives: Implications for policy and financial literacy By Altman, Morris
  7. Partnerships, Imperfect Monitoring and Outside Options: Theory and Experimental Evidence By Paolo Crosetto; Alexia Gaudeul; Gerhard Riener

  1. By: Paolo Crosetto (Max Planck Institute of Economics, Strategic Interaction Group, Jena); Marco Mantovani (Université Libre de Bruxelles, and DEMM, Università degli studi di Milano, and CEREC, Facultés Universitaires Saint-Louis)
    Abstract: The paper presents the results of a novel experiment testing the effects of environment complexity on strategic behavior, using a centipede game. Behavior in the centipede game has been explained either by appealing to failures of backward induction or by calling for preferences that induce equilibria consistent with observed behavior. By manipulating the way in which information is provided to subjects we show that reduced availability of information is sufficient to shift the distribution of take-nodes further from the equilibrium prediction. On the other hand, similar results are obtained in a treatment where reduced availability of information is combined with an attempt to elicit preferences for reciprocity, through the presentation of the centipede as a repeated trust game. Our results could be interpreted as cognitive limitations being more effective than preferences in determining (shifts in) behavior in our experimental centipede. Furthermore our results are at odds with the recent ones in Cox and James (2012), suggesting caution in generalizing their results. Reducing the availability of information may hamper backward induction or induce myopic behavior, depending on the strategic environment.
    Keywords: Centipede, Backward Induction, Representation effects
    JEL: C72 C73 C91
    Date: 2012–09–11
  2. By: Antoine Nebout
    Abstract: This paper is a critical reflection on the notion of dynamic consistency that is commonly used in the literature in Economics and Decision Theory and on the difficulty to test it in an experimental set up. Building on the possible characteristics of individual dynamic preferences, we propose a conceptual categorisation of possible sequential decision making behaviors. In particular, we show that not conforming to Expected Utility Theory does not necessarily implies a violation of dynamic consistency and propose a simple set of decision tasks that allows to reveal different strategic types of resolution of a sequential decision problem by a non-expected utility maximizers.
    Date: 2012–09
  3. By: Quang Nguyen (Division of Economics - Nanyang Technological University); Marie-Claire Villeval (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon); Hui Xu (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon)
    Abstract: We study the influence of risk and time preferences on trust and trustworthiness by conducting a field experiment in Vietnamese villages and by estimating the parameters of the Cumulative Prospect Theory and of quasi-hyperbolic time preferences. We find that while probability sensitivity or risk aversion do not affect trust, loss aversion influences trust indirectly by lowering the expectations of return. Also, more risk averse and less present biased participants are found to be trustworthier. The experience of receiving remittances influences behavior and a longer exposure to a collectivist economy tend to reduce trust and trustworthiness.
    Keywords: Trust, trustworthiness ; risk preferences ; time preferences ; Cumulative Prospect Theory ; Vietnam ; field experiment
    Date: 2012–09–10
  4. By: Natalia Montinari (Max Planck Institute of Economics, Jena, Germany); Antonio Nicolò (University of Padua, Italy); Regine Oexl (University of Innsbruck, Austria)
    Abstract: We report evidence from an experiment where a principal chooses an agent out of two to perform a task for a fixed compensation. The principal's payoff depends on the agent's ex-ante ability and on a non-contractible effort that the agent has to exert once employed. We find that a significant share of principals select the mediocre agent (i.e. the one with the lower ex-ante ability). When the principal is allowed to send a message, mediocre agents exert more effort than agents with the higher ability, and principals who chooses mediocre agents on average have a larger payoff than principals who select agents with higher ability. This difference in effort overcompensates the difference in ability. Mediocre agents reciprocate more than agents who have ex-ante higher ability when the principals are able to make them feeling indebted.
    Keywords: reciprocity, communication, incentives, mediocrity
    JEL: C9
    Date: 2012–09–12
  5. By: Ekaterina Svetlova (Karlshochschule International University); Henk van Elst (Karlshochschule International University)
    Abstract: In this article, we address the question of how non-knowledge about future events that influence economic agents' decisions in choice settings has been formally represented in economic theory up to date. To position our discussion within the ongoing debate on uncertainty, we provide a brief review of historical developments in economic theory and decision theory on the description of economic agents' choice behaviour under conditions of uncertainty, understood as either (i) ambiguity, or (ii) unawareness. Accordingly, we identify and discuss two approaches to the formalisation of non-knowledge: one based on decision-making in the context of a state space representing the exogenous world, as in Savage's axiomatisation and some successor concepts (ambiguity as situations with unknown probabilities), and one based on decision-making over a set of menus of potential future opportunities, providing the possibility of derivation of agents' subjective state spaces (unawareness as situation with imperfect subjective knowledge of all future events possible). We also discuss impeding challenges of the formalisation of non-knowledge.
    Date: 2012–09
  6. By: Altman, Morris
    Abstract: This paper summarizes and highlights different approaches to behavioural economics. It includes a discussion of the differences between the “old” behavioural economics school, led by scholars like Herbert Simon, and the “new” behavioural economics, which builds on the work of Daniel Kahneman and Amos Tversky and is best exemplified by Richard Thaler and Cass Sunstein’s recent book, Nudge. These important currents in behavioural economics are also contrasted with the conventional economic wisdom. The focus of this comparative analysis is to examine the implications of these different approaches in behavioural economics for financial literacy.
    Keywords: Financial literacy, behavioral economics, imperfect information, heuristics, trust, nudging, decision-­‐making environment,
    Date: 2012–05–04
  7. By: Paolo Crosetto (Max Planck Institute of Economics, Jena); Alexia Gaudeul (Max Planck Institute of Economics, Jena); Gerhard Riener (Düsseldorf Institute for Competition Economics (DICE), Heinrich Heine University, Düsseldorf)
    Abstract: We study theoretically and experimentally a two-person partnership game whereby agents only see the uncertain outcome of their joint effort but not how much the other agent contributed to it. The model combines problems of free-riding present in public good production and in teams with imperfect monitoring. We analyse effort and exit behaviour conditional on subjects' beliefs over the action taken by their partners and consider the effect of the availability and profitability of outside options. Our subjects do not adapt effort as a response to changes in their beliefs about the effort of their partner. Subjects display aversion for team work by exiting the partnership even when they believe their partner exerts sufficient effort to sustain it. Higher outside options do not either motivate or discourage effort in joint work but rather result in not only inefficient but also irrational breakdown in partnerships. Overall, social welfare decreases as the incentive to exit increases.
    Keywords: Imperfect monitoring, outside options, partnerships, public good production, repeated games, teams
    JEL: D82 H41
    Date: 2012–09–11

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