nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2014‒08‒09
ten papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale “Amedeo Avogadro”

  1. Performance Appraisals and Job Satisfaction By Patrick Kampkötter
  2. Social Risk - the Role of Warmth and Competence By Jeffrey V. Butler; Joshua B. Miller
  3. Investment Decisions: Are we fully-Rational? By Pereira Reichhardt, Joaquín; Iqbal, Tabassum
  4. Behavioral Dimensions of Contests By Sheremeta, Roman
  5. Adolescents, Cognitive Ability, and Minimax Play By Shachat, Jason; Geng, Sen; Peng, Yujia; Zhong, Huizhen
  6. Does the letter matter (and for everyone)? Quasi-experimental evidence on the effects of home invitation on mammography uptake By Carrieri, V.;; Wuebker, A.;
  7. Forecast Error Information and Heterogeneous Expectations in Learning-to-Forecast Experiments By Luba Petersen
  8. Is response time predictive of choice? An experimental study of threshold strategies By Schotter, Andrew; Trevino, Isabel
  9. Cash versus debit card: the role of budget control By Lola Hernandez; Nicole Jonker; Anneke Kosse
  10. Anchoring or Loss Aversion? Empirical Evidence from Art Auctions By Mike Moses; Rachel Pownall

  1. By: Patrick Kampkötter
    Abstract: Formal performance appraisals (PA) are one of the most important human resource management practices in companies. In this paper, we focus on the reaction of employees to these performance assessments. In particular, we investigate the effect between the incidence of being formally evaluated by a supervisor and job and income satisfaction. Building on a representative, longitudinal sample of more than 12,000 individuals from the German Socio-Economic Panel Study (SOEP), we apply fixed effects regressions and find a significantly positive effect of PA on job satisfaction, which is driven by appraisals that are linked to monetary outcomes. Furthermore, the moderating effects of personality traits (Big Five, locus of control) on the relationship between PA and job satisfaction are explored. We find a negative interaction term between PA without any monetary consequences and both employees scoring high on openness to experience and internal locus of control. This suggests that for these employees appraisals, which induce performance monitoring without any monetary consequences, have a detrimental effect on job satisfaction rates.
    Keywords: Performance Appraisal; Job Satisfaction; Income Satisfaction; Big Five; Locus of Control; SOEP
    Date: 2014
  2. By: Jeffrey V. Butler (EIEF); Joshua B. Miller (Università Bocconi and IGIER)
    Abstract: Previous research has documented a behavioral distinction between "social risk" and financial risk. For example, individuals tend to demand a premium on the objective probability of a favorable outcome when that outcome is determined by a human being instead of a randomizing device (Bohnet, Greig, Herrmann, and Zeckhauser 2008; Bohnet and Zeckhauser 2004). In this paper we ask whether social risk is always aversive, answering in the negative and identifying factors that can eliminate, or even change the sign of, the social risk premium. Motivated by the stereotype content model from the social psychology literature, which we argue has straightforward predictions for situations involving social risk (Fiske, Cuddy, and Glick 2007), we focus on two factors: "warmth," synonymous with intent, and "competence." We investigate these factors using a between-subjects experimental design that implements slight modifications of the binary trust game of Bohnet and Zeckhauser across treatments. Our results indicate that having risk generated by another human being does not, on its own, lead to a social risk premium. Instead, we find that a positive risk premium is demanded when a counter-party has interests confl icting with one's own (low warmth) and, additionally, is competent. We find a negative social risk premium - i.e., social risk seeking - when the counter-party has contrary interests but lacks competence.
    Date: 2014
  3. By: Pereira Reichhardt, Joaquín; Iqbal, Tabassum
    Abstract: The purpose of this paper is to understand the reasons behind financial market behavior that often does not match that proposed by classic finance models. In particular, this work tests the fully-rational agents assumption made by classic finance to explain investment decisions under uncertainty. Many issues claim for a better alternative explanation to classic finance, regarding how and why of the financial market behavior changes. Among these issues, we may highlight: housing bubbles, financial crisis, excess of volatility, high heterogeneity in analyst forecasts, and a large amount of speculators looking for the “holy grail” to profit from the market. In order to answer the question, this paper has selected the most salient financial market anomalies, such as, the Closed-end fund mispricing and the Excess Volatility in stock markets. The purpose is to test by a thorough review of empirical works existent in the literature the assumption of fully-rationality in investment decisions. Subsequently, it goes deeper into trying to understand the way people – and investors – make decisions under uncertainty. A relevant and very popular bias is Overconfidence which is deeply analyzed, as well as the highly observed tendency among traders to let losing positions run while cutting winners too early (the Disposition Effect). For the latter, this study provides support on the theory of prospects and the Mental Accounting bias. Finally, the research focuses on unconscious mental strategies that people use to evaluate the likelihood of events, as well as the value of assets in a quick and low-cost way: Availability and Anchoring heuristics. The main findings of this research are that a) Markets are not efficient always; b) People are quasi-rational; hence the assumption of full-rationality is not realistic to interpret and forecast financial markets; and c) There is a deep ocean of cognitive factors in every individual and most of the time those are present in financial decision making, thus affecting the optimal output of their estimations and solutions to problems under uncertainty.
    Keywords: Behavioral finance, market anomalies, loss aversion, heuristics, biases
    JEL: G11 G12 G15
    Date: 2014–07–30
  4. By: Sheremeta, Roman
    Abstract: The standard theoretical description of rent-seeking contests is that of rational individuals or groups engaging in socially inefficient behavior by exerting costly effort. Experimental studies find that the actual efforts of participants are significantly higher than predicted in the models based on rational behavior and that over-dissipation of rents (or overbidding or over-expenditure of resources) can occur. Although over-dissipation cannot be explained by the standard rational-behavior theory, it can be explained by incorporating behavioral dimensions into the standard model, such as (1) the utility of winning, (2) relative payoff maximization, (3) bounded rationality, and (4) judgmental biases. These explanations are not exhaustive but provide a coherent picture of important behavioral dimensions to be considered when studying rent-seeking behavior in theory and in practice.
    Keywords: rent-seeking, contests, experiments, overbidding, over-dissipation
    JEL: C72 C91 C92 D72 D74
    Date: 2014–08–04
  5. By: Shachat, Jason; Geng, Sen; Peng, Yujia; Zhong, Huizhen
    Abstract: We conduct experiments with adolescent participants on repeated fixed play in three different zero-sum games which have mixed strategy minimax solutions. Further, we collect subject information on cognitive abilities and participation rates in competitive activities. We find the adolescents' correspondences with and deviations from minimax play largely consistent with previously and widely studied adult populations. Further, we find strategic sophistication in terms of implementation of the mixed minimax strategy as well as earnings are not correlated with cognitive ability nor previous experience in competitive situations.
    Keywords: Minimax; experimental game; adolescent; cognitive abilities
    JEL: C72 C93 D03
    Date: 2014–08–01
  6. By: Carrieri, V.;; Wuebker, A.;
    Abstract: We exploit regional variation in the availability of breast cancer screening policies and variations in age eligibility criteria across European regions to estimate the causal effect of home invitation on mammography uptake. We link administrative public data about regional breast cancer screening policies from various sources to individual Survey of Health Ageing and Retirement in Europe (SHARE) data. We find that home invitation increases mammography uptakes by around 24 percentage points. At the same time, we find that home invitation reduces education-related inequalities but increases gradient in the use related to cognitive functions. In addition, significant effects on mammography use are found only when at least 50 per cent of the population is reached by the home invitation. Our results suggest that an exogenous informational shock significantly affects preventive decisions especially among less informed individuals but the effectiveness of the informational shock is strongly reduced for women who are less able to process information.
    Keywords: home invitation; preventive health care; quasi-experiment;
    JEL: C10 I11 I14 I18
    Date: 2014–07
  7. By: Luba Petersen (Simon Fraser University)
    Abstract: This paper explores the importance of accessible and focal information in influencing beliefs and attention in a learning-to-forecast laboratory experiment where subjects are incentivized to form accurate expectations about inflation and the output gap. We consider the effects of salient and accessible forecast error information and learning on subjects' forecasting accuracy and heuristics, and on aggregate stability. Experimental evidence indicates that, while there is considerable heterogeneity in heuristics used, subjects' forecasts can be best described by a constant-gain learning model where subjects respond to forecast errors. Salient forecast error information reduces subjects' overreaction to their errors and leads to greater forecast accuracy, coordination of expectations and macroeconomic stability. The benefits of this focal information are short-lived and diminish with learning.
    Keywords: experimental macroeconomics, laboratory experiment, monetary policy, expectations, learning to forecast, availability heuristic, focal points, communication, rational inattention
    JEL: C92 E2 E52 D50 D91
    Date: 2014–07
  8. By: Schotter, Andrew; Trevino, Isabel
    Abstract: This paper investigates the usefulness of non-choice data, namely response times, as a predictor of threshold behavior in a simple global game experiment. Our results indicate that the signal associated to the highest or second highest response time at the beginning of the experiment are both unbiased estimates of the threshold employed by subjects at the end of the experiment. This predictive ability is lost when we move to the third or higher response times. Moreover, the response time predictions are better predictors of observed behavior than the equilibrium predictions of the game. They are also robust, in the sense that they characterize behavior in an out-of-treatment exercise where we use the strategy method to elicit thresholds. This paper is the first to point out the predictive power of response times in a strategic situation. --
    Keywords: response time,threshold strategies,global games
    JEL: C71 C9 D03 D89
    Date: 2014
  9. By: Lola Hernandez; Nicole Jonker; Anneke Kosse
    Abstract: Due to the financial crisis, an increasing number of households face financial problems. This may lead to an increasing need for monitoring spending and budgets. We demonstrate that both cash and the debit card are perceived as helpful in this respect. We show that, on average, consumers responsible for the financial decision making within a household find the debit card more useful for monitoring their household finances than cash. Individuals differ in major respects, however. In particular, low earners and the liquidity-constrained prefer cash as a monitoring and budgeting tool. Finally, we present evidence that at an aggregated level, such preferences strongly affect consumer payment behaviour. We suggest that the substitution of cash by cards may slow down because of the financial crisis. Also, we show that cash still brings benefits that electronic alternatives have been unable to match. This suggests that inclusion of enhanced budgeting and monitoring features in electronic payment instruments may encourage consumers to use them more frequently.
    Keywords: payment surveys; cash; debit card; consumer choice; budgeting; financial distress; self-control
    JEL: C81 D12 D14 E41 G21
    Date: 2014–07
  10. By: Mike Moses (Beautiful Asset Advisors, LLC); Rachel Pownall (Maastricht University and Tilberg University)
    Abstract: We find evidence for the behavioral biases of anchoring and loss aversion. We find that anchoring is more important for items that are resold quickly, and we find that the effect of loss aversion increases with the time that a painting is held. The evidence in favor of anchoring and loss aversion with this large dataset validates previous results and adds to the empirical evidence a finding of increasing loss aversion with the length a painting is held. We do not find evidence that investors can take advantage of these behavioral biases.
    Keywords: anchoring, loss aversion, endowment effect, art auctions
    JEL: D03 D44 Z11
    Date: 2014–06

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