nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2013‒07‒15
thirteen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. The Price of Luck By Bou, Silvia; Brandts, Jordi; Cayón, Magda; Guillén, Pablo
  2. The dynamics of organizational structures and performances under diverging distributions of knowledge and different power structures By Giovanni Dosi; Luigi Marengo
  3. The Future of Health Economics: The Potential of Behavioral and Experimental Economics By Hansen, Fredrik; Anell, Anders; Gerdtham, Ulf-G; Lyttkens, Carl Hampus
  4. Organizations, diffused pivotality and immoral outcomes By Falk, Armin; Szech, Nora
  5. Do Couples Discount Future Consequences Less than Individuals? By Mohammed Abdellaoui; Olivier l'Haridon; Corina Paraschiv
  6. Can Rumors and Other Uninformative Messages Cause Illiquidity ? By Radu, Vranceanu; Besancenot, Damien; Dubart, Delphine
  7. Nudging Energy Efficiency Behavior: The Role of Information Labels By Richard G. Newell; Juha V. Siikamäki
  8. The effect of identifiability on the relationship between risk attitudes and other-regarding concerns By Anastasios Koukoumelis; M. Vittoria Levati; Matteo Ploner
  9. When to Pay More: Incentives, Culture and Status in Principal‐ Agent Interactions By Dessi, Roberta; Miquel-Florensa, Pepita
  10. Cognitive Load and Strategic Sophistication By Allred , Sarah; Duffy, Sean; Smith, John
  11. Overconfidence, Effort, and Investment By Pikulina, E.S.; Renneboog, L.D.R.; Horst, J.R. ter; Tobler, P.N.
  12. Social Learning about Consumption By Isabelle Salle; Pascal Seppecher
  13. Being in the Right Place: A Natural Field Experiment on List Position and Consumer Choice By Novarese, Marco; Wilson, Chris M.

  1. By: Bou, Silvia; Brandts, Jordi; Cayón, Magda; Guillén, Pablo
    Abstract: We find that the vast majority of students taking an advanced undergraduate finance course show a preference for luck in a classroom experiment. In Phase I of the experiment part of the students, group A, were asked to guess a coin toss five times in a row. In Phase II the rest of the students, group B, were given 10 EUR to bet on some of the Group A students taking a second go at guessing a sequence of five coin tosses (Phase III). Group B students' bets were by default allocated to the worse performing student in Phase I. Switching to better performing Group A students was costly. A total of 23 out of 28 students were willing to pay for switching and thus showed a preference for luck.
    Keywords: experiments; hot hand fallacy; Decision heuristics
    Date: 2013–06
  2. By: Giovanni Dosi; Luigi Marengo
    Abstract: In this work we analyze the characteristics and dynamics of organi- zations wherein members diverge in terms of capabilities and visions they hold, and interests which they pursue. How does society put together such distributed and possibly coflicting knowledge? The question is "Hayekian" in its emphasis on the distributed features of the latter. However, our analytical point of departure is quite "anti- Hayekian" in that it focuses on how organizations aggregate and put to use such knowledge by means of di®erent combinations among power of allocation of decisions and exercise of authority. Together, organizational power shapes the very preferences of organizational members. More specifically, we study the efficiency of different balances between the three foregoing mechanisms. In all that, organization for sure "aggregate" and make compatible different pieces of distributed knowledge, but the causation arrow goes also the other way round: organizations shape the characteristics and distribution of knowledge itself, and of the micro "visions" and judgements.
    Keywords: authority, power, distributed knowledge
    Date: 2013–07–08
  3. By: Hansen, Fredrik (Department of Economics, Lund University); Anell, Anders (Department of Business Administration, Lund University); Gerdtham, Ulf-G (Department of Economics, Lund University); Lyttkens, Carl Hampus (Department of Economics, Lund University)
    Abstract: The health care systems in the Nordic countries are facing key challenges. While the possibilities and willingness to expand health care resources are limited, the demand for health care are increasing due to continuous development of new medical technologies, changing demographics, increasing income level and greater expectations from patients. Consequently, health care organizations are increasingly required to take economic restrictions into account and there is an urgent need to improve the efficiency in the health care sector. A reasonable question to ask is if health economics of today is prepared and equipped to support in meeting these challenges. This article argues that behavioral and experimental economics are promising fields to consider when closing vital knowledge gaps. The aim of this paper is two-fold: introduce the fields of behavioral and experimental economics, and thereafter identify and characterize health economic issues where these two fields have a particularly promising application potential. We also address the advantages of applying a pluralistic view on health economics. Based on the analysis in this, and similar articles, on the development of health economics, we anticipate a dynamic future of health economics.
    Keywords: Health economics; Behavioral economics; Experimental economics; Pluralism
    JEL: B40 C90 D03 I10
    Date: 2013–06–24
  4. By: Falk, Armin; Szech, Nora
    Abstract: This paper studies how organizational design affects moral outcomes. Subjects face the decision to either kill mice for money or to save mice. We compare a Baseline treatment where subjects are fully pivotal to a Diffused-Pivotality treatment where subjects simultaneously choose in groups of eight. In the latter condition eight mice are killed if at least one subject opts for killing. The fraction of subjects deciding to kill is higher when pivotality is diffused. The likelihood of killing is monotone in subjective perceptions of pivotality. On an aggregate level many more mice are killed in Diffused-Pivotality than Baseline. -- Diese Arbeit untersucht den Einfluss von institutionellem Design auf moralische Entscheidungen. Die Teilnehmer entscheiden, ob sie dem Tod von Mäusen für Geld zustimmen möchten, oder ob sie die Mäuse retten möchten. Wir vergleichen eine Baseline-Versuchsanordnung, in der die Teilnehmer individuell über das Leben einer Maus entscheiden und somit sicher pivotal sind, mit einer Diffused-Pivotality-Anordnung, bei der simultan in Gruppen zu jeweils acht Mitgliedern entschieden wird. In letzterer Anordnung werden acht Mäuse getötet, wenn sich wenigstens ein Mitglied für die Tötung ausspricht. Die Anzahl der Personen, die der Tötung zustimmen, ist höher, wenn die Pivotalität gestreut ist. Die Wahrscheinlichkeit zu töten steigt in der Pivotalitätswahrnehmung der Teilnehmer. Auf aggregierter Ebene werden bei Diffused-Pivotality erheblich mehr Mäuse getötet als in der Baseline-Anordnung.
    Keywords: Diffused Pivotality,Moral Decision Making,Committees,Group Decisions,Moral Transgression
    JEL: C91 D01 D03 D23 D63
    Date: 2013
  5. By: Mohammed Abdellaoui (HEC-Paris & GREGHEC-CNRS, France); Olivier l'Haridon (CREM CNRS UMR 6211, University of Rennes 1, France); Corina Paraschiv (HEC-Paris & GREGHEC-CNRS, France)
    Abstract: This paper examines couple time preferences by reporting the results of an ex- periment based on the elicitation of nearest equivalent values. Decisions involving delayed outcomes are studied for each of the two partners individually and for the couple. This allows for a direct comparison between couple behavior and individual partners’ behavior in choices over time. We use Fishburn and Rubinstein’s (1982) discounted utility model and infer measurements of utility and discounting at both the individual and the couple level. While utility is found to be similar for cou- ples and individuals, we observe that, in decision over time, couples discount future amounts of money less than individuals. This result suggests that making joint decisions significantly reduces revealed impatience. Moreover, we show that cou- ple time preferences cannot be considered as a mix of the individual preferences of each of the two partners. Taken together, these findings suggest that determinants of intertemporal decisions made by couples, such as financial decisions, should be considered as distinct from determinants of individual decisions.
    Keywords: Household decision-making, time preferences, hyperbolic discounting
    Date: 2013–06
  6. By: Radu, Vranceanu (ESSEC Business School); Besancenot, Damien (Centre d'Economie de l'Université Paris Nord (CEPN)); Dubart, Delphine (ESSEC Business School)
    Abstract: This paper analyzes whether false information, rumors and other uninformative messages can cause illiquidity. In the model, a group of investors are invited to participate to a high-yield collective project. The project succeeds only if a minimum participation rate is reached. Before taking their decision, investors receive an uninformative but emotion loaded message. If investors believe that the message has an impact on the beliefs of the others, the problem can be analyzed as a typical global game. We solve the model for the critical message separating the success / fail states of the project. It turns out that lesser investors will participate to the collective project when they receive a negative message as compared to the case when they receive a positive message. Predictions of the theoretical model are corroborated by data provided by an Online and a Lab experiment. Insights apply to contagion and market manipulation episodes.
    Keywords: Experiments; Global Games; Illiquidity; Market Panic; Rumors; Strategic Uncertainty
    JEL: C91 D84 G10 G11
    Date: 2013–07
  7. By: Richard G. Newell; Juha V. Siikamäki
    Abstract: We evaluate the effectiveness of energy efficiency labeling in guiding household decisions. Using a carefully designed choice experiment with alternative labels, we disentangle the relative importance of different types of information and intertemporal behavior (i.e., discounting) in guiding energy efficiency behavior. We find that simple information on the economic value of saving energy was the most important element guiding more cost-efficient investments in energy efficiency, with information on physical energy use and carbon emissions having additional but lesser importance. The degree to which the current EnergyGuide label guided cost-efficient decisions depends importantly on the discount rate assumed. Using individual discount rates separately elicited in our study, we find that the current EnergyGuide label came very close to guiding cost-efficient decisions, on average. However, using a uniform five percent discount rate—which was much lower than the average elicited rate—the EnergyGuide label led to choices that result in a one-third undervaluation of energy efficiency. We find that labels that also endorsed a model (with Energy Star) or gave a suggestive grade to a model (EU-style label), encouraged substantially higher energy efficiency. Our results reinforce the centrality of views on intertemporal choice and discounting, both in terms of understanding individual behavior and in guiding policy.
    JEL: C91 D12 D83 D91 H43 Q41 Q48
    Date: 2013–07
  8. By: Anastasios Koukoumelis (Max Planck Institute of Economics, Strategic Interaction Group, Jena); M. Vittoria Levati (Max Planck Institute of Economics, Strategic Interaction Group, Jena, and DSE, University of Verona); Matteo Ploner (Department of Economics, University of Trento)
    Abstract: Previous studies have shown that other-regarding concerns are weakened under risky situations. Daily experience also suggests that people care more about an identifiable than about an unidentifiable third person. We report on an experiment designed to explore whether rendering the other identifiable-via a speechless video and the revelation of personal information-affects the relationship between other-regarding concerns and risk preferences when there is risk to one's own and/or the other's payoff. We find that the acquisition of information about the other has no effect on behavior. Regardless of the treatment, most of the participants are other-regarding with respect to expected payoff but self-oriented with respect to risk allocation.
    Keywords: Risk attitudes, Other-regarding concerns, Identifiability
    JEL: C90 D63 D81
    Date: 2013–07–01
  9. By: Dessi, Roberta (IDEI, Toulouse School of Economics); Miquel-Florensa, Pepita (Toulouse School of Economics)
    Abstract: We study the role of status in an experimental Principal-Agent game.Status is awarded to subjects based on either talent or luck. In each randomly matched principal-agent pair, the principal chooses the agent's status-contingent piece rate for a task in which talent matters for performance (an IQ test). We perform the experiment in Cambridge (UK) and in HCMV (Vietnam). We find that in Cambridge piece rate others are significantly higher for high-status agents (only) when status signals talent. However, these higher offers are not payoff-maximizing for the principals.In contrast, Vietnam piece rate offers are significantly higher for high-status agents (only) when status is determined by luck. We explore possible explanations, and the implications for status and incentives.
    Keywords: , , incentives, status, identity, piece rate, principal-agent, signaling, culture.
    Date: 2013–05
  10. By: Allred , Sarah; Duffy, Sean; Smith, John
    Abstract: We study the relationship between the cognitive load manipulation and strategic sophistication. The cognitive load manipulation is designed to reduce the subject's cognitive resources which are available for deliberation on a choice. In our experiment, subjects are placed under a large cognitive load (given a difficult number to remember) or a low cognitive load (given a number which is not difficult to remember). Subsequently, the subjects play a one-shot game then they are asked to recall the number. This procedure is repeated for various games, where a new number is given for each game. We find a nuanced and nonmonotonic relationship between cognitive load and strategic sophistication. This relationship is consistent with two effects. First, subjects under a high cognitive load tend to exhibit behavior consistent with the reduced ability to compute the optimal decision. Second, the cognitive load tends to affect the subject's perception of their relative standing in the distribution of cognitive ability. The net result of these two effects depends on the strategic setting. Our experiment provides indirect evidence on the literature which examines the relationship between measures of cognitive ability and strategic sophistication.
    Keywords: bounded rationality; experimental economics; working memory load; beauty contest; strategic sophistication; rational inattention
    JEL: C72 C91
    Date: 2013–07–03
  11. By: Pikulina, E.S.; Renneboog, L.D.R.; Horst, J.R. ter; Tobler, P.N. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: The theoretical finance literature predicts that overconfident managers overinvest in risky projects and exert more effort to learn about potentially value-enhancing projects in comparison with their unbiased peers. We test this prediction experimentally. We demonstrate that strong overconfidence results in overinvestment and excess effort levels, moderate overconfidence leads to accurate decisions, and underconfidence induces underinvestment and insufficient effort. Our results can be generalized as they are based on different subject types (financial professionals and students), various media (computer-, paper-, and web-based designs), and different types of effort costs (real effort and monetary investment costs).
    Keywords: Self-confidence;Overconfidence;Judgmental Bias;Better-than-Average;Overinvestment;Investment Choice;Effort.
    JEL: G11 J22
    Date: 2013
  12. By: Isabelle Salle; Pascal Seppecher
    Abstract: This paper applies a parsimonious learning model to the optimal consumption rule of Allen & Carroll (2001), and delivers convincing convergence dynamics towards the optimal rule within a limited amount of time. These findings constitute a significant improvement regarding previous results in the literature, both in terms of speed of convergence and parsimony of the learning model. The social learning model exhibits several appealing features: it is frugal (involving only two free parameters), easy to apply to a range of learning objectives, requires few procedures and little information. Particular care is given to behavioural interpretation of the modelling assumptions in light of evidence from the fields of psychology and social science. Our results highlight the need to depart from the genetic metaphor, and account for intentional decision-making, based on agents' relative performances. By contrast, we show that convergence is strongly hindered by exact imitation processes, or random exploration mechanisms, which are usually assumed when modelling social learning behaviour. Our results suggest a method for modelling bounded rationality, which could be tested most interestingly within the framework of a wide range of economic models with adaptive dynamics.
    Keywords: learning, bounded rationality, evolutionary algorithms, consumption rule
    JEL: D83 D91 C63 E21
    Date: 2013–05
  13. By: Novarese, Marco; Wilson, Chris M.
    Abstract: By randomising the order in which new economics research papers are presented in email alerts and tracking economists’ subsequent download activity, this paper uses a natural field experiment to better understand the reasons why individuals show a disproportionate tendency to select items listed in top position. Using a novel method, the paper tests and rejects three common explanations regarding item order, choice fatigue and position as a quality signal. The paper then further demonstrates how the causes of top position effects vary significantly with list length, and points to some alternative explanations.
    Keywords: Position Effects, Order Effects, Primacy Effects, Recency Effects, Choice Fatigue, Prominence
    JEL: C93 D01 D03 L0 L00
    Date: 2013–06

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