nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2015‒01‒09
fifteen papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale “Amedeo Avogadro”

  1. Risk-taking with Other People’s Money By Kvaløy, Ola; Eriksen, Kristoffer; Luzuriaga , Miguel
  2. Contributing to Public Goods as Individuals versus Group Representatives: Evidence of Gender Differences By Hauge, Karen Evelyn; Røgeberg, Ole
  3. Cognitive Ability and the Effect of Strategic Uncertainty By Nobuyuki Hanaki; Nicolas Jacquemet; Stéphane Luchini; Adam Zylberstejn
  4. Game form misconceptions do not explain the endowment effect By Björn Bartling; Florian Engl; Roberto A. Weber
  5. Defaults and Donations: Evidence from a Field Experiment By Altmann, Steffen; Falk, Armin; Heidhues, Paul; Jayaraman, Rajshri
  6. A Theory of Rational Attitude Polarization By Benoît, Jean-Pierre; Dubra, Juan
  7. Think Twice Before Running! Bank Runs and Cognitive Abilities By Hubert János Kiss; Ismael Rodriguez-Lara; Alfonso Rosa-García
  8. Individual perceptions of local crime risk By Salm, M.; Vollaard, B.A.
  9. Risky Choices of Poor People: Comparing Risk Preference Elicitation Approaches in Field Experiments By Holden , Stein
  10. Overconfidence, Effort, and Investment (Revised version of CentER DP 2013-035) By Pikulina, E.S.; Renneboog, L.D.R.; Tobler, P.N.
  11. Overconfidence and career choice By Jonathan Schulz; Christian Thöni
  12. Locus of Control and the Labor Market By Cobb-Clark, Deborah A.
  13. Voluntary sleep choice and its effects on Bayesian decisions: A study of two samples of college students. By David L. Dickinson; Sean P.A. Drummond; Jeff Dyche
  14. Learning by Imitation in Games: Theory, Field, and Laboratory By Erik Mohlin; Robert Ostling; Joseph Tao-yi Wang
  15. Do Psychological Fallacies Influence Trading in Financial Markets? Evidence from the Foreign Exchange Market By Michael Bleaney; Spiros Bougheas; Zhiyong Li

  1. By: Kvaløy, Ola (UiS); Eriksen, Kristoffer (UiS); Luzuriaga , Miguel (UiS)
    Abstract: We present an experimental study on how people take risk with other people’s money. We use three different elicitation methods, and study how each subject makes decisions both on behalf of own money and on behalf of another individual’s money. We find that a majority of subjects make different decisions on behalf of others than on behalf of themselves. Approximately one third of the subjects increase risk-taking when it is on behalf of another subject, while one third reduces risk-taking. In sum, we find a weak tendency of lower risk-taking with other’s money compared with own money. We also find that subjects on average think that others are more risk averse than themselves. Moreover, subjects believe that other participants take less risk with their own money than with other people’s money.
    Keywords: Risk-taking; Experiment; Social preferences
    JEL: C91 G11
    Date: 2014–11–20
  2. By: Hauge, Karen Evelyn (Ragnar Frisch Centre for Economic Research,); Røgeberg, Ole (Ragnar Frisch Centre for Economic Research,)
    Abstract: We report evidence from a laboratory experiment comparing contributions in public good games played as individuals to contributions made as group representatives. We find that women alter their behaviour more than men. The change is in an out-group friendly direction: while men’s contributions are largely similar across the two treatments, women increase their contributions by 40% on average as group representatives. The results are consistent with empirical research from labour markets suggesting that female corporate leaders emphasize stakeholders beyond the shareholders to a larger extent than men, and they are in line with stereotypes commonly held regarding male and female leaders.
    Keywords: responsibility; group representative; gender; public good game; laboratory experiment
    JEL: C91 H41 J16
    Date: 2014–07–30
  3. By: Nobuyuki Hanaki (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS); Nicolas Jacquemet (Université de Lorraine (BETA) and Paris School of Economics); Stéphane Luchini (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS); Adam Zylberstejn (Université de Lyon)
    Abstract: How is one’s cognitive ability related to the way one responds to strategic uncertainty? We address this question by conducting a set of experiments in simple 2 x 2 dominance solvable coordination games. Our experiments involve two main treatments: one in which two human subjects interact, and another in which one human subject interacts with a computer program whose behavior is known. By making the behavior of the computer perfectly predictable, the latter treatment eliminates strategic uncertainty. We find that subjects with higher cognitive abilities are more sensitive to strategic uncertainty than those with lower cognitive abilities.
    Keywords: strategic uncertainty, robot, bounded rationality, Experiment
    JEL: C92 D83
    Date: 2014–12–16
  4. By: Björn Bartling; Florian Engl; Roberto A. Weber
    Abstract: We test the claim that game form misconception among subjects making choices through the Becker-DeGroot-Marschak (BDM) value elicitation procedure provides an explanation for the endowment effect, as suggested by Cason and Plott (forthcoming). We employ a design that allows us to clearly identify whether subjects comprehend the incentive properties of a price-list version of the BDM procedure. We find a robust endowment effect, even among those subjects whose elicited valuations for a known monetary value and whose ability to calculate the payoffs resulting from their choices indicate no misconception of the task. We conclude that game form misconceptions alone are unlikely to account for behavioral patterns like the endowment effect.
    Keywords: Endowment effect, game from misconception, BDM mechanism, experimental methods, replicable audio files of instructions
    JEL: C91 D03
    Date: 2014–11
  5. By: Altmann, Steffen (University of Copenhagen); Falk, Armin (University of Bonn); Heidhues, Paul (European School of Management and Technology (ESMT)); Jayaraman, Rajshri (European School of Management and Technology (ESMT))
    Abstract: We study how website defaults affect consumer behavior in the domain of charitable giving. In a field experiment that was conducted on a large platform for making charitable donations over the web, we exogenously vary the default options in two distinct choice dimensions. The first pertains to the primary donation decision, namely, how much to contribute to the charitable cause. The second relates to an "add-on" decision of how much to contribute to supporting the online platform itself. We find a strong impact of defaults on individual behavior: in each of our treatments, the modal positive contributions in both choice dimensions invariably correspond to the specified default amounts. Defaults, nevertheless, have no impact on aggregate donations. This is because defaults in the donation domain induce some people to donate more and others to donate less than they otherwise would have. In contrast, higher defaults in the secondary choice dimension unambiguously induce higher contributions to the online platform.
    Keywords: default options, charitable giving, online platforms, field experiment
    JEL: C93 D03 D64
    Date: 2014–11
  6. By: Benoît, Jean-Pierre; Dubra, Juan
    Abstract: Numerous experiments have demonstrated the possibility of attitude polarization. For instance, Lord, Ross & Lepper (1979) partitioned subjects into two groups, according to whether or not they believed the death penalty had a deterrent effect, and presented them with a set of studies on the issue. Believers and skeptics both become more convinced of their initial views; that is, the population polarized. Many scholars have concluded that attitude polarization shows that people process information in a biased manner. We argue that not only is attitude polarization consistent with an unbiased evaluation of evidence, it is to be expected in many circumstances where it arises. At the same time, some experiments do not find polarization, under the conditions in which our theory predicts the absence of polarization.
    Keywords: Attitude Polarization; Confirmation Bias; Bayesian Decision Making.
    JEL: C9 C91 D81 D90
    Date: 2014–11–20
  7. By: Hubert János Kiss (‘Momentum’ Game Theory Research Group, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Eötvös Loránd University - Department of Economics); Ismael Rodriguez-Lara (Middlesex University London - Business School and LUISS Guido Carli University, Rome); Alfonso Rosa-García (Facultad de Ciencias Juridicas y de la Empresa, Universidad Catolica San Antonio)
    Abstract: We assess the impact of cognitive abilities on withdrawal decisions in a bank-run game. In our setup, depositors choose sequentially between withdrawing or keeping their funds deposited in a common bank. They may observe previous decisions depending on the information structure. Theoretically, the last depositor in the sequence of decisions has a dominant strategy and should always keep the funds deposited, regardless of what she observes (if anything). Recognizing the dominant strategy, however, is not always straightforward. If there exists strategic uncertainty (e.g., the last depositor has no information about predecessors’ decisions) the identification of the dominant strategy requires harder thinking than when there is not strategic uncertainty (e.g., the last depositor is informed about all previous decisions). We find that cognitive abilities, as measured by the Cognitive Reflection Test (CRT), predict withdrawals in the presence of strategic uncertainty (participants with higher abilities tend to identify the dominant strategy more easily) but the CRT does not predict behavior when there is no strategic uncertainty.
    Keywords: bank runs, coordination game, observability of actions, cognitive abilities, strate-gic uncertainty
    JEL: C91 D03 D8 G02 J16
    Date: 2014–11
  8. By: Salm, M. (Tilburg University, Center For Economic Research); Vollaard, B.A. (Tilburg University, Center For Economic Research)
    Abstract: We provide evidence that perceptions of crime risk are severely biased for many years after a move to a new neighborhood. Based on four successive waves of a large crime survey, matched with administrative records on household relocations, we find that the longer an individual lives in a neighborhood, the higher their perception of the crime rate in the neighborhood. This finding holds irrespective of whether the move is from a relatively low-crime to a relatively high-crime area or vice versa. We find that avoidance behavior adjusts in line with the observed changes in beliefs.
    Keywords: heuristic; Victimization; crime
    JEL: D81 K42
    Date: 2014
  9. By: Holden , Stein (Centre for Land Tenure Studies, Norwegian University of Life Sciences)
    Abstract: This paper studies the risk preferences of poor rural households in Malawi and compares the Holt and Laury (2002) (HL) multiple price list approach with hypothetical real-world framing and monetary incentive-compatible framing with the Tanaka, Camerer and Nguyen (2010) (TCN) monetary framing approach to elicit prospect theory parameters. The consistency of the results, the role of and potential bias attributable to measurement error, and correlations with socioeconomic characteristics are assessed. The study shows that measurement error can lead to upward bias in risk aversion estimates and over-weighting of low probabilities. The hypothetical real–world HL framing experiments are associated with higher sensitivity to background variation such as exposure to a recent drought shock and distance to markets/poor market access.
    Keywords: expected utility theory; prospect theory; risk preferences; loss aversion; probability weighting; field experiment; multiple price lists; measurement error; Malawi
    JEL: C93 D03 O12
    Date: 2014–11–18
  10. By: Pikulina, E.S. (Tilburg University, Center For Economic Research); Renneboog, L.D.R. (Tilburg University, Center For Economic Research); Tobler, P.N. (Tilburg University, Center For Economic Research)
    Abstract: A positive relation between confidence and effort/investment provision has been theoretically justified and practically assumed in the literature, but has not been thoroughly investigated. We test and confirm this positive relation between direct measures of confidence and choice of effort or investment. More precisely, strong overconfidence results in excess investment of effort and money, underconfidence induces insufficient effort provision and underinvestment, and moderate overconfidence leads to accurate decisions. Our experimental results can be generalized as they are based on different subject pools (financial professionals and students), media (computer-, paper-, and web-based), and types of effort (real mental effort and monetary effort, i.e. investment).
    Keywords: Self-confidence; Overconfidence; Judgmental Bias; Overinvestment; Investment Choice; Effort
    JEL: G11 J22
    Date: 2014
  11. By: Jonathan Schulz (University of Nottingham, School of Economics); Christian Thöni (University of Lausanne)
    Abstract: People self-assess their relative ability when making career choices. Thus, confidence in own abilities is likely an important factor for selection into various career paths. In a sample of 711 first-year students we examine whether there are systematic differences in confidence levels across fields of study. We find evidence for selection based on our experimental confidence measure: While Political Science students exhibit the highest confidence levels, students of Humanities range at the other end of the scale. This may have important implications for subsequent earnings and/or professions students select themselves in.
    Keywords: Overconfidence, selection, field of study, career choice
  12. By: Cobb-Clark, Deborah A. (University of Melbourne)
    Abstract: This paper reviews the role of locus of control in the labor market. I begin with a discussion of the conceptual origins of locus of control, including its relationship to related concepts such as self-efficacy, motivation, and self-control. The relationship between locus of control and labor market success is then summarized. In doing so, I pay careful attention to what we know about three potential mechanisms – human capital investments, hiring decisions, and optimal incentive contracts – through which locus of control might operate. Finally, the broader implications of these relationships for public policy and future research are discussed.
    Keywords: locus of control, labor market, behavioral economics
    JEL: J01 J08
    Date: 2014–11
  13. By: David L. Dickinson; Sean P.A. Drummond; Jeff Dyche
    Abstract: This study examines whether voluntary sleep restriction at commonly experienced levels impacts decision-making in a Bayesian choice task. Participants were largely traditional age college students from a regional state university (n=100) and a federal military academy (n=99). Sleep was measured by actigraphy over a one-week period, followed by performance of a decision task. The task involved two sources of information, base rate odds and sample evidence, with subjects asked to make a probability judgment. Results found that subjects with nightly sleep < 6 hr (sleep deprived=SD), relative to those with > 7 hr, placed less decision weight on new evidence, relative to base rate information, in making difficult choices. This result is mediated by gender and differs when comparing cadets with traditional student subjects. For easier choices, voluntary SD did not affect relative decision weights placed on the two sources of available information, and results were similar across institutions and by gender. Key Words:
    Date: 2014
  14. By: Erik Mohlin; Robert Ostling; Joseph Tao-yi Wang
    Abstract: We exploit a unique opportunity to study how a large population of players in the field learn to play a novel game with a complicated and non-intuitive mixed strategy equilibrium.  We argue that standard models of belief-based learning and reinforcement learning are unable to explain the data, but that a simple model of similarity-based global cumulative imitation can do so.  We corroborate our findings using laboratory data from a scaled-down version of the same game, as well as from three other games.  The theoretical properties of the proposed learning model are studied by means of stochastic approximation.
    Keywords: Learning, imitation, behavioral game theory, evolutionary game theory, stochastic approximation, replicator dynamic, similarity-based reasoning, generalization, mixed equilibrium
    JEL: C72 C73 L83
    Date: 2014–11–28
  15. By: Michael Bleaney (Department of Economics, Maastricht University); Spiros Bougheas (University of Nottingham, School of Economics); Zhiyong Li (University of Nottingham, School of Economics)
    Abstract: Research in both economics and psychology suggests that, when agents predict the next value of a random series, they frequently exhibit two types of biases, which are called the gambler’s fallacy (GF) and the hot hand fallacy (HHF). The gambler’s fallacy is to expect a negative correlation in a process which is in fact random. The hot hands fallacy is more or less the opposite of this – to believe that another heads is more likely after a run of heads. The evidence for these fallacies comes largely from situations where they are not punished (lotteries, casinos and laboratory experiments with random returns). In many real-world situations, such as in financial markets, succumbing to fallacies is costly, which gives an incentive to overcome them. The present study is based on high-frequency data from a market-maker in the foreign exchange market. Trading behaviour is only partly explained by the rational exploitation of past patterns in the data, but there is also evidence of the gambler’s fallacy: a tendency to sell the dollar after it has risen persistently or strongly.
    Keywords: Gambler’s Fallacy, Hot hand Fallacy, Foreign Exchange Market

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