nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2014‒11‒28
ten papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale “Amedeo Avogadro”

  1. Aspects of Behavior in Repeated Games: An Experimental Study By Douglas Davis; Asen Ivanov; Oleg Korenok
  2. Visceral emotions, within-community communication, and (ill-judged) endorsement of financial propositions By Kim Kaivanto
  3. Voting on contributions to a threshold public goods game: An experimental investigation By Feige, Christian; Ehrhart, Karl-Martin; Krämer, Jan
  4. Control thyself: Self-control failure and household wealth By Biljanovska, Nina; Palligkinis, Spyros
  5. Risk, Uncertainty and Entrepreneurship: Evidence from a Lab-in-the-Field Experiment By Koudstaal, Martin; Sloof, Randolph; van Praag, Mirjam C.
  6. The curse of knowledge increases self-selection into competition: Experimental evidence By Danz, David
  7. The Effect of Communication Channels on Lying By Julian Conrads
  8. De Gustibus Non Est Disputandum: An Experimental Investigation By Dasgupta, Utteeyo; Gangadharan, Lata; Maitra, Pushkar; Mani, Subha
  9. Inequality aversion in long-term contracts By Cato, Susumu; Ebina, Takeshi
  10. Measuring risk preferences in rural Ethiopia: Risk tolerance and exogenous income proxies By Vieider, Ferdinand M.; Beyene, Abebe; Bluffstone, Randall; Dissanayake, Sahan; Gebreegziabher, Zenebe; Martinsson, Peter; Mekonnen, Alemu

  1. By: Douglas Davis (Virginia Commonwealth University); Asen Ivanov (Queen Mary University of London); Oleg Korenok (Virginia Commonwealth University)
    Abstract: We introduce a novel approach to studying behavior in repeated games - one that is based on the psychology of play. Our approach is based on the following six "aspects" of a player's behavior: round-1 cooperation, lenience, forgiveness, loyalty, leadership, and following. Using a laboratory experiment, we explore how aspects are correlated between each other in a given repeated game, how they are correlated with behavior at various histories in a given repeated game, and how each aspect is correlated across different repeated games. We also investigate whether two players' aspects from a given repeated game tend to predict the frequency of the cooperate-cooperate outcome if these two players are matched to play either the same kind of repeated game or an altogether different repeated game. An important feature of our study is that it addresses the question of cross-game prediction.
    Keywords: Repeated games, Prisoner's dilemma, Experiment, Cooperation
    JEL: C92 D03 D70
    Date: 2014–10
  2. By: Kim Kaivanto
    Abstract: The 2007-08 financial crisis exposed poignant examples of ill-judged risk accretion in both tails of the Lorenz curve: concentrations of inappropriate mortgages within low-income neighborhoods, and concentrations of Bernard Madoff’s victims within wealthy, predominantly Jewish country-club communities. These examples share three key elements. First, individual behavioural decision makers take decisions privately but contribute to the build-up of risk within the community. Second, sales agents employ psychological persuasion techniques (bypassing logical processes), and trigger visceral emotions (overriding rational deliberation). Third, community membership immerses individuals within information flows that trigger invidious visceral emotions, and leads to biased inferences due to sample-size illusion and persuasion bias. We develop a closed-form model based on Signal-Detection Theory (SDT) that incorporates all three abovementioned elements: it is behavioral in employing a Prospect Theory (PT) objective function; peripheral-route persuasion and visceral emotions are incorporated through their impacts on discriminability d′; and sample-size illusion and persuasion bias are incorporated through their effects on the score θ. This PT-SDT model predicts that visceral-emotion-charged hot states can short-circuit the capacity to practice caveat emptor, carrying implications for regulation and for our understanding of US household-borrowing growth 2001–2006.
    Keywords: within-community risk accretion, signal detection theory, prospect theory, psychology of deception, peripheral-route persuasion, visceral emotions, persuasion bias, mortgage mis-selling, predatory lending, Madoff ponzi scheme, caveat emptor, accredited investor status
    JEL: G11 D81
    Date: 2014
  3. By: Feige, Christian; Ehrhart, Karl-Martin; Krämer, Jan
    Abstract: We introduce a binding unanimous voting rule to a public goods game with an uncertain threshold for the total group contribution. In a laboratory experiment we find that voting generates significantly higher total contributions than making individual voluntary contributions to the public good. Heterogeneity with regard to marginal costs of contribution makes coordination on the threshold value somewhat more di cult when voting, but apparently facilitates coordination when not voting. Homogeneous non-voting groups instead exhibit a breakdown of contributions commonly observed in linear public goods games, but unusual for a threshold setting. We also notice a preference for payoff symmetry over maximization of expected welfare in heterogeneous voting groups, which to a lesser extent also appears in nonvoting groups. Using a top-down rule, i.e., splitting the voting process into two separate votes on 1) total contribution and 2) individual contributions does not affect these results.
    Keywords: public good,threshold uncertainty,experimental economics,unanimous voting,committee,heterogeneity
    JEL: C92 D71 H41
    Date: 2014
  4. By: Biljanovska, Nina; Palligkinis, Spyros
    Abstract: We examine the relationship between household wealth and self-control. Although self-control has been linked to consumption and financial behavior, its measurement remains an open issue. We employ a definition of self-control failure that follows literature in psychology, suggesting that three factors can render self-control defective: lack of planning, lack of monitoring, and lack of commitment to pre-set plans. Our measure combines those three ingredients and can be computed using a standard representative survey. We find that self-control failure is strongly associated with different household net wealth measures and with self-assessed financial distress.
    Keywords: Self-Control,Household Wealth,Household Finance
    JEL: D01 D12 D14
    Date: 2014
  5. By: Koudstaal, Martin (University of Amsterdam); Sloof, Randolph (University of Amsterdam); van Praag, Mirjam C. (Copenhagen Business School)
    Abstract: Theory predicts that entrepreneurs have distinct attitudes towards risk and uncertainty, but empirical evidence is mixed. To better understand the unique behavioral characteristics of entrepreneurs and the causes of these mixed results, we perform a large 'lab-in-the-field' experiment comparing entrepreneurs to managers – a suitable comparison group – and employees (n = 2288). The results indicate that entrepreneurs perceive themselves as less risk averse than managers and employees, in line with common wisdom. However, when using experimental incentivized measures, the differences are subtler. Entrepreneurs are only found to be unique in their lower degree of loss aversion, and not in their risk or ambiguity aversion. This combination of results might be explained by our finding that perceived risk attitude is not only correlated to risk aversion but also to loss aversion. Overall, we therefore suggest using a broader definition of risk that captures this unique feature of entrepreneurs; their willingness to risk losses.
    Keywords: entrepreneurs, managers, risk aversion, loss aversion, ambiguity aversion, lab-in-the-field experiment
    JEL: L26 C93 D03 M13
    Date: 2014–10
  6. By: Danz, David
    Abstract: The psychology literature provides ample evidence that people have difficulties taking the perspective of less-informed others. This paper presents a controlled experiment showing that this "curse of knowledge" can cause comparative overconfidence and overentry into competition. In a broader context, the results provide an explanation for the overconfidence of nascent entrepreneurs and the substantial rate of failure among new businesses.
    Keywords: curse of knowledge,hindsight bias,information projection,overconfidence,sorting,incentive schemes,competition,beliefs,experiments
    JEL: C91 D80 D82 D83 D84
    Date: 2014
  7. By: Julian Conrads (University of Cologne)
    Abstract: This paper investigates the effect of different channels of communication on lying behavior. A simple coin flip game with four coin tosses is adapted in which subjects have monetary incentives to misreport their private information. The treatments differ with respect to the communication channel employed to convey the private information, i.e., face-to face, phone, computer-mediated, and online. Against the hypotheses, the results show that a majority of subjects lies independently of communication channel in use. However, the decision whether to lie either to some or the full extent depends on the communication channel. Compared to more socially-distant communication, direct communication encourages partial lying, but decreases lying to the extreme. Women tend to lie to the full extent only under online communication. Social distance considerations and the probability of being detect lying may drive observed behavioral patterns. The findings highlight the relevance of lying costs in relation to the decision making environment.
    Keywords: experiment, private information, lying costs, communication
    JEL: C91 D63 D82 D83
  8. By: Dasgupta, Utteeyo (Wagner College); Gangadharan, Lata (Monash University); Maitra, Pushkar (Monash University); Mani, Subha (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: 2014–10
  9. By: Cato, Susumu; Ebina, Takeshi
    Abstract: This paper examines a two-period moral hazard model with an inequality-averse agent. We show how the agent's past performance will help the principal to relax incentive compatibility constraints and how the existence of an inequality aversion of the agent affects a level of wage in each period in a long-term contract. In particular, we focus on the performance in period 1 on the level of wage in period 2. We show that the agent's wage in period 2 depends on performance in periods 1 and 2. This implies that the long-term relationship creates the opportunity for intertemporal risk and inequality sharing.
    Keywords: Moral hazard, Inequality aversion, Behavioral contract theory, Distribution
    JEL: D63 D86 J31 L23
    Date: 2014–11–14
  10. By: Vieider, Ferdinand M.; Beyene, Abebe; Bluffstone, Randall; Dissanayake, Sahan; Gebreegziabher, Zenebe; Martinsson, Peter; Mekonnen, Alemu
    Abstract: Risk aversion has generally been found to decrease in income or wealth. This may lead one to expect that poor countries will be more risk averse than rich countries. Recent comparative findings with students, however, suggest the opposite, giving rise to a riskincome paradox. We test this paradox by measuring the risk preferences of over 500 household heads spread over the highlands of Ethiopia. We do so using certainty equivalents, which have rarely been used in developing countries, but permit us to relate the findings to a host of evidence from the West. We find high degrees of risk tolerance, in agreement with the student comparisons finding higher risk tolerance in poorer countries. We also find risk tolerance to increase in income proxies, thus completing the paradox. We thereby use income proxies that can be considered as exogenous, allowing us to conclude that at least part of the causality must run from income to risk tolerance. We furthermore provide extensive methodological discussions on measuring and estimating risk preferences in development settings.
    Keywords: risk preferences,development,experimental methodology
    JEL: C93 D03 D80 O12
    Date: 2014

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