nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2013‒10‒02
ten papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Rational inattention or rational overreaction? Consumer reactions to health news By Martin Browning; Lars Gårn Hansen; Sinne Smed
  2. It’s Not the Size of the Gift; It’s How You Present It: New Evidence on Gift Exchange from a Field Experiment By Duncan Gilchrist; Michael Luca; Deepak Malhotra
  3. Tearing the Veil of Privacy Law: An Experiment on Chilling Effects and the Right to Be Forgotten By Yoan Hermstrüwer; Stephan Dickert
  4. Those Outsiders: How Downstream Externalities Affect Public Good Provision By Sarah Jacobson; Jason Delaney
  5. Words Substitute Fists – Justifying Punishment in a Public Good Experiment By Christoph Engel; Lilia Zhurakhovska
  6. Incentives and Information as Driving Forces of Default Effects By Altmann, Steffen; Falk, Armin; Grunewald, Andreas
  7. Entitlement in a Real Effort Ultimatum Game By Michael D. Carr; Phil Mellizo
  8. Biases and Implicit Knowledge By Cunningham, Thomas
  9. Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers By Shawn Cole; Martin Kanz; Leora Klapper
  10. Foundations for Cooperation in the Prisoners’ Dilemma By Brendan Daley; Philipp Sadowski

  1. By: Martin Browning (Dept. of Economics, University of Oxford); Lars Gårn Hansen (Department of Food and Resource Economics, University of Copenhagen); Sinne Smed (Department of Food and Resource Economics, University of Copenhagen)
    Abstract: We investigate differences in how consumers of …fish react to health information in the mass media. We specify a dynamic empirical model that allows for heterogeneity in all basic parameters of consumer behavior as well as in how consumers react to information. We estimate the model using a unique houshold panel tracking consumption, prices, news stories and media habits over 24 quarters. We fi…nd that the consumers most likely to be rationally ignorant of health effects react more dramatically to health news than the consumers who most likely are well informed.
    Keywords: health information, consumer behaviour, pervasive heterogeneity
    JEL: D1 C5
    Date: 2013–09
  2. By: Duncan Gilchrist (Harvard University); Michael Luca (Harvard Business School, Negotiation, Organizations & Markets Unit); Deepak Malhotra (Harvard Business School, Negotiation, Organizations & Markets Unit)
    Abstract: Behavioral economists argue that above-market wages elicit reciprocity, causing employees to work harder - even in the absence of repeated interactions or strategic career concerns. In a field experiment with 266 employees, we show that paying above-market wages, per se, does not have an effect on effort. However, structuring a portion of the wage as a clear and unexpected gift (by hiring at a given wage, and then offering a raise with no further conditions after the employee has accepted the contract) does lead to persistently higher effort. Consistent with the idea that the recipient's interpretation of the wage as a gift is an important factor, we find that effects are strongest for employees with the most experience and those who have worked most recently - precisely the individuals who would recognize that this is a gift.
    Date: 2013–09
  3. By: Yoan Hermstrüwer (Max Planck Institute for Research on Collective Goods, Bonn); Stephan Dickert (Vienna University of Economics and Business, Institute for Marketing and Consumer Research)
    Abstract: Privacy law relies on the argument that consent does not entail any relevant impediments for the liberty of the consenting individual. Challenging this argument, we experimentally investigate whether consent to the publication of personal information in cyberspace entails self-coercion on a social norm level. Our results suggest that the monetary benefits from consent constitute a price that people are willing to accept for increased compliance with social norms. Providing people with a prior consent option is sufficient to generate chilling effects (i.e., a reduction of norm-deviant behavior). However, nudging people towards potential publicity does not increase the value they place on privacy. We also test how the default design of the right to deletion of personal information (right to be forgotten) affects chilling effects and privacy valuations. Surprisingly, the right to be forgotten does not reduce chilling effects. Moreover, individuals tend to stick with the status quo of permanent information storage.
    Keywords: Social Norms, Nudges, Behavioral Law and Economics of Privacy, Consent, Right to Be Forgotten, Dictator Games
    JEL: C93 C91 A13 D03 K29
    Date: 2013–08
  4. By: Sarah Jacobson (Williams College); Jason Delaney (School of Business Administration, Georgia Gwinnett College)
    Abstract: Some policy problems pit the interests of one group against those of another group. One group may, for example, determine the provision of a project (such as a power plant or a dam) that benefits group members but has downstream externalities that hurt people outside the group. We introduce a model of projects with such asymmetries. In-group members may contribute to a common fund that benefits them as a public good. In the model, benefits from the project may or may not vary within the group. Project provision has negative downstream externalities: common fund contributions hurt agents outside the in-group (“Outsiders”) rendering common fund contributions anti-social overall. Many models of social preferences predict that such externalities should reduce or eliminate project provision, although conditional cooperation or a preference for in-group members may counteract this effect. We test this model with a lab experiment. With homogeneous in-group benefits, the presence of negative downstream externalities reduces contribution levels by nearly half. We introduce a rotating high-return position that allows subjects to trade favors. Contributions diminish only slightly with the introduction of the negative externality and reciprocal giving occurs whether or not Outsiders are present.
    Keywords: public bad, public good, social preferences, reciprocity, externalities, in-group-out-group, parochial altruism
    JEL: C91 D01 D62 D71 H41 Q50
    Date: 2013–09
  5. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn); Lilia Zhurakhovska (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Punishees regularly ask for justification. But is justification also effective? To answer this question under controlled conditions, we have conducted a public goods experiment with central punishment. The authority is neutral – she does not benefit from contributions to the public good. Punishment is costly. Along with the punishment decisions the authority writes justifications for her decisions. In the Baseline, authorities are requested to justify punishment decisions, but the reasons are kept confidential. In the Private treatment, the addressee is only informed about the justification of the authority’s decision affecting herself, not affecting others. In the Public treatment, all reasons are made public. Whenever reasons are communicated, there is less monetary punishment. Authorities partly substitute words for action. Contributions decay in later periods if the justification is only communicated to the addressee. In the remaining two treatments, contributions stabilize at a high level.
    Keywords: experiment, Public Good, justification, authority, central intervention
    JEL: H41 D63 C91 D62 D03 K14
    Date: 2013–08
  6. By: Altmann, Steffen (IZA); Falk, Armin (University of Bonn); Grunewald, Andreas (University of Bonn)
    Abstract: The behavioral relevance of non-binding default options is well established. While most research has focused on decision makers' responses to a given default, we argue that this individual decision making perspective is incomplete. Instead, a comprehensive understanding of the foundation of default effects requires taking account of the strategic interaction between default setters and decision makers. We provide a theoretical framework to analyze which default options arise in such interactions, and which defaults are more likely to affect behavior. The key drivers are the relative level of information of default setters and decision makers, and their alignment of interests. We show that default effects are more pronounced if interests of the default setter and decision makers are more closely aligned. Moreover, decision makers are more likely to follow default options the less they are privately informed about the relevant decision environment. In the second part of the paper we experimentally test the main predictions of the model. We report evidence that both the alignment of interests as well as the relative level of information are key determinants of default effects. An important policy relevant conclusion is that potential distortions arising from default options are unlikely if decision makers are either well-informed or reflect on the interests of default setters.
    Keywords: default options, libertarian paternalism, behavioral economics, incentives, laboratory experiment
    JEL: D03 D18 D83 C92
    Date: 2013–09
  7. By: Michael D. Carr; Phil Mellizo
    Abstract: Data from lab experiments support the claim that individuals have social preferences. Most models of social preferences, however, consider only the distribution of outcomes, not the source of the endowment used in the game. Once the source is considered, outcomes in the ultimatum game are more difficult to interpret. We extend the ultimatum game to allow for responder-produced endowments. We find that offers increase when the responder produces the endowment, but rejection rates are lower. Further, offers remain below 100% of the endowment, suggesting that unproductive proposers feel entitled to a part of the endowment, and responders respect this right.
    JEL: C91 D30 D63
    Date: 2013–09
  8. By: Cunningham, Thomas
    Abstract: A common explanation for biases in judgment and choice has been to postulate two separate processes in the brain: a “System 1” that generates judgments automatically, but using only a subset of the information available, and a “System 2” that uses the entire information set, but is only occasionally activated. This theory faces two important problems: that inconsistent judgments often persist even with high incentives, and that inconsistencies often disappear in within-subject studies. In this paper I argue that these behaviors are due to the existence of “implicit knowledge”, in the sense that our automatic judgments (System 1) incorporate information which is not directly available to our reflective system (System 2). System 2 therefore faces a signal extraction problem, and information will not always be efficiently aggregated. The model predicts that biases will exist whenever there is an interaction between the information private to System 1 and that private to System 2. Additionally it can explain other puzzling features of judgment: that judgments become consistent when they are made jointly, that biases diminish with experience, and that people are bad at predicting their own future judgments. Because System 1 and System 2 have perfectly aligned preferences, welfare is well-defined in this model, and it allows for a precise treatment of eliciting preferences in the presence of framing effects.
    Keywords: biases, implicit knowledge, dual systems
    JEL: D11 D81
    Date: 2013–09–29
  9. By: Shawn Cole; Martin Kanz; Leora Klapper
    Abstract: We use an experiment with commercial bank loan officers to test how performance based compensation affects risk-assessment and lending. High-powered incentives lead to greater screening effort and more profitable lending decisions. This effect, however, is muted by deferred compensation and limited liability, two standard features of loan officer incentive contracts. We find that career concerns and personality traits affect screening behavior, but show that the response to monetary incentives does not vary with traits such as risk-aversion, optimism or overconfidence. Finally, we present evidence that incentive contracts distort the assessment of credit risk, even among trained professionals with many years of experience. Loans evaluated under permissive incentives are rated significantly less risky than the same loans evaluated under pay-for-performance.
    JEL: D03 G21 J33
    Date: 2013–09
  10. By: Brendan Daley; Philipp Sadowski
    Abstract: We provide axiomatic foundations for a simple model of play in the prisoners’ dilemma. The model accommodates cooperation and suggests that players behave as if their expectations about their opponents’ behavior vary with their own choice. We refer to this nonstandard updating as magical thinking. The degree to which players exhibit magical thinking may be heterogeneous in the population and is captured by a uniquely identified parameter for each player. Further, it is as if all players perceive these parameters to be i.i.d. draws from a common distribution. The model’s identification allows for tractable comparative statics.
    Keywords: Prisoners’ dilemma, magical thinking, cooperation
    JEL: C7 D8
    Date: 2013

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