nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2012‒12‒22
twenty papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Insiders, outsiders, and the adaptability of informal rules to ecological shocks By Erik O. Kimbrough; Bart J. Wilson
  2. A theoretical framework for trading experiments. By Maxence Soumare; Jørgen Vitting Andersen; Francis Bouchard; Alain Elkaim; Dominique Guegan; Justin Leroux; Michel Miniconi; Lars Stentoft
  3. Why Do People (Not) Cough in Concerts? The Economics of Concert Etiquette By Andreas Wagener
  4. Relative Performance of Liability Rules: Experimental Evidence By Angelova, Vera; Attanasi, Giuseppe; Hiriart, Yolande
  5. The More You Know? – Consumption Behavior and the Communication of Economic Information By Jeannette Brosig-Koch; Klemens Keldenich
  6. Reconstructing a Computable and Computationally Complex Theoretic Path Towards Simon's Behavioural Economics By Ying-Fang Kao; K. Vela Velupillai
  7. The Time-Inconsistency Factor: How Banks Adapt to their Mix of Savers By Carolina Laureti; Ariane Szafarz
  8. The Effect of a Short Planning Horizon on Intertemporal Consumption Choices By Enrica Carbone; Gerardo Infante
  9. Thirty Years of Prospect Theory in Economics: A Review and Assessment By Nicholas C. Barberis
  10. The Lure of Authority: Motivation and Incentive Effects of Power By Fehr, Ernst; Herz, Holger; Wilkening, Tom
  11. Are Groups Better Planners Than Individuals? An Experimental Analysis By Enrica Carbone; Gerardo Infante
  12. Working for a Good Cause By Dur, Robert; Zoutenbier, Robin
  13. Use and Abuse of Authority: A Behavioral Foundation of the Employment Relation By Bartling, Björn; Fehr, Ernst; Schmidt, Klaus M.
  14. Behavioural Economics and Environmental Incentives By Jason Shogren
  15. Nurse or Mechanic? The Role of Parental Socialization and Children’s Personality in the Formation of Sex-Typed Occupational Aspirations By Javier Polavieja; Lucinda Platt
  16. How do Incentives affect Creativity? By Katharina Eckartz; Oliver Kirchkamp; Daniel Schunk
  17. Reciprocal Relationships in Tax Compliance Decisions By Mathieu Désolé; Stefano Farolfi; Patrick Rio
  18. Who are the Voluntary Leaders? Experimental Evidence from a Sequential Contribution Game. By Raphaële Préget; Phu Nguyen-Van; Marc Willinger
  19. Ability Dispersion and Team Performance: A Field Experiment By Hoogendoorn, Sander M.; Parker, Simon C.; van Praag, Mirjam
  20. Use and Abuse of Authority By Bartling, Björn; Fehr, Ernst; Schmidt, Klaus M.

  1. By: Erik O. Kimbrough (Simon Fraser Unviersity); Bart J. Wilson (Chapman University)
    Abstract: The history of the world is strewn with the remains of societies whose institutions failed to adapt to ecological change, but the determinants of institutional fragility are difficult to identify in the historical record. We report a laboratory experiment that explores the impact of an exogenous ecological shock on the informal rules of property and exchange. We find that geographically induced tribal sentiments, which are unobservable in the historical record, impede adaptation post-shock and that inequality declines as wealth and sociableness increase. Quantitative measures of individual and group sociality account for some of the di?erences in successful or failed adaptation.
    Keywords: Experimental Economics, Rules, Ecological Shocks
    JEL: C9 D02 D7 Q2
    Date: 2012–07
  2. By: Maxence Soumare (Laboratoire J.-A. Dieudonné - Université de Nice-Sophia Antipolis); Jørgen Vitting Andersen (Centre d'Economie de la Sorbonne); Francis Bouchard (HEC Montréal); Alain Elkaim (HEC Montréal); Dominique Guegan (Centre d'Economie de la Sorbonne - Paris School of Economics); Justin Leroux (HEC Montréal); Michel Miniconi (Laboratoire J.-A. Dieudonné - Université de Nice-Sophia Antipolis); Lars Stentoft (HEC Montréal)
    Abstract: A general framework is suggested to describe human decision making in a certain class of experiments performed in a trading laboratory. We are in particular interested in discerning between two different moods, or states of the investors, corresponding to investors using fundemental investment strategies, technical analysis investment strategies respectively. Our framework accounts for two opposite situations already encountered in experimental setups : i) the rational expectations case, and ii) the case of pure speculation. We consider new experimental conditions which allow both elements to be present in the decision making process of the traders, thereby creating a dilemma in terms of investment strategy. Our theoretical framework allows us to predict the outcome of this type of trading experiments, depending on such variables as the number of people trading, the liquidity of the market, the amount of information used in technical analysis strategies, as well as the dividends attributed to an asset. We find that it is possible to give a qualitative prediction of trading behavior depending on a ratio that quantifies the fluctuations in the model.
    Keywords: Decision making, game theory, complex systems theory, technical analysis, rational expectations.
    JEL: D81 D84 C0
    Date: 2012–11
  3. By: Andreas Wagener (School of Economics and Management, University of Hannover)
    Abstract: Concert etiquette demands that audiences of classical concerts avoid inept noises such as coughs. Yet, coughing in concerts occurs more frequently than elsewhere, implying a widespread and intentional breach of concert etiquette. Using the toolbox of (behavioral) economics, we study the social costs and benefits of concert etiquette and the motives and implications of individually disobeying such social norms. Both etiquette and its breach arise from the fact that music and its "proper" perception form parts of individual and group identities, convey prestige and status, allow for demarcation and inclusion, produce conformity, and affirm individual and social values.
    Keywords: Concert etiquette, social norms, music
    JEL: Z11 Z13 D02
    Date: 2012–12
  4. By: Angelova, Vera; Attanasi, Giuseppe; Hiriart, Yolande
    Date: 2012–04
  5. By: Jeannette Brosig-Koch; Klemens Keldenich
    Abstract: This paper uses a laboratory experiment to analyze the impact of different types of information on consumption and savings behavior. Based on a buffer stock savings model, three treatment dimensions are used: The amount of information subjects receive about the likelihood of income shocks, whether subjects are informed about other people's beliefs about these shocks, and the framing of shocks. The results reveal that – even with little information about the random term determining the income shock – consumption decisions are surprisingly close to the optimal consumption path. If at all, more information rather worsens than improves consumption behavior. Nevertheless, in line with the theoretical prediction, observed behavior is robust to the framing and other people's beliefs about income shocks. Given that actual decisions are significantly correlated with the optimal consumption amount (and not with easier accessible variables like cash-on-hand) suggests that subjects do not simply use naive heuristics to determine their consumption.
    Keywords: Consumption; framing; beliefs
    JEL: C91
    Date: 2012–12
  6. By: Ying-Fang Kao; K. Vela Velupillai
    Abstract: This paper aims to interpret and formalize Herbert Simon's notions of bounded rationality, satisficing and heuristics in terms of computability theory and computational complexity theory. Simon's theory of human problem solving is analysed in the light of Turing's work on Solvable and Unsolvable Problems. It is suggested here that bounded rationality results from the fact that the deliberations required for searching computationally complex spaces exceed the actual complexity that human beings can handle. The immediate consequence is that satisficing becomes the general criterion of decision makers and heuristics are the procedures used for achieving their goals. In such decision problems, it is demonstrated that bounded rationality and satisficing are more general than Olympian rationality and optimization, respectively, and not the other way about.
    Keywords: Bounded Rationality, Satisficing, Heuristics, Computability, Computational Complexity
    Date: 2012
  7. By: Carolina Laureti; Ariane Szafarz
    Abstract: This paper starts from a puzzle. On the one hand, the literature documents that a large proportion of poor people are ready to forgo interest on rigid – or commitment – savings accounts to discipline their future selves. On the other, our stylized facts from Bangladesh show that microfinance institutions pay a premium on commitment savings with respect to flexible savings. To address this puzzle, we build an equilibrium model in which a monopolistic bank offers flexible and commitment savings accounts to both rational and time-inconsistent agents. Two factors concur to explain why the bank may find it optimal to pay a commitment premium even though time-inconsistent savers do not necessarily demand one. First, the bank needs commitment accounts to meet its reserve requirements. Second, it cannot segment its clientele ex ante, and rational savers demand compensation for commitment. Last, we discuss the consequences of our findings from a regulatory perspective.
    Keywords: Savings; banks; microfinance; commitment; flexibility; present-bias; hyperbolic discounting; Bangladesh
    JEL: D82 D91 G21 O12
    Date: 2012–12–06
  8. By: Enrica Carbone; Gerardo Infante
    Abstract: Previous experimental results (Ballinger et al. (2003) and Carbone and Hey (2004)) have found that many agents fail to correctly take into account the length of the planning horizon also finding some support (See Carbone (2006)) for descriptive models, such as the Rolling Model. This paper presents an experimental analysis on the effect of a short planning horizon on intertemporal consumption choices. The purpose of the study is to test whether very short horizons are more easily perceived by agents, allowing them to plan optimally. This experiment tests a somewhat implicit assumption of the Rolling Model, or of similar descriptive approaches, namely that people might be able to use the optimal strategy if they are faced with shorter planning horizons. Moreover, this hypothesis is tested in the cases of decision making under certainty, risk and uncertainty, in order to analyze how these environments may affect the perception of the length of the planning horizon. Results suggest that planning periods have a significant effect on deviations from unconditional optimum in all sequences and all treatments. This finding has been interpreted as evidence of participants not using the optimal strategy. When conditional deviations are considered, results are confirmed only in the case of decision making under uncertainty. This second finding has been interpreted as suggesting that uncertainty on income seems to prevent participants from improving their decision making.
    Keywords: Intertemporal Consumer Choice, Life Cycle, Risk, Uncertainty, Laboratory Experiments, Short Planning Horizon.
    JEL: D12 D91 D81 C91 C92
    Date: 2012–12
  9. By: Nicholas C. Barberis
    Abstract: Prospect theory, first described in a 1979 paper by Daniel Kahneman and Amos Tversky, is widely viewed as the best available description of how people evaluate risk in experimental settings. While the theory contains many remarkable insights, economists have found it challenging to apply these insights, and it is only recently that there has been real progress in doing so. In this paper, after first reviewing prospect theory and the difficulties inherent in applying it, I discuss some of this recent work. While it is too early to declare this research effort an unqualified success, the rapid progress of the last decade makes me optimistic that at least some of the insights of prospect theory will eventually find a permanent and significant place in mainstream economic analysis.
    JEL: D03 D81
    Date: 2012–12
  10. By: Fehr, Ernst (University of Zurich); Herz, Holger (University of Zurich); Wilkening, Tom (University of Melbourne)
    Abstract: Authority and power permeate political, social, and economic life, but empirical knowledge about the motivational origins and consequences of authority is limited. We study the motivation and incentive effects of authority experimentally in an authority-delegation game. Individuals often retain authority even when its delegation is in their material interest – suggesting that authority has non-pecuniary consequences for utility. Authority also leads to over-provision of effort by the controlling parties, while a large percentage of subordinates under-provide effort despite pecuniary incentives to the contrary. Authority thus has important motivational consequences that exacerbate the inefficiencies arising from suboptimal delegation choices.
    Keywords: organizational behavior, incentives, experiments and contracts
    JEL: C92 D83 D23
    Date: 2012–11
  11. By: Enrica Carbone; Gerardo Infante
    Abstract: Over the last ten years the literature in experimental economics has seen a growing interest in groups and how they compare to individuals in different settings. This paper contributes to the literature on this topic by investigating the comparison between groups and individuals with respect to intertemporal consumption problems. Empirical evidence has shown how dynamic optimization problems, representing intertemporal consumption decisions, involve computational difficulties that agents are not always equipped to solve optimally. Several econometric estimations on household and aggregate data seem to show that people do not save enough. Similarly, in many experiments, results suggest that people are very different in how they solve this class of problems and in how they react to changes in the decision environment. We present an experiment comparing group and individual planning under risk and uncertainty. Our study is focussed on investigating how groups perform in intertemporal decision making tasks, in particular observing the significance of group planning compared to individuals when choosing under risk and uncertainty. Results suggest that groups perform better than individuals when planning under risk, while the opposite happens in the case of planning under uncertainty. Interestingly, when comparing the behaviour of our agents in the second lifecycle (denominated "sequence") groups seem to lose all their advantage on individuals (in terms of less deviation from optimum). We interpret this as a "stability effect" caused by the random matching rule adopted during the groups sessions.
    Keywords: Collective Decision Making, Intertemporal Consumer Choice,Life Cycle, Risk, Uncertainty, Laboratory Experiments.
    JEL: D12 D91 D81 C91 C92
    Date: 2012–12
  12. By: Dur, Robert (Erasmus University Rotterdam); Zoutenbier, Robin (Erasmus University Rotterdam)
    Abstract: A rich literature in public administration has shown that public sector employees have stronger altruistic motivations than private sector employees. Recent economic theories stress the importance of mission preferences, and predict that altruistic people sort into the public sector when they subscribe to its mission. This paper uses data from a representative survey among more than 30,000 employees from 50 countries to test this prediction. We find strong evidence for a mutually reinforcing role of altruism and mission alignment in sorting to the public sector, particularly among highly educated workers and among workers in less-developed countries.
    Keywords: public service motivation, altruism, mission preferences, sorting, World Values Survey
    JEL: H1 J45 M5
    Date: 2012–12
  13. By: Bartling, Björn (University of Zurich); Fehr, Ernst (University of Zurich); Schmidt, Klaus M. (University of Munich)
    Abstract: Employment contracts give a principal the authority to decide flexibly which task his agent should execute. However, there is a tradeoff, first pointed out by Simon (1951), between flexibility and employer moral hazard. An employment contract allows the principal to adjust the task quickly to the realization of the state of the world, but he may also abuse this flexibility to exploit the agent. We capture this tradeoff in an experimental design and show that principals exhibit a strong preference for the employment contract. However, selfish principals exploit agents in one-shot interactions, inducing them to resist entering into employment contracts. This resistance to employment contracts vanishes if fairness preferences in combination with reputation opportunities keep principals from abusing their power, leading to the widespread, endogenous formation of efficient long-run employment relations. Our results inform the theory of the firm by showing how behavioral forces shape an important transaction cost of integration – the abuse of authority – and by providing an empirical basis for assessing differences between the Marxian and the Coasian view of the firm, as well as Alchian and Demsetz's (1972) critique of the Coasian approach.
    Keywords: theory of the firm, transaction cost economics, authority, power abuse, employment relation, fairness, reputation
    JEL: C91 D23 D86 M5
    Date: 2012–11
  14. By: Jason Shogren
    Abstract: This review aims to improve our understanding of the implications of the insights from behavioural economics for environmental policy design. The review focuses on the question of incentive design in two broad areas — risk, conflict and cooperation; and mechanism design. A number of lessons for policy design emerge from the literature and are highlighted in the paper.<BR>Cet examen vise à améliorer notre compréhension des implications des perspectives de l'économie comportementale pour la conception de la politique environnementale. L'examen porte sur la question de la conception d'incitation dans deux grandes zones: (A) le risque, les conflits et la coopération et (B) la conception du mécanisme. Des leçons émergent de la littérature pour la conception des politiques et sont mis en évidence dans le document.
    Keywords: institutions, environmental policy, behavioural economics, mechanism design, institutions, politique environnementale, économie comportementale, conception du mécanisme
    JEL: D70 H30 H41 Q28 Q58
    Date: 2012–11–07
  15. By: Javier Polavieja (IMDEA-Social Sciences Institute); Lucinda Platt (Department of Quantitative Social Science, Institute of Education, University of London)
    Abstract: This study investigates the role of parental socialization and children’s agency in the formation of sex-typed occupational preferences using data for British children aged between 11 and 15. We anchor agency in observable psychological attributes associated with children’s capacity to act in the face of constraints. We focus on two such attributes, motivation and self-esteem. Our findings identify two main sources of parental influence: 1) parental socio-economic resources, which affect children’s occupational ambition, and 2) parental sex-typical behaviors, from which children learn which occupations are appropriate for each sex. We find, additionally, that girls with high motivation and both girls and boys with high self-esteem are less likely to aspire to sex-typical occupations, net of inherited traits and parental characteristics. Motivation and self-esteem help girls to aim higher in the occupational ladder, which automatically reduces their levels of sex-typicality. In the case of boys, however, self-esteem reduces sex-typicality at all levels of the aspired occupational distribution. This suggests that boys with high self-esteem are better equipped to contradict the existing social norms regarding sex-typical behavior. The implications of our findings are discussed.
    Keywords: Gender Segregation, Occupational Aspirations, Children, Socialization, Personality Traits
    JEL: J13 J16 J24 Z13
    Date: 2012–12–04
  16. By: Katharina Eckartz (Friedrich-Schiller-University Jena, International Max Planck Research School on Adapting Behavior in a Fundamentally Uncertain World); Oliver Kirchkamp (Chair for Empirical and Experimental Economics, Friedrich-Schiller-University Jena); Daniel Schunk (University of Mainz)
    Abstract: We compare performance in a word based creativity task under three incentive schemes: a flat fee, a linear payment and a tournament. Furthermore, we also compare performance under two control tasks (Raven's advanced progressive matrices or a number-adding task) with the same treatments. In all tasks we find that incentives seem to have very small effects and that differences in performance are predominantly related to individual skills.
    Keywords: Creativity, Incentives, Real effort task, Experimental economics
    JEL: C91 J33
    Date: 2012–12–13
  17. By: Mathieu Désolé; Stefano Farolfi; Patrick Rio
    Abstract: This paper uses a CGT TU game modified into a coordination experiment to explore the causal effect of context on players’ behaviour. An analytical framework focusing on four attributes representative of the game’s context is proposed and an experimental protocol based on this framework allows testing hypotheses regarding the influence of context on players’ choices. Results show that attributes such as Repetition and Communication seem to have a higher influence than Illustration on players’ behaviour. The peculiar nature of the experimental results in the control group, showing the emergence of a focal point other than the outcome prescribed by the theory, allows discussing the expected “noise” observed in the treatments from a new perspective.
    Date: 2012–12
  18. By: Raphaële Préget; Phu Nguyen-Van; Marc Willinger
    Abstract: We show that the preference to act as a leader rather than as a follower is related to subjects’ behavioral type. We rely on the methodology proposed by Fischbacher et al. (2001) and Fischbacher and Gächter (2010) in order to identify subjects’ behavioral types. We then link the likelihood to act as a leader in a repeated public goods game to the elicited behavioral types. The leader in a group is defined as the subject who voluntarily decides in the first place about his contribution. The leader’s contribution is then reported publicly to the remaining group members who are requested to take their contribution decisions simultaneously. Our main findings are that leaders emerge in almost all rounds and that conditional cooperators are more likely to act as leaders compared to free riders. We also find that voluntary leaders, irrespective of their behavioral type, contribute more than the followers. However leadership does not prevent the decay that is commonly observed in linear public goods experiments.
    Keywords: Public Goods, Experimental Economics, Voluntary Contribution Mechanism, Leadership.
    JEL: H41 C92
    Date: 2012
  19. By: Hoogendoorn, Sander M. (University of Amsterdam); Parker, Simon C. (University of Western Ontario); van Praag, Mirjam (University of Amsterdam)
    Abstract: This paper studies the impact of diversity in cognitive ability among members of a team on their performance. We conduct a large field experiment in which teams start up and manage real companies under identical circumstances. Exogenous variation in – otherwise random – team composition is imposed by assigning individuals to teams based on their measured cognitive abilities. The setting is one of business management practices in the longer run where tasks are diverse and involve complex decision-making. We propose a model in which greater ability dispersion generates greater knowledge for a team, but also increases the costs of monitoring necessitated by moral hazard. Consistent with the predictions of our model, we find that team performance as measured in terms of sales, profits and profits per share first increases, and then decreases, with ability dispersion. Teams with a moderate degree of ability dispersion also experience fewer dismissals due to fewer shirking members in those teams.
    Keywords: ability dispersion, team performance, field experiment, entrepreneurship, knowledge pooling, moral hazard
    JEL: C93 D83 J24 L25 L26 M13 M54
    Date: 2012–11
  20. By: Bartling, Björn; Fehr, Ernst; Schmidt, Klaus M.
    Abstract: Employment contracts give a principal the authority to decide flexibly which task his agent should execute. However, there is a tradeoff, first pointed out by Simon (1951), between flexibility and employer moral hazard. An employment contract allows the principal to adjust the task quickly to the realization of the state of the world, but he may also abuse this flexibility to exploit the agent. We capture this tradeoff in an experimental design and show that principals exhibit a strong preference for the employment contract. However, selfish principals exploit agents in one-shot interactions, inducing them to resist entering into employment contracts. This resistance to employment contracts vanishes if fairness preferences in combination with reputation opportunities keep principals from abusing their power, leading to the widespread, endogenous formation of efficient long-run employment relations. Our results inform the theory of the firm by showing how behavioral forces shape an important transaction cost of integration – the abuse of authority – and by providing an empirical basis for assessing differences between the Marxian and the Coasian view of the firm, as well as Alchian and Demsetz’s (1972) critique of the Coasian approach.
    Keywords: theory of the firm; transaction cost economics; authority; power abuse; employment relation; fairness; reputation
    JEL: C91 D23 D86 M5
    Date: 2012–12

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