nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2013‒11‒29
nineteen papers chosen by
Marco Novarese
University Amedeo Avogadro

  1. Risking Other People’s Money: Experimental Evidence on Bonus Schemes, Competition, and Altruism By Andersson, Ola; Holm, Håkan J.; Tyran, Jean-Robert; Wengström, Erik
  2. Is Underconfidence Favored over Overconfidence? An Experiment on the Perception of a Biased Self-Assessment By Thoma, Carmen
  3. The roles of level-k and team reasoning in solving coordination games By Marco Faillo; Alessandra Smerilli; Robert Sugden
  4. Do women self-select as good borrowers? By Irene Comeig; Ainhoa Jaramillo-Gutiérrez; Federico Ramírez
  5. Non-binding Defaults and Voluntary Contributions to a Public Good - Clean Evidence from a Natural Field Experiment By Felix Ebeling
  6. The Power of Stereotyping and Confirmation Bias to Overwhelm Accurate Assessment: The Case of Economics, Gender, and Risk Aversion By Julie A. Nelson
  7. Conflicted Emotions Following Trust-based Interaction By Eric Schniter; Roman M. Sheremeta; Timothy W. Shields
  8. The Value of Familiarity: Effects of Experience, Knowledge and Signals on Willingness to Pay for a Public Good By Jacob Lariviere; Mikołaj Czajkowski; Nick Hanley; Margrethe Aanesen; Jannike Falk-Petersen; Dugald Tinch
  9. Eliciting Private Information with Noise: The Case of Randomized Response By Andreas Blume; Ernest K. Lai; Wooyoung Lim
  10. CAN HIGHER REWARDS LEAD TO LESS EFFORT? INCENTIVE REVERSAL IN TEAMS By Esteban Klor; Sebastian Kube; Eyal Winter; Ro'i Zultan
  11. Hidden Skewness: On the Difficulty of Multiplicative Compounding under Random Shocks By Ludwig Ensthaler; Olga Nottmeyer; Georg Weizsäcker; Christian Zankiewicz
  12. A new solution for the moral hazard problem in team production By Guillen, Pablo; Merrett, Danielle; Slonim, Robert
  13. Exploring the Meaning of Significance in Experimental Economics By Andreas Ortman; Le Zhang
  14. The contractor game: a theoretical and experimental analysis By Nejat Anbarci; Nick Feltovich; Mehmet Y. Gurdal
  15. Net-Loss Reciprocation and the Context Dependency of Economic Choices By König, Clemens
  16. Cognitive stimulation of individual creativity in a group context: mediated and face-to-face idea sharing By Sergey Yagolkovskiy
  17. Big five personality traits and academic performance in Russian universities By John Nye; Ekaterina Orel; Ekaterina Kochergina
  18. Fostering and Measuring Skills: Interventions That Improve Character and Cognition By Heckman, James J.; Kautz, Tim
  19. The Role of Bounded Rationality in Macro-Finance Affine Term-Structure Models By Tack Yun; Eunmi Ko; Jinsook Kim

  1. By: Andersson, Ola (Research Institute of Industrial Economics (IFN)); Holm, Håkan J. (Lund University); Tyran, Jean-Robert (University of Vienna); Wengström, Erik (Lund University)
    Abstract: We study risk taking on behalf of others in an experiment on a large random sample. The decision makers in our experiment are facing high-powered incentives to increase the risk on behalf of others through hedged compensation contracts or with tournament incentives. Compared to a baseline condition without such incentives, we find that the decision makers respond strongly to these incentives that result in an increased risk exposure of others. However, we find that the increase in risk taking is mitigated by altruistic preferences and pro-social personality traits.
    Keywords: Incentives; Competition; Hedging; Risk taking; Social preferences
    JEL: C72 C90 D30 D81
    Date: 2013–11–19
  2. By: Thoma, Carmen
    Abstract: This paper reports findings of a laboratory experiment, which explores how elfassessment regarding the own relative performance is perceived by others. In particular, I investigate whether overconfident subjects or underconfident subjects are considered as more likable by others, and who of the two is expected to achieve a higher performance in a real effort task. I observe that underconfidence beats overconfidence in both respects. Underconfident subjects are rewarded significantly more often than overconfident subjects, and are significantly more often expected to win the competitive real-effort task. It seems as if subjects being less convinced of their performance are taken as more congenial and are expected to be more ambitious to improve, whereas overconfident subjects are rather expected to rest on their high beliefs. While subjects do not anticipate the stronger performance signal of underconfidence, they anticipate its higher sympathy value. The comparison to a non-strategic setting shows that men strategically deflate their self-assessment to be rewarded by others. Women, in contrast, either do not deflate their self-assessment or do so even in non-strategic situations, a behavior that might be driven by nonmonetary image concerns of women.
    Keywords: Self-confidence; Overconfidence; Experiment
    JEL: C91 D03 J16
    Date: 2013–11–19
  3. By: Marco Faillo; Alessandra Smerilli; Robert Sugden
    Abstract: Level-k and team reasoning theories, among others, have been used to explain experimental evidence on coordination games. Both theories succeed in explaining some results and both fail in explaining other results. Sometimes it is impossible to discriminate between them. For this reason we propose an experiment with pie games, similar to the ones used by Crawford et al. (2008). We observe subjects playing a series of coordination games, with different configurations of equality and Pareto-dominance, for which it is possible to provide clear predictions derived from both team reasoning and a particular cognitive hierarchy model: level-k theory. In line with previous experimental results, we find that each theory fails to predict observed behaviour in some games. However, because of the design of our experiment, we can go deeper into the matter. Our results show that Pareto dominance, fairness and uniqueness are good predictors for coordination choices. Secondly, we find mixed evidence about level-k and team reasoning theories. In particular team reasoning theory fails to predict choices when they picks out a solution which is Pareto dominated and not compensated by grater equality; Level-k theory fails in games in which it predicts the choice of one of not unique slices, and the unique choice is more equal than the alternative choices. This could represent a step forward to investigate the presence of team reasoning or level-k in coordinating behaviour
    Keywords: Coordination games, Focal points, Team reasoning, Level-k theory
    JEL: C72 C91 A13
    Date: 2013
  4. By: Irene Comeig (Department of Finance, U. of Virginia, USA & U. of Valencia, Spain); Ainhoa Jaramillo-Gutiérrez (LEE-Department of Economics, Universitat Jaume I-Castellón, ERICES-University of Valencia, Spain); Federico Ramírez (Department of Finance, University of Valencia, Spain)
    Abstract: A key question in credit markets is how to disclose borrowers’ private information. Typically, banks offer incentive compatible contracts (with collateral) to induce borrowers to disclose their private information. However, if men and women systematically differ in their risk taking behavior, contract choices in the self selection mechanism with collateral may differ. If women are particularly averse to financial risk, they may be classified as high risk borrowers thus not receiving the loan designed for the good borrowers, or even suffering credit rationing. In this paper, we conduct a laboratory experiment on financial decision making in three different European countries designed to study systematic gender differences in self selection. Our results show that incentive compatible contracts with collateral fail to disclose women private information, while they disclose men private information. Thus, low risk women borrowers do not self select as “theoretical” good borrowers. Beside this contribution, our results show that gender differences arise when subjects face low failure probabilities. We provide some suggestive evidence on differences in probability weighting between men and women.
    Keywords: adverse selection, behavioral finance, gender, credit screening, self-selection
    JEL: C91 D03 D82 G32
    Date: 2013
  5. By: Felix Ebeling
    Abstract: We conducted a large scale field experiment to test whether framing a voluntary contribution decision with different non-binding defaults affect people's behavior. On an electricity provider's website, we manipulated non-binding green energy defaults in electricity contract offers. The default was either green or non-green. Buying green is costly and protects the environment. Hence, it is a voluntary contribution to a public good. Our core results are: First, defaults have a strong effect on contributions. 69% of new customer buy green, when the default was green, but only 7% when the default was nongreen. Second, the fraction of website visitors signing an electricity contract is similar across treatments. Third, regional election results affect green energy choice of customers.
    Keywords: Framing, Defaults, Public Goods, Randomized Field Experiments
    JEL: D03 D12 Q4
    Date: 2013–11–20
  6. By: Julie A. Nelson
    Abstract: Behavioral research has revealed how normal human cognitive processes can tend to lead us astray. But do these affect economic researchers, ourselves? This article explores the consequences of stereotyping and confirmation bias using a sample of published articles from the economics literature on gender and risk aversion. The results demonstrate that the supposedly “robust†claim that “women are more risk averse than men†is far less empirically supported than has been claimed. The questions of how these cognitive biases arise and why they have such power are discussed, and methodological practices that may help to attenuate these biases are outlined.
    Keywords: stereotyping, bias, confirmation bias, gender, risk aversion, effect size, index of similarity
    JEL: D83 D03 D81 J16 B41 C9
    Date: 2013–11
  7. By: Eric Schniter (Economic Science Institute, Chapman University and Argyros School of Business and Economics, Chapman University); Roman M. Sheremeta (Economic Science Institute, Chapman University and Department of Economics, Weatherhead School of Management, Case Western Reserve University); Timothy W. Shields (Economic Science Institute, Chapman University and Argyros School of Business and Economics, Chapman University)
    Abstract: We investigated whether 20 emotional states, reported by 170 participants after participating in a Trust game, were experienced in a patterned way predicted by the “Recalibrational Model” or Valence Models. According to the Recalibrational Model, new information about trust-based interaction outcomes triggers specific sets of emotions. Unlike Valence Models that predict reports of large sets of either positive or negative emotional states, the Recalibrational Model predicts the possibility of conflicted (concurrent positive and negative) emotional states. Consistent with the Recalibrational Model, we observed reports of conflicted emotional states activated after interactions where trust was demonstrated but trustworthiness was not. We discuss the implications of having conflicted goals and conflicted emotional states for both scientific and well-being pursuits.
    Keywords: emotion, affect valence, recalibrational theory, Trust game, experiment
    JEL: C73 C91 D87
    Date: 2013
  8. By: Jacob Lariviere (Department of Economics and Baker Center for Public Policy, University of Tennessee); Mikołaj Czajkowski (Faculty of Economic Sciences, University of Warsaw); Nick Hanley (Division of Economics, University of Stirling); Margrethe Aanesen (Faculty of Biosciences, Fisheries and Economics, University of Tromso); Jannike Falk-Petersen (Faculty of Biosciences, Fisheries and Economics, University of Tromso); Dugald Tinch (Division of Economics, University of Stirling)
    Abstract: This paper compares how increases in experience versus increases in knowledge about a public good affect willingness to pay (WTP) for its provision. This is challenging because while consumers are often certain about their previous experiences with a good, they may be uncertain about the accuracy of their knowledge. We therefore design and conduct a field experiment in which treated subjects receive a precise and objective signal regarding their knowledge about a public good before estimating their WTP for it. Using data for two different public goods, we show qualitative equivalence of the effect of knowledge and experience on valuation for a public good. Surprisingly, though, we find that the causal effect of objective signals about the accuracy of a subject’s knowledge for a public good can dramatically affect their valuation for it: treatment causes an increase of $150-$200 in WTP for well-informed individuals. We find no such effect for less informed subjects. Our results imply that WTP estimates for public goods are not only a function of true information states of the respondents but beliefs about those information states.
    Keywords: Information, Beliefs, Field Experiment, Valuation, Uncertainty, Choice Experiment
    JEL: C93 Q51 D83
    Date: 2013
  9. By: Andreas Blume; Ernest K. Lai; Wooyoung Lim
    Abstract: The paper formalizes Warner's (1965) randomized response technique (RRT) as a game and implements it experimentally, thus linking game theoretic approaches to randomness in communication with survey practice in the field and a novel implementation in the lab. As predicted by our model and in line with Warner, the frequency of truthful responses is significantly higher with randomization than without. The model predicts that randomization weakly improves information elicitation, as measured in terms of mutual information, although, surprisingly, not always by RRT inducing truth-telling. Contrary to this prediction, randomization significantly reduces the elicited information in our experiment.
    Keywords: Randomized Response, Lying Aversion, Stigmatization Aversion, Mutual Information, Laboratory Experiments
    JEL: C72 C92 D82 D83
    Date: 2013–07
  10. By: Esteban Klor; Sebastian Kube; Eyal Winter; Ro'i Zultan (BGU)
    Abstract: Conventional wisdom suggests that a global increase in monetary rewards should induce agents to exert higher effort. In this paper we demonstrate that this may not hold in team settings. In the context of sequential team production with positive externalities between agents, incentive reversal might occur: an increase in monetary rewards (either because bonuses increase or effort costs decrease) may lead agents to exert lower effort in the completion of a joint task — even if agents are fully rational, self-centered money maximizers. Herein we discuss this seemingly paradoxical phenomenon and report on two experiments that provide supportive evidence.
    Keywords: Incentives, Incentive Reversal, Team Production, Externalities, Laboratory Experiments, Personnel Economics.
    JEL: C92 D23 J31 J33 J41 M12 M52
    Date: 2013
  11. By: Ludwig Ensthaler; Olga Nottmeyer; Georg Weizsäcker; Christian Zankiewicz
    Abstract: Multiplicative growth processes that are subject to random shocks often have a skewed distribution of outcomes. In a number of incentivized laboratory experiments we show that a large majority of participants either strongly underestimate skewness or ignore it completely. Participants misperceive the outcome distribution's spread to be far too narrow-band and they estimate the median to lie too close to the distribution's center. The observed bias in expectations is irrespective to risk preferences and fairly robust to feedback. It is consistent with a behavioral model in which geometric growth is confused with linear growth. The misperception is a possible explanation of investors' difficulties with real-world financial products like leveraged ETFs.
    Keywords: Behavioral economics, irrational expectations, binomial tree
    JEL: C91 D03 D14 G02
    Date: 2013
  12. By: Guillen, Pablo; Merrett, Danielle; Slonim, Robert
    Abstract: We propose an intergroup competition scheme (ICS) to theoretically solve free-riding in team production and provide experimental evidence from a voluntary contribution mechanism (VCM) public goods game. The ICS includes an internal transfer payment from the lowest to highest contributing team proportional to the difference in group contributions. The ICS requires minimal information, makes the efficient contribution a dominant strategy and is budget balanced. These features make the ICS ideally suited to solve the moral hazard problem in team production. Our experiment demonstrates that the ICS raises contributions to almost reach optimality with appropriate parameters. We also show experimentally that the success of the ICS can be primarily attributed to the effect of higher returns and to the introduction of competition, and is not due to the introduction of potential losses or information regarding other groups.
    Keywords: economic experiments; voluntary contributions mechanism; intergroup competition; public goods; free riding; moral hazard; team production
    Date: 2013–11
  13. By: Andreas Ortman (School of Economics, Australian School of Business, the University of New South Wales); Le Zhang (School of Banking and Finance, Australian School of Business, the University of New South Wales)
    Abstract: Null Hypothesis Significance Testing has been widely used in the experimental economics literature. Typically, attention is restricted to type-I-errors. We demonstrate that not taking type-II errors into account is problematic. We also provide evidence, for one prominent area in experimental economics (dictator game experiments), that most studies are severely underpowered, suggesting that their findings are questionable. We then illustrate with several examples how poor (no) power planning can lead to questionable results.
    Keywords: Null Hypothesis Significance Testing, Type-I-errors, Type-II errors, Significance level, Statistical power
    JEL: A10 B23 C12
    Date: 2013–11
  14. By: Nejat Anbarci; Nick Feltovich; Mehmet Y. Gurdal
    Abstract: We introduce the contractor game , related to the ultimatum game (UG). The proposer makes an offer , and simultaneously sends a cheap talk message , indicating (possibly falsely) the amount of the offer. The responder observes the message with certainty and the offer with probability p before accepting or rejecting the offer. We theoretically examine versions with p = 0 and p = 0.5 along with the UG, played by some standard economic agents and others who are averse to inequity, lies and lying. The equilibria yield intuitive predictions, which are supported by our experimental results. Offers are higher when they might be seen by the responder. Messages over–state offers, but less so when the offer might be seen. Responders are more likely to accept an unseen offer if it might have been seen. When offers are seen, responders reward truthful messages, rather than punishing lies, compared to when no message is sent.
    Keywords: ultimatum game, messages, lies, truth–telling, other–regarding behaviour
    JEL: C72 C78 D82
    Date: 2013–11–20
  15. By: König, Clemens
    Abstract: This paper proposes a novel explanation for the context dependency of individual choices in two-player games. Context dependency refers to the well-established phenomenon that a player, when choosing from a given opportunity set created by the other player’s strategy, chooses differently in different situations because of different alternatives to the other player’s strategy. The utility model used to explain this kind of context dependency incorporates a preference for net-loss reciprocation. Net-loss reciprocation means that a player’s willingness to impose a net loss (i.e., loss minus gain) on the other player increases in the net loss that he or she derives from the other player’s strategy. I show that net-loss reciprocation together with the method for calculating net losses developed in this paper explains the context dependencies in individual behaviour that have been documented in a number of experimental studies, whereas existing models of intention-based reciprocity fail to explain all the evidence.
    Keywords: Reciprocity; Fairness; Experimental economics; Game theory; Loss aversion
    JEL: C70 C91 D63 D64
    Date: 2013–11–17
  16. By: Sergey Yagolkovskiy (National Research University Higher School of Economics. Department of general and experimental psychology, Associate professor)
    Abstract: We examine how idea exposure produces cognitive stimulation. Study participants were given stimulus ideas with a low or high level of originality, or with absurd content. Stimuli were exposed in conditions of face-to-face communication and with computer and paper mediation, respectively. Three parameters of creativity were analyzed: Fluency, flexibility, and originality. Results revealed a positive effect on fluency scores for face-to-face communication. This effect is the most evident for the exposure of absurd stimulus ideas. We also found a positive effect on originality scores for highly original stimulus ideas
    Keywords: creativity, brainstorming, idea sharing, cognitive stimulation, group creativity, electronic brainstorming
    JEL: Z
    Date: 2013
  17. By: John Nye (George Mason University and National Research University – Higher School of Economics, Moscow, academic advisor of International Laboratory for Institutional Analysis of Economic Reforms.); Ekaterina Orel (National Research University-Higher School of Economics, Moscow, research fellow in International Laboratory for Institutional Analysis of Economic Reforms.); Ekaterina Kochergina (National Research University – Higher School of Economics, Moscow, research assistant in International Laboratory for Institutional Analysis of Economic Reforms.)
    Abstract: We study which Big Five personality traits are associated with academic performance among a sample of Russian university students using results from the Unified State Examination (for university admissions) and their current grade point averages as measures of academic performance. We find that Introversion, Agreeableness, Neuroticism, and Openness to experience have observable ties to academic performance. Those results partially confirm existing international studies, but our findings are notable for the relative unimportance of conscientiousness for success in our Russian sample. We suggest that cross-cultural differences in educational environment may explain why this trait seems less obviously important in the analysis
    Keywords: personality traits, academic success, psychology of education, Big Five, academic performance measurement.
    JEL: Z I23
    Date: 2013
  18. By: Heckman, James J. (University of Chicago); Kautz, Tim (University of Chicago)
    Abstract: This paper reviews the recent literature on measuring and boosting cognitive and noncognitive skills. The literature establishes that achievement tests do not adequately capture character skills – personality traits, goals, motivations, and preferences that are valued in the labor market, in school, and in many other domains. Their predictive power rivals that of cognitive skills. Reliable measures of character have been developed. All measures of character and cognition are measures of performance on some task. In order to reliably estimate skills from tasks, it is necessary to standardize for incentives, effort, and other skills when measuring any particular skill. Character is a skill, not a trait. At any age, character skills are stable across different tasks, but skills can change over the life cycle. Character is shaped by families, schools, and social environments. Skill development is a dynamic process, in which the early years lay the foundation for successful investment in later years. High-quality early childhood and elementary school programs improve character skills in a lasting and cost-effective way. Many of them beneficially affect later-life outcomes without improving cognition. There are fewer long-term evaluations of adolescent interventions, but workplace-based programs that teach character skills are promising. The common feature of successful interventions across all stages of the life cycle through adulthood is that they promote attachment and provide a secure base for exploration and learning for the child. Successful interventions emulate the mentoring environments offered by successful families.
    Keywords: character, achievement tests, skill development, interventions
    JEL: D01 I20 J24
    Date: 2013–11
  19. By: Tack Yun (Seoul National University); Eunmi Ko (Seoul National University); Jinsook Kim (Seoul National University)
    Abstract: Our goal in this paper is two-fold. First, we develop a class of term structure models that allow for the role of bounded rationality by incorporating either information-processing constraint or fear for mis-specification into affine term structure models. We indentify a set of sufficient conditions to generate the observational equivalence between affine term-structure models with rational inattention and a fear for model misspecification. The presence of bounded rationality creates a new additional factor that is not spanned by conventional factors such as level, slope, and curvature factors. Second, our empirical results indicate that substantial amounts of information capacity constraint and robustness preference for model misspecification are needed to explain the observed behavior of yields.
    Date: 2013

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