nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2013‒02‒16
thirteen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Loss Aversion and Seller Behavior : Evidence from the Housing Market : Comment Working Paper. By Florent Buisson
  2. Manipulating Reliance on Intuition Reduces Risk and Ambiguity Aversion By Jeffrey V. Butler; Luigi Guiso; Tullio Jappelli
  3. Legitimacy and cooperation: A framed field experiment By Bouma, Jetske A.; Joy, K.J.; Paranjape, Suhas; Ansink, Erik
  4. Time Preferences and Lifetime Outcomes By Golsteyn, Bart H.H.; Grönqvist, Hans; Lindahl, Lena
  5. Characterizing Behavioral Decisions with Choice Data By Ghosal, Sayantan; Dalton, Patricio
  6. On the role of endowment heterogeneity and ambiguity for conditional cooperation By Felix Ebeling
  7. Coordination in 2 x 2 Games by Following Recommendations from Correlated Equilibria By Johne Bone; Michalis Drouvelis; Indrajit Ray
  8. Social Distance and Trust: Experimental Evidence from a Slum in Cairo By Binzel, Christine; Fehr, Dietmar
  9. Entrepreneurial Under-Diversification: Over Optimism and Overconfidence By Enrico Maria Cervellati; Pierpaolo Pattitoni; Marco Savioli; Rassoul Yazdipour
  10. Hot Hand Belief and Gambler's Fallacy in Teams: Evidence from Investment Experiments By Thomas Stöckl; Jürgen Huber; Michael Kirchler; Florian Lindner
  11. Contracting under Incomplete Information and Social Preferences: An Experimental Study By Hoppe, Eva I.; Schmitz, Patrick W.
  12. Overbidding and Heterogeneous Behavior in Contest Experiments By Roman M. Sheremeta
  13. Prospect theory in the health domain: a quantitative assessment By Attema, Arthur; Brouwer, Werner; l'Haridon, Olivier

  1. By: Florent Buisson (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: In an often quoted article, Genesove and Mayer (2001) observe that house sellers are reluctant to sell at a loss, and attribute this finding to loss aversion. I show that loss aversion cannot explain this phenomenon.
    Keywords: Loss aversion, prospect theory, housing market.
    JEL: D03 D11 D83
    Date: 2013–01
  2. By: Jeffrey V. Butler (Einaudi Institute for Economics and Finance (EIEF)); Luigi Guiso (Einaudi Institute for Economics and Finance (EIEF)); Tullio Jappelli (University of Naples Federico II and CSEF)
    Abstract: Prior research suggests that those who rely on intuition rather than effortful reasoning when making decisions are less averse to risk and ambiguity. The evidence is largely correlational, however, leaving open the question of the direction of causality. In this paper, we present experimental evidence of causation running from reliance on intuition to risk and ambiguity preferences. We directly manipulate participants’ predilection to rely on intuition and find that enhancing reliance on intuition lowers the probability of being ambiguity averse by 30 percentage points and increases risk tolerance by about 30 percent in the experimental sub-population where we would a priori expect the manipulation to be successful (males)
    Keywords: Risk Aversion, Risk Ambiguity, Decision Theory, Dual Systems, Intuitive Thinking
    JEL: D81 D83
    Date: 2013–01–24
  3. By: Bouma, Jetske A.; Joy, K.J.; Paranjape, Suhas; Ansink, Erik
    Abstract: Decentralization of irrigation management to local communities is often claimed to improve performance. The argument is that decentralization enhances the perceived legitimacy of irrigation management, which in turn increases the willingness of water users to cooperate and contribute to irrigation management. To test this hypothesis, we collected information about water users’ legitimacy perceptions in five villages alongside an irrigation channel in Maharashtra, India. In two of the villages, the irrigation department is in charge of irrigation management, while in the other three villages, this task has been decentralized to local water users associations (WUAs). To assess the impact of legitimacy perceptions on cooperation, we used survey-based indicators of perceived legitimacy to explain three outcomes, each of which partly reflects the willingness of water users to cooperate and contribute to irrigation management: (1) water users’ self-reported charge payments, (2) WUA-reported charge payments, and (3) water users’ behavior in a field experiment that was framed in terms of irrigation management. Our results show that legitimacy perceptions differ between the two types of villages as well as between WUA members and non-members, but these differences do not explain any of the three outcomes. Non-members contribute significantly less under the irrigation frame as compared to WUA members, but game behavior is not correlated with (self-reported or WUA-reported) charge payments. We conclude that decentralization of irrigation management may enhance legitimacy perceptions but this has no effect on the willingness of water users to contribute to irrigation management.
    Keywords: Framed field experiment; public goods game; irrigation management; legitimacy; water users association
    JEL: D70 Q15 C93
    Date: 2013–02–08
  4. By: Golsteyn, Bart H.H. (Maastricht University); Grönqvist, Hans (SOFI, Stockholm University); Lindahl, Lena (SOFI, Stockholm University)
    Abstract: This paper investigates the relationship between time preferences and lifetime social and economic behavior. We use a Swedish longitudinal dataset that links information from a large survey on children's time preferences at age 13 to administrative registers spanning over five decades. Our results indicate a substantial adverse relationship between high discount rates and school performance, health, labor supply, and lifetime income. Males and high ability children gain significantly more from being future-oriented. These discrepancies are largest regarding outcomes later in life. We also show that the relationship between time preferences and long-run outcomes operates through early human capital investments.
    Keywords: intertemporal choice, personality, preference parameter, human capital, income, health
    JEL: D03 D91 J01
    Date: 2013–01
  5. By: Ghosal, Sayantan (University of Warwick); Dalton, Patricio (Tilberg University)
    Abstract: This paper provides an axiomatic characterization of choices in a setting where a decision-maker may not fully internalize all the consequences of her choices on herself. Such a departure from rationality, it turns out, is common across a variety of positive behavioral models and admits the standard rational choice model as a special case. We show that choice data satisfying (a) Sen’s axioms and fully characterize behavioral decisions, and (b) Sen’s axiom and fully characterize standard decision-making. In addition, we show that (a) it is possible to identify a minimal and a maximal set of psychological states using choice data alone, and (b) under specific choice scenarios, "revealed mistakes" can be inferred directly from choice data.
    Keywords: Behavioral Decisions, Revealed and Normative Preferences, Welfare, Axiomatic characterization
    Date: 2013
  6. By: Felix Ebeling
    Abstract: Conditional cooperation (CC) is one of the most persistent behaviors in charitable giving. The laboratory experiment presented in this paper is designed to explore two questions: First, whether heterogeneous endowments of donors affect conditional cooperative giving. Second, whether potential donors exploit ambiguity about other donors’ endowments in a self-serving manner to justify lower giving. We find that heterogeneous endowments affect giving in a way that suggests individuals concern for equality of donors’ earnings after giving. Furthermore, the results do not confirm the exploitation of ambiguity about other donors’ endowments. Individuals do not bias beliefs about other donors’ endowments in a self-serving manner to justify lower giving.
    Keywords: public good, donation, conditional cooperation, social norms, ambiguity
    JEL: C91 D63 H41
    Date: 2013–02–05
  7. By: Johne Bone; Michalis Drouvelis; Indrajit Ray
    Abstract: We consider three games, Symmetric Battle of the Sexes, Modified Battle of the Sexes and Chicken and two different correlation devices, public and private, with the same expected payoffs in equilibrium, which is also the best correlated equilibrium payoff for these games. Despite our choices of the payoffs in these games based on some theoretical criteria, we find that coordination and following recommendations vary significantly among our treatments. We explain these differences by analysing players' choices in cases when they do and do not follow recommendations in different games.
    Keywords: Coordination, Public message, Recommendation, Correlated equilibrium
    JEL: C72 C92 D83
    Date: 2013–02
  8. By: Binzel, Christine (University of Heidelberg); Fehr, Dietmar (WZB - Social Science Research Center Berlin)
    Abstract: While strong social ties help individuals cope with missing institutions, trade is essentially limited to those who are part of the social network. We examine what makes the decision to trust a stranger different from the decision to trust a member of a given social network (a friend), by comparing the determinants of these two decisions for the same individual. We implement a binary trust game with hidden action in a lab-in-the-field experiment with residents of an informal housing area in Cairo. Our results show that trust is higher among friends than among strangers and that higher trust among friends is related to the principal's belief of trustworthiness. However, on average a principal underestimates her friend's trustworthiness leading to inefficient outcomes. Our findings suggest that even within a social network, trade may often be limited to exchanges with few information asymmetries.
    Keywords: trust, social distance, hidden action, solidarity, economic development
    JEL: C72 C93 D82 O12
    Date: 2013–01
  9. By: Enrico Maria Cervellati (Department of Management, University of Bologna, Italy; Luiss Guido Carli, Italy); Pierpaolo Pattitoni (Department of Management, University of Bologna, Italy; The Rimini Centre for Economic Analysis (RCEA), Italy); Marco Savioli (The Rimini Centre for Economic Analysis (RCEA), Italy; Department of Economics and Statistics, University of Siena, Italy); Rassoul Yazdipour (Academy of Behavioral Finance & Economics, USA)
    Abstract: Past research shows that entrepreneurs often invest a large share of their personal wealth in their company, exposing themselves to idiosyncratic risk. In this paper, we focus on a possible explanation for this costly exposure, based on two behavioral biases: overconfidence and over optimism. Both these biases affect the very main variables of the risk-return analysis à la Markowitz. In particular, we find that if entrepreneurs perceive their private company to have a lower risk and a higher return than actual, they may overweight the company in their investment portfolios.
    Date: 2013–01
  10. By: Thomas Stöckl; Jürgen Huber; Michael Kirchler; Florian Lindner
    Abstract: In laboratory experiments we explore the effects of communication and group decision making on investment behavior and on subjects’ proneness to behavioral biases. Most importantly, we show that communication and group decision making does not impact subjects’ overall proneness to biases like gambler’s fallacy and hot hand belief. However, groups decide differently than individuals as they rely significantly less on useless outside advice from “experts” and choose the risk-free option less frequently. Finally, we document gender differences in investment behavior: groups of two female subjects choose the risk-free investment more often and are slightly more prone to the hot hand belief than groups of two male subjects.
    Keywords: Hot hand belief, Gambler’s fallacy, Experimental finance, Experts, Team decision making
    JEL: C91 C92 D81 G10
    Date: 2013–01
  11. By: Hoppe, Eva I.; Schmitz, Patrick W.
    Abstract: Principal-agent models in which the agent has access to private information before a contract is signed are a cornerstone of contract theory. We have conducted an experiment with 720 participants to explore whether the theoretical insights are reflected by the behavior of subjects in the laboratory and to what extent deviations from standard theory can be explained by social preferences. Investigating settings with both exogenous and endogenous information structures, we find that agency theory is indeed useful to qualitatively predict how variations in the degree of uncertainty affect subjects' behavior. Regarding the quantitative deviations from standard predictions, our analysis based on several control treatments and quantal response estimations shows that agents' behavior can be explained by social preferences that are less pronounced than in conventional ultimatum games. Principals' own social preferences are not an important determinant of their behavior. However, when the principals make contract offers, they anticipate that social preferences affect agents' behavior.
    Keywords: Agency theory; Adverse selection; Information gathering; Ultimatum game; Social preferences; Experiment
    JEL: D86 D82 C72 C91
    Date: 2013–01
  12. By: Roman M. Sheremeta (Argyros School of Business and Economics, Chapman University)
    Abstract: We provide an overview of experimental literature on contests and point out the two main phenomena observed in most contest experiments- (i) overbidding relative to the standard Nash equilibrium prediction and (ii) heterogeneous behavior of ex-ante symmetric contestants. Based on the sample of contest experiments that we review, the median overbidding rate is 72%. We provide different explanations for the overbidding phenomenon, including bounded rationality, utility of winning, other-regarding preferences, probability distortion, and the shape of the payoff function. We also provide explanations for heterogeneous behavior of contestants based on differences in preferences towards winning, inequality, risk and losses, and demographic differences. Furthermore, we suggest mechanisms that can reduce overbidding and induce more homogeneous behavior. Finally, we discuss directions for future research.
    Keywords: experiments, contests, overbidding, heterogeneous behavior
    JEL: C72 C91 C92 D72 D74
    Date: 2013
  13. By: Attema, Arthur; Brouwer, Werner; l'Haridon, Olivier
    Abstract: It is well-known that expected utility (EU) has empirical deficiencies. Prospect theory (PT) has developed as an alternative with more descriptive validity. However, PT’s full function had not yet been quantified in the health domain. This paper is the first to simultaneously measure utility of life duration, probability weighting, and loss aversion for health. We observe loss aversion and risk aversion, which for gains can be explained by probabilistic pessimism. Utility for gains is almost linear. For losses, we find less weighting of probability 1/2 and concave utility. This contrasts with the common finding of convex utility for monetary losses. However, PT was proposed to explain choices among lotteries involving small outcomes. Life years are arguably not ‘small’ and need not generate convex utility for losses. Moreover, utility of life duration reflects discounting, causing concave utility. These results are a first step in fitting non-EU models for health-related decisions.
    Keywords: Loss aversion; Prospect theory; QALY model; Utility of life duration
    JEL: B41 I10
    Date: 2013–01–31

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