nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2014‒11‒12
seven papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale “Amedeo Avogadro”

  1. Do Women Panic More Than Men? An Experimental Study on Financial Decision By Hubert J. Kiss; Ismael Rodriguez-Lara; Alfonso Rosa-Garcia
  2. Focal Points Revisited: Team Reasoning, the Principle of Insufficient Reason and Cognitive Hierarchy Theory By Bardsley, Nicholas; Ule, Aljaz
  3. De Gustibus Non Est Disputandum: An Experimental Investigation By Utteeyo Dasgupta; Lata Gangadharan; Pushkar Maitra; Subha Mani
  4. Behavioral Finance By Hirshleifer, David
  5. Changing Behavior beyond the Here and Now By Rogers, Todd; Frey, Erin
  6. The Perception of Lethal Risks - Evidence from a Laboratory Experiment By Tilman Brück; Manuel Schubert
  7. Superstition and financial decision making By Hirshleifer, David; Jian, Ming; Zhang, Huai

  1. By: Hubert J. Kiss (Momentum Game Theory Research Group, Institute of Economics, Centre for Economic and Regional Studies Hungarian Academy of Sciences); Ismael Rodriguez-Lara (Economics and international development, Middlesex University London); Alfonso Rosa-Garcia (Facultad de Ciencias Juridicas y de la Empresa, Universidad Catolica San Antonio)
    Abstract: We report experimental evidence on gender differences in financial decision that involves three depositors choosing between waiting or withdrawing their money from a common bank. We find that the position in the line, the fact of being observed and the observed decisions are key determinants to explain subjects’ behavior. Although both men and women value being observed, it has a greater effect on women’s decisions. Observing a withdrawal increases the likelihood of withdrawal but women and men do not react differently to what is observed, so they are equally likely to panic if a bank run is already underway. Interestingly, risk aversion has no predictive power on depositors’ behavior.
    Keywords: bank run, gender difference, strategic uncertainty, experimental evidence, coordination.
    JEL: C91 D03 D8 G02 J16
    Date: 2014–02
  2. By: Bardsley, Nicholas; Ule, Aljaz
    Abstract: Coordination on focal points in one shot games can often be explained by team reasoning, a departure from individualistic choice theory. However, a less exotic explanation of coordination is also available based on best-responding to uniform randomisation. We test the team reasoning explanation experimentally against this alternative, using coordination games with variable losses in the off-diagonal cells. Subjects’ responses are observed when the behaviour of their partner is determined in accordance with each theory, and under game conditions where behaviour is unconstrained. The results are more consistent with the team reasoning explanation. Increasing the difficulty of the coordination tasks produces some behaviour suggestive of response to randomisation, but this effect is not pronounced.
    Keywords: coordination, team reasoning, cognitive hierarchy theory
    JEL: C91 D01
    Date: 2014
  3. By: Utteeyo Dasgupta (Wagner College); Lata Gangadharan (Monash University); Pushkar Maitra (Monash University); Subha Mani (Fordham University)
    Abstract: The goal of this paper is to examine stability in preferences using the Stigler-Becker state-dependent framework. Using a randomized intervention that changes the opportunity sets of individuals we construct a unique panel data from an artefactual field experiment and evaluate whether the change in the state space influences our selected indicators of preferences: risk, competitiveness, and confidence. We find that there is considerable heterogeneity of preferences across individuals at a point in time; risk and competitive preferences inter-temporally are consistent with state-dependent preferences, while measures of confidence seem to depend on past experiences.
    Keywords: Preference stability, State Contingent Preferences, Artefactual Field Experiment.
    JEL: C9 D01 D03
    Date: 2014
  4. By: Hirshleifer, David
    Abstract: Behavioral finance studies the application of psychology to finance, with a focus on individual-level cognitive biases. I describe here the sources of judgment and decision biases, how they affect trading and market prices, the role of arbitrage and flows of wealth between more rational and less rational investors, how firms exploit inefficient prices and incite misvaluation, and the effects of managerial judgment biases. There is need for more theory and testing of the effects of feelings on financial decisions and aggregate outcomes. Especially, the time has come to move beyond behavioral finance to social finance, which studies the structure of social interactions, how financial ideas spread and evolve, and how social processes affect financial outcomes.
    Keywords: Investor psychology, heuristics, overconfidence, attention, feelings, reference dependence, social finance
    JEL: G02 G1 G11 G14 G3
    Date: 2014–08–14
  5. By: Rogers, Todd (Harvard University); Frey, Erin (Harvard University)
    Abstract: Behavioral science is increasingly being used to develop interventions to influence important behaviors throughout society. We explore three ways that time interacts with psychological processes to affect the impact of behavioral interventions. The first is how and when there would be a lag between the moment in which an intervention is administered and the moment in which the target behavior is to be performed. The second is when and why there would be marginal benefits to continued administration of treatment over time. The third is how behavioral interventions might generate persistent treatment effects even after the intervention is discontinued. Our hope is that scholars find these frameworks productive for advancing and organizing future research, and that they help those who develop behavioral interventions to make them more effective.
    Date: 2014–02
  6. By: Tilman Brück (Stockholm International Peace Research Institute (SIPRI), Institute for the Study of Labor (IZA) and International Security and Development Center (ISDC)); Manuel Schubert (University of Passau)
    Abstract: We run a novel experiment to explore the relationship between the perception of real-life risks and the demand for risk reduction. Subjects play a series of loss lotteries in which the odds are matched to the likelihood of lethal events in real life. For each risk, subjects can pay premiums in order to reduce the likelihood of total bankruptcy. Our results show a complex interplay of mortality perception and demand for risk reduction. We observe that perceived annual mortality positively affects the demand for risk reduction. Moreover, we find certain risk characteristics to affect perceived mortality, others to drive the demand for risk reduction, and some to alter both. Our findings suggest that 30 percent of all insurance payments are due to biased perceptions of annual mortality while perfect precaution could lower payments by 45 percent. Implications for risk management policies are discussed.
    Keywords: risk perception, lethal risks, experiment, insurance
    JEL: C9 D81
    Date: 2014–10
  7. By: Hirshleifer, David; Jian, Ming; Zhang, Huai
    Abstract: In Chinese culture, certain digits are lucky and others unlucky. We test how such numerological superstition affects financial decision in the China IPO market. We find that the frequency of lucky numerical stock listing codes exceeds what would be expected by chance. Also consistent with superstition effects, newly listed firms with lucky listing codes are initially traded at a premium after controlling for known determinants of valuation multiples, the lucky number premium dissipates within three years of the IPO, and lucky number firms experience inferior post-IPO abnormal returns.
    Keywords: Finance; Asset pricing; Investment
    JEL: G12 G14 G15
    Date: 2014–09–15

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