nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2013‒04‒13
seventeen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. How the Allocation of Children?s Time Affects Cognitive and Non-Cognitive Development By Mario Fiorini; Michael P. Keane
  2. Cooperation preferences and framing effects By Dariel A.
  3. Advice and Fictive Learning: The Pricing of Assets in the Laboratory By Jonathan E. Alevy; Michael K. Price
  4. Variation in risk seeking behavior following large losses: A natural experiment By Lionel Page; David A. Savage; Benno Torgler
  5. Asymmetric default bias in dishonesty – how defaults work but only when in one’s favor By Toke Reinholt Fosgaard
  6. Is It How You Look or Speak That Matters? “An Experimental Study Exploring the Mechanisms of Ethnic Discrimination” By Magnus Rodin; Gulay Ozcan
  7. As Easy as Pie: How Retirement Savers use Prescribed Investment Disclosures By Hazel Bateman; Isabella Dobrescu; Ben R. Newell; Andreas Ortmann; Susan Thorp
  8. The Alpha of a Survey of the Literature in Economic and Financial Literacy By William T. Alpert; Oskar R. Harmon
  9. Responsibility effects in decision making under risk By Pahlke, Julius; Strasser, Sebastian; Vieider, Ferdinand M.
  10. Does everyone accept a free lunch? Decision making under (almost) zero cost borrowing By Michael Insler; Pamela Schmitt; Jake Compton
  11. A Theoretical and Experimental Appraisal of Five Risk Elicitation Methods By Paolo Crosetto; Antonio Filippin
  12. Preference for randomization: Empirical and experimental evidence By Dwenger, Nadja; Kübler, Dorothea; Weizsäcker, Georg
  13. Strategies and Evolution in the Minority Game: A Multi- Round Strategy Experiment By Jona Linde; Joep Sonnemans; Jan Tuinstra
  14. Personal Financial Literacy Among High School Students in New Zealand, Japan and the United States By Michael P. Cameron; Richard Calderwood; Ashleigh Cox; Steven Lim; Michio Yamaoka
  15. 'I'll do it by myself as I knew it all along': On the failure of hindsight-biased principals to delegate optimally By Danz, David; Hüber, Frank; Kübler, Dorothea; Mechtenberg, Lydia; Schmid, Julia
  16. Room Effects By Marco Castillo; Gregory Leo; Ragan Petrie
  17. The Importance of the Cognitive Environment for Intertemporal Choice By Michael A. Kuhn; Peter Kuhn; Marie Claire Villeval

  1. By: Mario Fiorini (Economics Discipline Group, University of Technology, Sydney); Michael P. Keane (University of Oxford)
    Abstract: The allocation of children?s time among different activities may be important for their cognitive and non-cognitive development. In our work we exploit time use diaries from the Longitudinal Study of Australian Children to study the effect of time allocation across a wide range of alternative activities. By doing so we characterize the trade-off between the activities to which a child is exposed. On the one hand, our results suggest that time spent in educational activities, particularly with parents, is the most productive input for cognitive skill development. On the other hand, non-cognitive skills appear insensitive to alternative time allocations. Instead, these skills are greatly affected by the mother?s parenting style.
    Date: 2013–02–01
  2. By: Dariel A. (GSBE)
    Abstract: This paper presents the results from an experiment investigating whether framing affects the elicitation and predictive power of preferences for cooperation, i.e., the willingness to cooperate with others. Cooperation preferences are elicited in three treatments using the method of Fischbacher, Gächter and Fehr (2001). The treatments vary two features of their method: the sequence and order in which the contributions of other group members are presented. The predictive power of the elicited preferences is evaluated in a one-shot and a finitely-repeated public-good game. I find that the order in which the contributions of others are presented, by and large, has no impact on the elicited preferences and their predictive power. In contrast, presenting the contributions of others in a sequence has a pronounced effect on the elicited preferences and reduces substantially their predictive power. Overall, elicited preferences are more accurate at predicting behavior when others contributions are presented simultaneously and in ascending order, like in Fischbacher, Gächter and Fehr (2001).
    Keywords: Design of Experiments: Laboratory, Individual;
    Date: 2013
  3. By: Jonathan E. Alevy (Department of Economics, University of Alaska Anchorage); Michael K. Price (Department of Economics, Georgia State University)
    Abstract: A burgeoning literature in the neurosciences suggests that individuals modify their behavior not only in response to their own experiences, but also from what they learn about the experiences of others engaged in similar tasks. Importantly, these different forms of learning are associated with common neurological processes. We explore whether others’ advice provides a fictive learning signal that substitutes for one’s own experience. We examine this question in an environment where inexperienced traders frequently perform poorly – an experimental asset market. Prices in sessions with advice tend towards fundamentals mitigating the severity of price bubbles. Further, advice allays behaviors shown to yield bubbles in prior studies. Taken jointly, our data suggest that advice triggers fictive learning which helps agents avoid the “mistakes” made by naïve counterparts.
    Keywords: asset pricing, laboratory experiments, advice
    JEL: C92 D83 G12
    Date: 2012–12
  4. By: Lionel Page; David A. Savage; Benno Torgler
    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: 2013–03–14
  5. By: Toke Reinholt Fosgaard (Department of Food and Resource Economics, University of Copenhagen)
    Abstract: Based on a dice rolling task where participants can cheat on the outcome, this paper asks if default answers change dishonesty? The paper finds that various default answers have asymmetric effects. Compared to not having a default answer at all, providing a low default answer, or adding the expected mean as the default answer when participants report the outcome of the task do not affect behavior. Adding a high default answer, however, significantly increases the reported outcome.
    Keywords: Dice task, Cheating, Default bias
    JEL: C91 D03
    Date: 2013–04
  6. By: Magnus Rodin (Swedish Institute for Social Research, Stockholm University and Stockholm University Linnaeus Center for Integration Studies (SULCIS)); Gulay Ozcan (Swedish Institute for Social Research, Stockholm University and Stockholm University Linnaeus Center for Integration Studies (SULCIS))
    Abstract: Using a unique laboratory experiment where subjects are asked to guess the test performance of candidates presented by facial portraits and voice messages, this paper explores the following questions: Are beliefs about performance affected by if a candidate is perceived to have looks that are non-stereotypical for the dominant population and do these beliefs change if the candidate has native-like versus accented speech? The experiment is conducted in Sweden and the results show that candidates not perceived as stereotypically Swedish are considered to be worse performers. These beliefs are found in within-gender but not in cross-gender evaluations and are not eliminated when additional performance-related information about the candidates is provided. When candidates are presented by both looks and speech,differential evaluations based on looks disappear. Instead, we ?nd strong negative beliefs about performance for candidates that speak Swedish with a foreign accent implying that ethnic stereotypes associated with speech override stereotypes associated with appearance. The negative beliefs associated with foreign-accented speech are not supported by corresponding mean differences in the candidates’ actual test performance.
    Keywords: Experiment, Appearance, Speech, Beliefs, Performance, Stereotypes
    JEL: J71 J15 D03
    Date: 2013–03
  7. By: Hazel Bateman (School of Risk and Actuarial Studies, University of New South Wales); Isabella Dobrescu (CEPAR and School of Economics, University of New South Wales); Ben R. Newell (School of Psychology, University of New South Wales); Andreas Ortmann (School of Economics, University of New South Wales); Susan Thorp (Finance Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: : We report the results of two laboratory experiments that study how university student and staff participants chose retirement savings investment options using ?user-friendly? information prescribed by regulators. We demonstrate that choices of more than 20% of participants cannot be predicted using any of the prescribed information items but that 30% of participants used all, or almost all, items, frequently in unexpected ways. A pie-chart showing asset allocation had the largest marginal impact on investment choices. Participants preferred options with more segmented pies (lower concentration) and with equally sized segments (lower deviation froma 1/n allocation). This choice behavior is consistent with the application of a simple diversification heuristic. Participants cannot choose more than one investment but are guided by the extent to which a pre-mixed investment option appears evenly balanced across asset classes. This novel application of a 1/n strategy is distinct from existing findings of na?ve diversification in ?mix-it-yourself? conditions where participants spread resources evenly across funds or categories. The results highlight that information contained in prescribed investment disclosures may not be used in the manner intended by the regulator. The results also pose interesting methodological questions about the way ?user-friendly? information prescribed by regulators is validated before being legislated.
    Keywords: consumer finance; diversification heuristics; pensions; choice experiment
    JEL: G11 D14 C91
    Date: 2013–03–01
  8. By: William T. Alpert (University of Connecticut); Oskar R. Harmon (University of Connecticut)
    Abstract: There is a century long history of economic and financial education laced with implications for both political civic education. It has been argued by some economists that since economics is based on rational self-interested “agents” we don’t need to teach economics at the undergraduate level all. This paper offers a brief review of the literature from the K- college results of economic and financial education extending the survey to the more recent attempts at public financial and economic education. In the review we try to highlight both the results and types of approaches. We then identify some of the areas in which the relatively new areas of behavioral and experimental economics are relevant to economic and financial literacy efforts. We speculate on how these findings may effect economic and financial literacy efforts in the future. JEL Classification: A20, A21, A22, A29
    Keywords: Financial literacy, economic literacy, economic education, financial education
    Date: 2013–03
  9. By: Pahlke, Julius; Strasser, Sebastian; Vieider, Ferdinand M.
    Abstract: We explore situations in which a decision-maker bears responsibility for somebody else's outcomes as well as for her own. For gains we confirm the intuition that being responsible for somebody else's payoffs increases risk aversion, while in the loss domain we find increased risk seeking. In a second experiment we replicate the finding of increased risk aversion for large probabilities of a gain, while for small probability gains we find an increase of risk seeking under conditions of responsibility. This discredits hypotheses of a cautious shift under responsibility, and indicates an accentuation of the fourfold pattern of risk attitudes usually found for individual choices. --
    Keywords: risk attitude,prospect theory,social norms,responsibility,other-regarding preferences
    JEL: D03 D81
    Date: 2012
  10. By: Michael Insler (United States Naval Academy); Pamela Schmitt (United States Naval Academy); Jake Compton (United States Navy)
    Abstract: We examine decision making by a group of college students who have the opportunity to take out a sizable, very low-interest, non-credit dependent loan which, if simply invested in low-risk assets, would effectively yield a free lunch in net interest earnings. We exploit this natural experiment to study the characteristics of those willing and unwilling to take the loan. We characterize the latter as debt averse, and for those who accept the loan, we also consider whether they anticipate repaying it early. In particular, we use simple linear and non-linear binary choice models to explore how these two decisions relate to individual and family demographics as well as socio-economic characteristics, personality traits (as measured by the Myers-Briggs Type Indicator), cognitive ability (as measured by the Cognitive Reflection Test), and intellectual ability (as measured by SAT scores and grade point average). We find no consistent relationships between debt aversion and intellectual ability or gender. Individuals willing to accept the loan tend to have prior debt, longer planning horizons, come from middle-income families, and may have higher cognitive ability.
    Date: 2013–03
  11. By: Paolo Crosetto; Antonio Filippin
    Abstract: We perform a comparative analysis of five incentivized tasks used to elicit risk preferences. Theoretically, we compare the elicitation methods in terms of completeness of the range of the estimates as well as their precision, the likelihood of triggering loss aversion, and problems arising when multiple choices are required. Using original data from a homogeneous population, we experimentally investigate the distribution of estimated risk preferences, whether they differ by gender, and the complexity of the tasks. We do so using both non-parametric tests and a structural model estimated with maximum likelihood. We find that the estimated risk aversion parameters vary greatly across tasks and that gender differences appear only when the task is more likely to trigger loss aversion.
    Keywords: Risk attitudes, Elicitation methods, Experiment
    JEL: C81 C91 D81
    Date: 2013
  12. By: Dwenger, Nadja; Kübler, Dorothea; Weizsäcker, Georg
    Abstract: We investigate violations of consequentialism in the form of the stochastic dominance property. The property is shared by many theories of choice and implies that the decisionmaker prefers receiving the best outcome for sure over all lotteries that involve multiple outcomes. We run experiments to demonstrate that dominated randomization can be attractive. In treatments where decision-makers are asked to submit multiple decisions without knowing which one is relevant, many participants submit contradictory sets of decisions and thereby induce a dominated lottery between outcomes. Explicit choice of non-consequentialist randomization is observed in a separate treatment. A possible reason for the effect is the desire to avoid having to make the decision. A large data set on (highstake) university applications in Germany shows patterns that are consistent with a preference for randomization. --
    Keywords: stochastic dominance violations,individual decision making,university choice,matching
    JEL: D03 D01
    Date: 2013
  13. By: Jona Linde (University of Amsterdam); Joep Sonnemans (University of Amsterdam); Jan Tuinstra (University of Amsterdam)
    Abstract: Minority games are a stylized description of strategic situations with both coordination and competition. These games are widely studied using either simulations or laboratory experiments. Simulations can show the dynamics of aggregate behavior, but the results of such simulations depend on the type of strategies used. So far experiments provided little guidance on the type of strategies people use because the set of possible strategies is very large. We therefore use a multi-round strategy method experiment to directly elicit people's strategies. Between rounds participants can adjust their strategy and test the performance of (possible) new strategies against strategies from the previous round. Strategies gathered in the experiment are subjected to an evolutionary competition. The strategies people use are very heterogeneous although aggregate outcomes resemble the symmetric Nash equilibrium. The strategies that survive evolutionary competition achieve much higher levels of coordination.
    Keywords: minority game; strategy experiment; evolution; simulation
    JEL: C63 C72 C91 D03
    Date: 2013–03–07
  14. By: Michael P. Cameron (University of Waikato); Richard Calderwood (University of Waikato); Ashleigh Cox (University of Waikato); Steven Lim (University of Waikato); Michio Yamaoka (Waseda University)
    Abstract: Personal financial literacy is becoming increasingly important in the modern world, especially for young people. In this paper we compare financial literacy of high school students in Hamilton, New Zealand, with samples from Japan and the United States. We compare not only overall financial literacy, but also literacy across five dimensions (or ‘themes’) of financial literacy, and across three cognitive levels. We find that financial literacy is poor overall in all three countries, but is substantially worse in New Zealand and the United States than in Japan. The performance is similar across themes and cognitive levels for U.S. and New Zealand students, but Japanese students perform better mostly in terms of their greater knowledge of terminology and definitions, rather than better comprehension and ability to apply their knowledge. This suggests that all three countries should work harder to develop the financial literacy of their high school students.
    Keywords: financial literacy; New Zealand; Japan; United States
    JEL: A21 D14
    Date: 2013–03–25
  15. By: Danz, David; Hüber, Frank; Kübler, Dorothea; Mechtenberg, Lydia; Schmid, Julia
    Abstract: With the help of a simple model, we show that the hindsight bias can lead to inefficient delegation decisions. This prediction is tested experimentally. In an online experiment that was conducted during the FIFA World Cup 2010 participants were asked to predict a number of outcomes of the ongoing World Cup and had to recall their assessments after the outcomes had been realized. This served as a measure of the hindsight bias for each participant. The participants also had to make choices in a delegation game. Our data confirm that hindsight-biased subjects more frequently fail to delegate optimally than subjects whom we have classified as not hindsight biased. --
    Keywords: hindsight bias,delegation,experiments
    JEL: C72 C91 D84
    Date: 2013
  16. By: Marco Castillo (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University); Gregory Leo (Department of Economics, University of California, Santa Barbara); Ragan Petrie (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University)
    Abstract: We present clean evidence of a direct social context effect on behavior in a laboratory experiment: the gender composition of the room significantly alters the risk decisions of subjects even when the actions or presence of others are neither payoff nor information relevant. Our design is such that subjects do not know the decisions of others, nor can they be inferred. We find that women become more risk taking as the proportion of men in the group increases. This is most consistent with women imitating the expected behavior of others in the session. Our results imply that aggregate behavior is not a simple extrapolation of individual preferences. Groups might have more extreme behavior than the average individual. Length: 27
    Keywords: gender, context effect, risk aversion, experiment
    JEL: C91 D81 J16
    Date: 2013–04
  17. By: Michael A. Kuhn (Department of Economics, University of California San Diego, 9500 Gilman Drive # 0508, La Jolla, CA 92093); Peter Kuhn (Department of Economics, University of California Santa Barbara, 2127 North Hall, Santa Barbara, CA 93106-9210, USA); Marie Claire Villeval (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: We experimentally manipulate two aspects of the cognitive environment — cognitive depletion and recent sugar intake — and estimate their effects on individuals’ time preferences in a way that allows us to identify the structural parameters of a simple (α,β,δ) intertemporal utility function for each person. We find that individuals exposed to a prior cognitive load, individuals who consumed a sugared drink and individuals who consumed a sugar-free drink all defer more income than a control group exposed to none of these conditions. Structural estimates show that all three effects are driven entirely by increases in the intertemporal substitution elasticity parameter (α). Together, our results suggest that at least for complex economic decisions like intertemporal financial choice, the ‘attention/focusing’ effect of both prior cognitively demanding activity and prior assignment of a primary reward can improve decision-making.
    Keywords: Time preferences, self-control, depletion, sucrose, experiment
    JEL: C91 D90
    Date: 2013

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