nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2013‒01‒12
twelve papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Patient Preferences and Treatment Thresholds under Diagnostic Risk: An Economic Laboratory Experiment By Mayrhofer, Thomas; Krieger, Miriam
  2. An Experiment on Decision Making under Risk and Uncertainty By Archavski, V. Yu.; Okulov, V. L.
  3. Portfolio Complexity and Herd Behavior: Evidence from the German Mutual Fund Market By Franck, Alexander; Walter, Andreas
  4. Cognitive skills, tasks and job mobility By Warnke, Arne Jonas; Ederer, Peer; Schuller, Philipp
  5. The dark side of team incentives: Experimental evidence on advice quality from financial service professionals By Anastasia Danilov; Torsten Biemann; Thorn Kring; Dirk Sliwka
  6. Hidden Costs of Control in Social Groups By Wiederhold, Simon; Riener, Gerhard
  7. Gambling in contests with regret By Han Feng; David Hobson
  8. Group Identity and Leading-by-Example By Michalis Drouvelis; Daniele Nosenzo
  9. The effects of early childhood intervention on child development and early skill formation. Evidence from a randomized experiment. By Sandner, Malte
  10. You Can’t Put Old Wine in New Bottles: The Effect of Newcomers on Coordination in Groups By McCarter, Matthew; Sheremeta, Roman
  11. Three-Player Trust Game with Insider Communication By Sheremeta, Roman; Zhang, Jingjing
  12. The impact of risk perception and risk attitudes on corrupt behavior: Evidence from a petty corruption experiment By Fahr, René; Djawadi, Behnud Mir

  1. By: Mayrhofer, Thomas; Krieger, Miriam
    Abstract: We study risk-aversion and prudence in medical treatment decisions. In a laboratory experiment, we investigate the frequency and intensity of second- and third-order risk preferences, as well as the effect of the medical decision context. Risk preferences are assessed through treatment thresholds (the indifference point between not treating and treating). Under diagnostic risk, medical decision theory predicts lower treatment thresholds for risk-averse than for risk-neutral decision makers. Given a comorbidity risk in the sick state, prudent individuals have an even lower threshold. Our results demonstrate risk-averse and prudent behavior in medical decisions, which reduce the (average) treatment threshold by 41% relative to risk-neutrality (from 50.0% to 29.3%). Risk aversion accounts for 3/4 of this effect, prudence for 1/4. Medical decision framing does not affect risk aversion, but is associated with more and stronger prudent behavior. These findings can have consequences for diagnostic technologies and QALYs, and thus for clinical guidelines. --
    JEL: I10 C91 D81
    Date: 2012
  2. By: Archavski, V. Yu.; Okulov, V. L.
    Abstract: We asked the participants of our controlled experiment to solve the Newsboy Problem. In this work we describe the design of the experiment. We analyze results of the experiment and emphasize the difference between the theoretical solution and the solution chosen by our subjects. We test sever-al hypotheses including the hypothesis of learning. We also suggest a pos-sible algorithm that could have been used by the participants. Using the assumptions of the probabilistic algorithm we compute the stationary distribution of the solutions. Executive summary is available on p.39 (in English).
    Keywords: Newsboy (Newsvendor) Problem, random demand, economic experiment, uncertainty, risk, algorithm decision, steady-state distribution,
    Date: 2012
  3. By: Franck, Alexander; Walter, Andreas
    Abstract: We examine the herd behavior among equity funds in Germany based on a large sample of funds from 2000 to 2009. We show that a large portion of the detected herding can be explained by identical trading among funds of the same investment company. However, we also find statistically significant stock herding among funds belonging to different fund families. In contrast to existing herding studies which analyze herd behavior within a purely national stock environment, we investigate mutual fund herding in international stocks. We contribute to the literature by analyzing the impact of portfolio complexity on herd behavior. We find the most pronounced levels of herding for funds choosing their portfolio stocks from a broad, international and therefore complex investment universe. Further, we approximate a fund s portfolio complexity by its size and find high levels of herding among the biggest funds. To analyze the herd behavior of individual funds, we introduce a new and intuitive way to assign levels of herding to funds according to their trading activity within a given period. We show that managers differentiate between buy-herding and sell-herding and that individual funds exhibit similar herding intensities within a given and a succeeding period. --
    JEL: D82 G11 G23
    Date: 2012
  4. By: Warnke, Arne Jonas; Ederer, Peer; Schuller, Philipp
    Abstract: The authors investigate on the basis of primary and secondary data the relationship between individual cognitive skills and the complexity of the particular work those individuals perform. Additionally, the relationship between skills and mobility between more or less complex jobs in an highly homogenous industrial environment is analyzed. The primary data consists of a survey conducted in 2011 of anonymously tested 305 participants in selected factories of four different companies. The survey consists of a newly developed dynamic problem solving test and a standard general intelligence test. Skill measurement is supplemented by information about tasks and personal background. Results are compared to larger scale secondary data sources. Special focus is placed on different employment groups within a company: assemblers, craftsmen, technicians and engineers. Using this data, we can show that non-routine content of individual work is strongly related to cognitive skills. Also, higher cognitive skill levels predict upward occupational mobility. Finally, we demonstrate that the established task-based approach helps to explain why the occupational mobility between some occupational groups is lower than between others. These findings can be useful for the discovery of opportunities for occupational upward mobility in a homogenous environment. --
    JEL: J24 J62 J60
    Date: 2012
  5. By: Anastasia Danilov (University of Cologne); Torsten Biemann (University of Cologne); Thorn Kring (Steinbeis University of Berlin); Dirk Sliwka (University of Cologne)
    Abstract: In an experiment with professionals from the financial services sector, we investigate the impact of a team incentive scheme on recommendation quality of investment products when advisors benefit from advising lower quality products. Experimental results reveal that, when group affiliation is strong, worse products are recommended significantly more often under team incentives than under individual incentives.
    Keywords: deception, team incentives, professionals, financial advice, experiment
    JEL: C90 D82 J30 M52
    Date: 2012–10–15
  6. By: Wiederhold, Simon; Riener, Gerhard
    Abstract: This paper investigates the role of social identity in reactions to control. We propose a simple principal-agent model with control that incorporates the existence of social groups. Our laboratory experiment shows that, in contrast to no-group agents, agents in social groups (i) perform better; (ii) expect less control; (iii) do not reciprocate when facing less control than expected; (iv) decrease their performance substantially when actual control exceeds their expectation. Hidden costs of control thus appear to be more substantial in social groups. --
    JEL: C92 M54 D03
    Date: 2012
  7. By: Han Feng; David Hobson
    Abstract: This paper discusses the gambling contest introduced in Seel & Strack (Gambling in contests, Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 375, Mar 2012.) and considers the impact of adding a penalty associated with failure to follow a winning strategy. The Seel & Strack model consists of $n$-agents each of whom privately observes a transient diffusion process and chooses when to stop it. The player with the highest stopped value wins the contest, and each player's objective is to maximise their probability of winning the contest. We give a new derivation of the results of Seel & Strack based on a Lagrangian approach. Moreover, we consider an extension of the problem in which in the case when an agent is penalised when their strategy is suboptimal, in the sense that they do not win the contest, but there existed an alternative strategy which would have resulted in victory.
    Date: 2013–01
  8. By: Michalis Drouvelis (Department of Economics, University of Birmingham); Daniele Nosenzo (School of Economics, University of Nottingham)
    Abstract: We study the interplay between leading-by-example and group identity in a public goods game experiment. A common identity between the leader and her followers is beneficial for cooperation: average contributions are more than 30% higher than in a treatment where no identity was induced. In two further treatments we study the effects of heterogeneous identities. We find no effect on cooperation when only part of the followers share the leader’s identity, or when followers share a common identity that differs from that of the leader. We conclude that group identity is an effective but fragile instrument to promote cooperation.
    Keywords: leading-by-example,leadership, public goods, voluntary contributions,cooperation,identity,experiment
    Date: 2012–05
  9. By: Sandner, Malte
    Abstract: This paper presents results from a randomized evaluation of a home visiting program for disadvantaged first time mothers and their families implemented in three German federal states. At the end of the first year of the program, children in home visited families perform significantly better than those in the control families by 0.18 standard deviations in the Mental Developmental Index. Examination of gender differences revealed that home visited girls scored 0.30 standard deviations higher than girls in the control families, whereas boys scored similar in both groups. Results indicate no differences in the scores of the Psychomotor Developmental Index and the birth outcomes, despite 0.28 standard deviations higher birth weight for boys in the home visited families compared to boys in the control families. We find evidence for skill self productivity but in different magnitude for boys and girls. Furthermore, we analyze possible monetary returns of the program. --
    JEL: J13 J12 I21
    Date: 2012
  10. By: McCarter, Matthew; Sheremeta, Roman
    Abstract: A common finding in social sciences is that member change hinders group functioning and performance. However, questions remain as to why member change negatively affects group performance and what are some ways to alleviate the negative effects of member change on performance? To answer these questions we conduct an experiment in which we investigate the effect of newcomers on a group’s ability to coordinate efficiently. Participants play a coordination game in a four-person group for the first part of the experiment, and then two members of the group are replaced with new participants, and the newly formed group plays the game for the second part of the experiment. Our results show that the arrival of newcomers decreases trust among group members and this decrease in trust negatively affects group performance. Knowing the performance history of the arriving newcomers mitigates the negative effect of their arrival, but only when newcomers also know the oldtimers performance history. Surprisingly, in groups that performed poorly prior to the newcomers’ arrival, the distrust generated by newcomers is mainly between oldtimers about each other rather than about the newcomers.
    Keywords: coordination; group performance; oldtimers; newcomers; trust; experiments
    JEL: C72 C91
    Date: 2013–01–02
  11. By: Sheremeta, Roman; Zhang, Jingjing
    Abstract: We examine behavior in a three-player trust game in which the first player may invest in the second and the second may invest in the third. Any amount sent from one player to the next is tripled. The third player decides the final allocation among three players. The baseline treatment with no communication shows that the first and second players send significant amounts and the third player reciprocates. Allowing insider communication between the second and the third players increases cooperation between these two. Interestingly, there is an external effect of insider communication: the first player who is outside communication sends 54% more and receives 289% more than in the baseline treatment. As a result, insider communication increases efficiency from 44% to 68%.
    Keywords: three-player trust games; experiments; reciprocity; communication
    JEL: C72 C91
    Date: 2013–01–02
  12. By: Fahr, René; Djawadi, Behnud Mir
    Abstract: We investigate one possible explanation for corrupt behavior namely that individual decision makers who engage frequently in illegal actions might underestimate the overall probability of being caught. This might be in particular true for petty corruption where small amounts of bribes are involved and detection rate is rather low. To abstract from confounding effects of reciprocal behavior we design an experiment where a public official decides upon accepting a bribe that leads to a higher present period income while facing the risk of being audited and left with a considerable lower income in all subsequent periods. Because risk attitudes might be different when putting earned versus endowed income at risk we compare treatments where participants either receive an endowment beforehand or earn their income by conducting a real effort task in every period. Independent of the treatments we already find high rates of corruption in very early periods. Risk attitudes measured with a subsequent lottery-choice experiment do not correlate with the behavior observed in the corruption experiment. We explain our findings by a systematic underestimation of the overall probability to be audited. Although detection probability is small in each period, the probability of being caught only once is substantially high when engaging in corrupt behavior on a regular basis. Our findings have important political implications because the underestimation of the total risk involved in engaging in corrupt behaviour might nullify measures to fight petty corruption by increased governmental auditing. --
    JEL: D73 C91 D81
    Date: 2012

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