nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2013‒04‒20
eleven papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Risk Aversion Relates to Cognitive Ability: Fact or Fiction? By Andersson, Ola; Tyran, Jean-Robert; Wengström, Erik; Holm, Håkan J.
  2. Groupthink: Collective Delusions in Organizations and Markets By Benabou, Roland
  3. Bounded Rationality and Strategic Uncertainty in a Simple Dominance Solvable Game By Nobuyuki Hanaki; Nicolas Jacquemet; Stéphane Luchini; Adam Zylbersztejn
  4. Who is Coming to the Experiment? A Cautionary Tale from China By Elaine Liu; Paul Frijters; Tao Sherry Kong
  5. Principal-Agent and Peer Relationships in Tornaments By Gerald Eisenkopf; Sabrina Teyssier
  6. Honest on Mondays: Honesty and the Temporal Distance between Decisions and Payoffs By Ruffle, Bradley; Tobol, Yossi
  7. "Behavioral Approach to Repeated Games with Private Monitoring" By Hitoshi Matsushima; Tomomi Tanaka; Tomohisa Toyama
  8. Do Control Questions Influence Behavior in Experiments? By Catherine Roux; Christian Thöni
  9. I am sorry - Honest and fake apologies By Verena Utikal
  10. Cooperation, Trust, and Economic Development: An Experimental Study in China By Junyi Shen; Xiangdong Qin
  11. From welfare to preferences, do decision flaws matter? The case of tuition fees By Guilhem Lecouteux; Léonard Moulin

  1. By: Andersson, Ola (Research Institute of Industrial Economics (IFN)); Tyran, Jean-Robert (Department of Economics, University of Vienna); Wengström, Erik (Department of Economics, Lund University); Holm, Håkan J. (Department of Economics, Lund University)
    Abstract: Recent experimental studies suggest that risk aversion is negatively related to cognitive ability. In this paper we report evidence that this relation might be spurious. We recruit a large subject pool drawn from the general Danish population for our experiment. By presenting subjects with choice tasks that vary the bias induced by random choices, we are able to generate both negative and positive correlations between risk aversion and cognitive ability. Structural estimation allowing for heterogeneity of noise yields no significant relation between risk aversion and cognitive ability. Our results suggest that cognitive ability is related to random decision making, rather than to risk preferences.
    Keywords: Risk preference; cognitive ability; experiment; noise
    JEL: C81 C91 D12 D81
    Date: 2013–04–12
  2. By: Benabou, Roland (Princeton University)
    Abstract: This paper investigates collective denial and willful blindness in groups, organizations and markets. Agents with anticipatory preferences, linked through an interaction structure, choose how to interpret and recall public signals about future prospects. Wishful thinking (denial of bad news) is shown to be contagious when it is harmful to others, and self-limiting when it is beneficial. Similarly, with Kreps-Porteus preferences, willful blindness (information avoidance) spreads when it increases the risks borne by others. This general mechanism can generate multiple social cognitions of reality, and in hierarchies it implies that realism and delusion will trickle down from the leaders. The welfare analysis differentiates group morale from groupthink and identifies a fundamental tension in organizations' attitudes toward dissent. Contagious exuberance can also seize asset markets, generating investment frenzies and crashes.
    Keywords: cognitive dissonance, wishful thinking, toxic assets, financial crises, market crashes, manias speculative bubbles, market exuberance, morale, optimism, overconfidence, organizational culture, groupthink, cognitive biases anticipatory feelings, resolution of uncertainty, psychology
    JEL: D03 D23 D53 D83 D84 E32 G01 G14 Z1
    Date: 2013–03
  3. By: Nobuyuki Hanaki (Aix-Marseille University); Nicolas Jacquemet (University of Lorraine and Paris School of Economics); Stéphane Luchini (Aix-Marseille University); Adam Zylbersztejn (University of Lorraine and Paris School of Economics)
    Abstract: How much of the failures to achieve Pareto efficient outcome observed in a simple 2 2 dominance solvable game can be attributed to strategic uncertainty and how much is actually due to individual bounded rationality? We address this question by conducting a set of experiments involving two main treatments: one in which two human subjects interact, and another in which one human subject interacts with a computer program whose behavior is known. By making the behavior of the computer opponent perfectly predictable, the latter treatment eliminates strategic uncertainty. Our results suggest that observed coordination failures can be attributed equally to individual bounded rationality and strategic uncertainty.
    Date: 2013
  4. By: Elaine Liu (University of Houston); Paul Frijters (University of Queensland); Tao Sherry Kong (Peking University)
    Abstract: We compare the characteristics and regression coefficients between the participants in a field experiment in China and the survey population from which they were recruited. The experimental participants were more educated, younger, more likely to be male, more risk-loving and work fewer hours than the more general population. The estimates of their regression coefficients in the standard analyses of wages, happiness and entrepreneurship differed significantly from non-participants, indicating that inferences drawn from experimental samples may not hold for more representative groups of the population.
    Keywords: Field experiment, China
    JEL: A10
    Date: 2013–04–08
  5. By: Gerald Eisenkopf (Department of Economics, University of Konstanz, Germany); Sabrina Teyssier (INRA-ALISS, Ivery sur Seine, France)
    Abstract: Social preferences explain competitive behavior between agents and reciprocity towards a principal but there is no insight into the interaction of competition and reciprocity. We conducted a laboratory experiment with two treatments to address this issue. In a conventional tournament, an agent receives either the full prize or no prize at all. The other treatment provides the same incentives but the actual payment of an agent equals her expected payment. In both treatments the principal chooses between a low and a high guaranteed payment. Standard economic theory predicts the same effort provision in all situations. Our results show that inequity between agents’ payoffs and generosity of the principal determines the effectiveness of tournaments. Moreover, the data reveal that agents focus their preferences either on the principal or on the agent.
    Keywords: Tournament, Envy, Inequity, Agency problem
    JEL: M52 D03 C90
    Date: 2013–04–11
  6. By: Ruffle, Bradley (Ben Gurion University); Tobol, Yossi (Jerusalem College of Technology (JTC))
    Abstract: We show that temporally distancing the decision task from the payment of the reward increases honest behavior. Each of 427 Israeli soldiers fulfilling their mandatory military service rolled a six-sided die in private and reported the outcome to the unit's cadet coordinator. For every point reported, the soldier received an additional half-hour early release from the army base on Thursday afternoon. Soldiers who participated on Sunday (the first work day of the week) are significantly more honest than those who participated later in the week. We derive practical implications for eliciting honesty.
    Keywords: experimental economics, honesty, temporal distance, soldiers
    JEL: C93 D63
    Date: 2013–03
  7. By: Hitoshi Matsushima (Faculty of Economics, University of Tokyo); Tomomi Tanaka (Economic Development & Global Education, LLC); Tomohisa Toyama (Faculty of Engineering, Kogakuin University)
    Abstract: We examine repeated prisoners' dilemma with imperfect private monitoring and random termination where the termination probability is low. We run laboratory experiments and show subjects retaliate more severely when monitoring is more accurate. This experimental result contradicts the prediction of standard game theory. Instead of assuming full rationality and pure self-interest, we introduce naiveté and social preferences, i.e., reciprocal concerns, and develop a model that is consistent with, and uniquely predicts, the observed behavior in the experiments. Our behavioral model suggests there is a trade-off between naiveté and reciprocity. When people are concerned about reciprocity, they tend to make fewer random choices.
    Date: 2013–03
  8. By: Catherine Roux; Christian Thöni
    Abstract: Outcomes and strategies shown in control questions prior to experimental play may provide subjects with anchors or induce experimenter demand effects. In a Cournot oligopoly experiment we explore whether control questions influence subjects' choices in initial periods and over the course of a repeated game. We vary the framing of the control question to explore the cause of potential influences. We find no evidence for an influence of the control question on choices, neither in the first period nor later in the game.
    Keywords: Control questions; Experimenter demand effects; Anchoring; Experimental design
    JEL: B41 C72 C91
    Date: 2013–03
  9. By: Verena Utikal
    Abstract: Apologies have a positive effect on forgiveness. Nevertheless not all people apologize after an offense. In a laboratory experiment we test whether lying aversion can explain this behavior by comparing honest and fake apologies. First, we show that even an honest apology comes along with a cost for some people. Second, costs for fake apologies are even higher. Fake apologies are less likely than honest apologies and consist of different wording and content. Receivers understand apologies as a signal for honesty. Following, forgiveness after an honest apology is more likely than after a fake apology.
    Keywords: Apology, Lying, Intentions, Experiment
    Date: 2013
  10. By: Junyi Shen (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Xiangdong Qin (School of Economics, Shanghai Jiao Tong University, China)
    Abstract: Many previous empirical studies have suggested that cooperation and trust affect economic growth. However, the precise relationship between trust and cooperation (i.e., whether trust leads to cooperation or cooperation leads to trust) remains unclear and it is not known how the level of economic development affects the level of cooperation and trust. Using a combination of public goods experiment, gambling game experiment, and trust game experiment, we investigate the links among cooperation, trust, and economic development in four regions of China. Our results suggest that first, there is a U-shaped or V-shaped relationship between cooperation and economic development; second, on the one hand, cooperation leads to trust, and on the other hand, more cooperative behavior may be created by rewarding trusting behavior; and third, men are more cooperative and trusting than women. Furthermore, we find that the widely used 'GSS trust' question from the General Social Survey (GSS) does not predict either cooperation or trust, whereas the questions 'GSS fair' and 'GSS help' have weak predictive power for trusting behavior but not for cooperative behavior.
    Keywords: Cooperation, Trust, Economic development, Experiment, China
    JEL: C91 H41 I32
    Date: 2013–04
  11. By: Guilhem Lecouteux (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Léonard Moulin (Université Paris 13 - PRES Sorbonne Paris Cité)
    Abstract: We investigate the relation between welfare and preference satisfaction in economics, and show that the extension of the scope of economic analysis through the 20th century forces economists to question the validity of the preference satisfaction criterion as a normative criterion for evaluating public policies. We then argue that welfare economists should clarify the normative content of this criterion in order to properly design public policies. We illustrate our point with the case of the selection at the entry of university, and show that, according to the normative criterion used by the social planner, the optimal policy radically changes. In particular, we argue that -- if we adopt a paternalistic conception of welfare -- it becomes necessary to establish a clear distinction between preference and welfare, and to integrate the different social and psychological biases that can influence the decision of the individuals in the design of public policies.
    Keywords: preferences, welfare, prospect theory, tuition fees
    Date: 2013–04–04

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