nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2014‒08‒20
eleven papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale “Amedeo Avogadro”

  1. Providing global public goods: Electoral delegation and cooperation By Martin G. Kocher; Fanagfang Tan; Jing Yu
  2. Psychological Incentives, Financial Incentives, and Risk Attitudes in Tournaments: An Artefactual Field Experiment By C. Bram Cadsby; Jim Engle-Warnick; Tony Fang; Fei Song
  3. Keep Up With the Winners: Experimental Evidence on Risk Taking, Asset Integration, and Peer Effects By Marcel Fafchamps; Bereket Kebede; Daniel John Zizzo
  4. Does More Detailed Information Mean Better Performance? An Experiment in Information Explicitness By Zilu Shang; Chris Brooks; Rachel McCloy
  5. Not-So-Strong Evidence for Gender Differences in Risk Taking By Julie A. Nelson
  6. Efficiency and Fairness in Revenue Sharing Contracts By Alexandros Karakostas; Axel Sonntag; Daniel John Zizzo
  7. Indifference Bands for Route Switching By Xuan Di; Henry X. Liu; Shanjiang Zhu; David Levinson
  8. Understanding Fear of Failure in Entrepreneurship: A Cognitive Process Framework By James Hayton; Gabriella Cacciotti; Andreas Giazitzoglu; J. Robert Mitchell; Chris Ainge
  9. Altruism, Anticipation, and Gender By Subhasish M. Chowdhury; Joo Young Jeon
  10. The psychology and economics of reverse mortgage attitudes: evidence from the Netherlands By Rik Dillingh; Henriette Prast; Maria Cristina Rossi; Maria Cesira Urzì Brancati
  11. "The Agricultural Origins of Time Preference" By Oded Galor; Omer Ozak

  1. By: Martin G. Kocher; Fanagfang Tan; Jing Yu
    Abstract: This paper experimentally examines the effect of electoral delegation on providing global public goods shared by several groups. Each group elects a delegate who can freely decide on each group member's contribution (including the contribution of herself) to the global public good. Our results show that people mostly vote for delegates who assign equal contributions for every group member. However, in contrast to standard theoretical predictions, unequal contributions across groups drive cooperation down over time, and it decreases efficiency by almost 50% compared to the benchmark. This pattern is not driven by delegates trying to exploit their fellow group members, as indicated by the theory - quite to the opposite, other-regarding preferences and a re-election incentives guarantee that delegates assign equal contributions for all group members. Since the source of the resulting inefficiency is the polycentric nature of global public goods provision together with other-regarding preferences, we use the term P-inefficiency to describe our finding.
    Keywords: Global Public Goods, Delegation, Cooperation, Experiment
    JEL: C92 D72 H41
    Date: 2014–08–01
  2. By: C. Bram Cadsby (Department of Economics and Finance, University of Guelph); Jim Engle-Warnick (McGill University); Tony Fang (Monash University); Fei Song (Ryerson University)
    Abstract: Tournaments are widely used to assign bonuses and determine promotions. Tournament-based compensation is motivating because of the link between relative performance and financial rewards. However, performing relatively well (poorly) may also yield psychological benefits (pain). This may also stimulate effort. Through a real-effort artefactual field experiment with factory workers in China, we examine how both psychological and financial incentives, together with attitudes toward risk, may influence motivation and performance. For comparison purposes, Chinese undergraduate students also participated in a comparable laboratory experiment. We provided performance-ranking information both privately and publicly, with and without rank based financial incentives. Our results show that performance-ranking information had a significant motivational effect on average performance for students, but not for workers. Adding financial incentives based on rank provided little evidence of further improvements. Much of the difference between workers and students can be explained by differences in attitudes toward risk. Indeed, for both groups the size of both financial and psychological incentive effects is inversely related to individual levels of risk aversion, and is positive and significant both for workers and for students who are sufficiently risk-tolerant. Lastly, performance did not deteriorate when incentives were removed, suggesting that they worked through the encouragement of learning.
    Keywords: incentives, social comparison, performance feedback, peer pressure, tournament, risk aversion, artefactual field experiment
    JEL: C91
    Date: 2014
  3. By: Marcel Fafchamps (University of Oxford); Bereket Kebede (University of East Anglia); Daniel John Zizzo (University of East Anglia)
    Abstract: The paper reports the result of an experimental game on asset integration and risk taking. We find evidence that winnings in earlier rounds affect risk taking in subsequent rounds, but no evidence that real life wealth outside the experiment affects risk taking. We and some evidence of imitation of the risk taking behavior of others that is distinct from learning. Controlling for past winnings, participants who receive a low endowment in a round engage in more risk taking. We also test a keeping-up-with-the-Joneses hypothesis and find some evidence that subjects seek to keep up with winners. Taken together, the evidence is consistent with risk taking tracking a reference point that is affected by social comparisons.
    Date: 2014
  4. By: Zilu Shang (ICMA Centre, Henley Business School, University of Reading); Chris Brooks (ICMA Centre, Henley Business School, University of Reading); Rachel McCloy (University of Reading)
    Abstract: Investors are now able to analyse more noise-free news to inform their trading decisions than ever before. Their expectation that more information means better performance is not supported by previous psychological experiments which argue that too much information actually impairs performance. To test whether more information always means better performance in the stock markets, an experiment is conducted based on a trading simulation manipulated from a real market-shock. The results indicate that the explicitness of information neither improves nor impairs participants’ performance effectiveness from the perspectives of returns, share and cash positions, and trading volumes. However, participants’ performance efficiency is significantly affected by information explicitness. Although they need less time to implement their decisions when placing an order, explicitly informed investors are punished by making more mistakes.
    Keywords: explicitness of information, performance effectiveness, performance efficiency, individual investors, experimental finance
    JEL: C91 D82 G02
    Date: 2013–06
  5. By: Julie A. Nelson
    Keywords: cognitive schema, fear, gender, risk aversion, stereotypes
    Date: 2013–09
  6. By: Alexandros Karakostas (Coventry University); Axel Sonntag (University of East Anglia); Daniel John Zizzo (University of East Anglia)
    Abstract: If principals are allowed to choose between a revenue sharing, a bonus and a trust contract, a large majority of experimental subjects choose the revenue sharing contract. We find that this choice is the most efficient while at the same time being fair in the Paretian sense that on average agents are not worse off than in the other contracts. Furthermore, the distribution of earnings is only mildly skewed towards the principal. We conclude that under revenue sharing contracts concerns for fairness can go in hand with the use of monetary incentives.
    Date: 2013
  7. By: Xuan Di; Henry X. Liu; Shanjiang Zhu; David Levinson (Nexus (Networks, Economics, and Urban Systems) Research Group, Department of Civil Engineering, University of Minnesota)
    Abstract: The replacement I-35W bridge in Minneapolis saw less traffic than the original bridge though it provided substantial travel time saving for many travelers. This observation cannot be explained by the classical route choice assumption that travelers always take the shortest path. Accordingly, a boundedly rational route switching model is proposed assuming that travelers will not switch to the new bridge unless travel time saving goes beyond a threshold or “indifference bandâ€. To validate the boundedly rational route switching assumption, route choices of 78 subjects from a GPS travel behavior study were analyzed before and after the addition of the new I-35W bridge. Indifference bands are estimated for both commuters who were previously bridge users and those who never had the experience of using the old bridge. This study offers the first empirical estimation of bounded rationality parameters from GPS data and provides guidelines for traffic assignment.
    Keywords: Route Choice, Travel Demand Modeling, Bounded Rationality, Indifference Band, GPS Study, Travel Behavior, Networks
    JEL: R40
    Date: 2014
  8. By: James Hayton (Warwick University Business School); Gabriella Cacciotti (Warwick University Business School); Andreas Giazitzoglu (Newcastle University); J. Robert Mitchell (Ivey Business School, Canada); Chris Ainge (Ivey Business School, Canada)
    Abstract: There is a broadly held assumption within the entrepreneurship literature that fear of failure is always and only an inhibitor of entrepreneurial behavior. However, anecdotal evidence and psychological theory suggest that this assumption is flawed. If fear stimulates greater striving in some cases or situations, then perhaps it can be a friend as much as a foe. The motivating value of fear may have consequences for the reactions, decisions, health and well-being of the entrepreneur. Unfortunately, a lack of rigorous conceptualization of the construct is a barrier to understanding such consequences. We present a grounded theoretic framework of the antecedents, moderators and consequences of fear of failure with significant implications for theory and future research.
    Keywords: entrepreneurship, fear of failure, psychology, motivation
    JEL: L26
    Date: 2013–05–03
  9. By: Subhasish M. Chowdhury (University of East Anglia); Joo Young Jeon (University of East Anglia)
    Abstract: Existing studies connect overall wellbeing with both payoffs and related anticipation, but it is not explored whether altruistic behavior as well as anticipation about the same may differ across gender and across income levels. We study altruistic behavior and the corresponding anticipation under a pure income effect with a focus on gender. In a dictator game we vary the common show-up fee of both the dictator and the recipient in each of the between-subject treatments, keep the amount to be shared the same, and incentivize recipients to anticipate the amount given. Overall, female dictators give more than their male counterparts but this is driven specifically by high show-up fees. Male recipients, on average and across all show-up fees, anticipate more than the amount female recipients anticipate. They also anticipate higher amounts than what males give as dictators; females do not show such significant pattern. The results reiterate context-driven behavior and lower payoff anticipation in females, and overconfidence in males.
    Date: 2013
  10. By: Rik Dillingh (University of Tilburg, Ministry of Social Affairs and Employment, and Netspar); Henriette Prast (University of Tilburg, CentER, Netspar); Maria Cristina Rossi (University of Turin and CeRP-Collegio Carlo Alberto, CEPS/INSTEAD and Netspar); Maria Cesira Urzì Brancati (University of Modena and Reggio Emilia and CeRP-Collegio Carlo Alberto)
    Abstract: This paper presents the results from a survey on the attitudes toward reverse mortgages of homeowners aged 45 and over in the Netherlands. We find that there is substantial potential interest in reverse mortgages, especially for the purpose of being able to live more comfortably and not worry about money until death, or to be able to spend a large sum of money upon retirement on hobbies, home improvements or traveling. A similar study has been done for Italy, where results differ from those related to the Netherland. For Italian households a reverse mortgage is primarily seen as a last resort. We use two different frames for suggestions on the use of the loan – own consumption versus bequest - and find that the latter significantly raises interest in reverse mortgages of people with a bequest wish. We interpret this as evidence that people are unaware of the potential of reverse mortgages to optimize the timing of bequests. Women are less interested, while demand is highest among those around retirement age, depends positively on the ratio of housing wealth over income and on the perceived riskiness of future pensions, and negatively on the expected replacement ratio. We find a counterintuitive result for bequest timing, as people are more interested if the age difference with the oldest child is larger.
    Date: 2013–11
  11. By: Oded Galor; Omer Ozak
    Abstract: This research explores the origins of the distribution of time preference across regions. It advances the hypothesis, and establishes empirically, that geographical variations in the incentives to delay consumption in favor of lucrative investment opportunities have had a persistent effect on the distribution of long-term orientation across societies. In particular, exploiting a natural experiment associated with the Columbian Exchange, the research establishes that agro-climatic characteristics in the pre-industrial era that were conducive to higher return to agricultural investment, triggered selection and learning processes that had a persistent positive effect on the prevalence of long-term orientation in the contemporary era.
    Keywords: Time preference, Delayed Gratiffcation, Culture, Agriculture, Economic Development, Evolution
    Date: 2014

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