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on Cognitive and Behavioural Economics |
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Issue of 2015‒04‒25
seventeen papers chosen by Marco Novarese Università degli Studi del Piemonte Orientale “Amedeo Avogadro” |
| By: | Cars Hommes (University of Amsterdam) |
| Abstract: | We discuss recent work on bounded rationality and learning in relation to Soros' principle of reflexivity and stress the empirical importance of non-rational, almost self-fulfilling equilibria in positive feedback systems. As an empirical example, we discuss a behavioral asset pricing model with heterogeneous expectations. Bubble and crash dynamics is triggered by shocks to fundamentals and amplified by agents switching endogenously between a mean-reverting fundamental rule and a trend-following rule, based upon their relative performance. We also discuss learning-to-forecast laboratory experiments, showing that in positive feedback systems individuals coordinate expectations on non-rational, almost self-fulfilling equilibria with persistent price fluctuations very different from rational equilibria. Economic policy analysis may benefit enormously by focussing on efficiency and welfare gains in correcting mispricing of almost self-fulfilling equilibria. |
| Keywords: | Expectation feedback, self-fulfilling beliefs, heuristic switching model, experimental macroeconomics |
| JEL: | D84 D83 E32 C92 |
| Date: | 2013–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20130206&r=cbe |
| By: | Tymula, Agnieszka; Whitehair, Jackson |
| Abstract: | Presence of peers is often identified as the main source of welfare-decreasing decision-making in young adulthood and adolescence. The mechanism through which peers exert this influence is not fully understood. In this paper, using an incentive compatible experiment, we investigate whether young people's willingness to accept known and unknown risks changes in the presence of a stranger of the same age compared to in private and whether preferences are affected by having observed others decisions. We find that behavioural changes caused by observation are different for men and women and are mediated through beliefs on own and observer's risk-taking. The results suggest that different approaches should be useful to mitigate consequences of observation on behaviour. |
| Keywords: | observation, peer effects, risk, uncertainty |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2015-08&r=cbe |
| By: | Dessi, Roberta; Ristichini, Aldo |
| Abstract: | A large literature in psychology, and more recently in economics, has argued that monetary rewards can reduce intrinsic motivation. We investigate whether the negative impact persists when intrinsic motivation is strong, and test this hypothesis experimentally focusing on the motivation to undertake interesting and challenging tasks, informative about individual ability. We find that this type of task can generate strong intrinsic motivation, that is impervious to the effect of monetary incentives, particularly when the individual is "racing against himself". In our experiments, monetary incentives have no significant impact on performance. In a second experiment using the same kind of task but a setting designed to weaken intrinsic motivation, monetary incentives do have a significant, positive, effect on performance. This result confirms that our experimental setup may, with appropriate conditions, replicate the known crowding out effects. |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:29269&r=cbe |
| By: | Diego A. Salzman (London South Bank University, London, United Kingdom, and University of Amsterdam); Remco C.J. Zwinkels (Erasmus University Rotterdam) |
| Abstract: | The behavioural approach to decision making under uncertainty combines insights from psychology and sociology into economic decision making. It steps away from the normative homo economicus and introduces a positive approach to human decision making under uncertainty. We provide an overview of the main themes in the behavioural real estate literature from the perspective of different market participants. It can be concluded that there seems to be general agreement that behavioural studies can help explain the inefficiency of real estate markets, but a large component of behavioural decision making in the property markets seems to be undiscovered. |
| Keywords: | real estate markets, market participants, behavioural decision making |
| JEL: | G02 R31 R33 |
| Date: | 2013–07–16 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20130088&r=cbe |
| By: | Sander Hoogendoorn (University of Amsterdam); Hessel Oosterbeek (University of Amsterdam); Mirjam van Praag (University of Amsterdam) |
| Abstract: | This discussion paper resulted in an article in <I>Management Science</I>. Volume 59 issue 7, pages 1514-1528.<P> This paper reports on a field experiment conducted to estimate the impact of the share of women in business teams on their performance. Teams consisting of undergraduate students in business studies start up a venture as part of their curriculum. We manipulated the gender composition of teams and assigned students randomly to teams, conditional on their gender. We find that teams with an equal gender mix perform better than male-dominated teams in terms of sales and profits. We explore various mechanisms suggested in the literature to explain this positive effect of gender diversity on performance (including complementarities, learning, monitoring, and conflicts) but find no support for them. The paper was accepted for publication in <I>Management Science</>. |
| Keywords: | Gender diversity, team performance, entrepreneurship, field experiment, entrepreneurship education, board effectiveness |
| JEL: | J16 L25 L26 M13 C93 |
| Date: | 2011–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20110074&r=cbe |
| By: | Cars Hommes (CeNDEF, University of Amsterdam) |
| Abstract: | Rational expectations assumes perfect, model consistency between beliefs and market realizations. Here we discuss behaviorally rational expectations, characterized by an observable, parsimonious and intuitive form of consistency between beliefs and realizations. We discuss three case-studies. Firstly, a New Keynesian macro model with a representative agent learning an optimal, but misspecied, AR(1) rule to forecast inflation consistent with observed sample mean and first-order autocorrelations. Secondly, an asset pricing model with heterogeneous expectations and agents switching between a mean-reverting fundamental rule and a trend-following rule, based upon their past performance. The third example concerns learning-to-forecast laboratory experiments, where under positive feedback individuals coordinate expectations on non-rational, almost self-fulling equilibria with persistent price fluctuations very different from rational equilibria. |
| Keywords: | Expectation feedback, self-fullling beliefs, heuristic switching model, experimental economics |
| JEL: | D84 D83 E32 C92 |
| Date: | 2013–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20130204&r=cbe |
| By: | John A Weymark (Vanderbilt University) |
| Abstract: | In Democratic Reason, Hélène Landemore has built a case for the epistemic virtues of inclusive deliberative democracy based on the cognitive diversity of the group engaged in making collective decisions. She supports her thesis by appealing to the Diversity Trumps Ability Theorem of Lu Hong and Scott Page. In practice, deliberative assemblies often restrict attention to situations with only two options. In this paper, it is shown that it is not possible to satisfy the assumptions of the Diversity Trumps Ability Theorem when decisions are binary. The relevance of this theorem for democratic decision-making in non-binary situations is also considered. |
| Keywords: | epistemic democracy, Diversity Trumps Ability Theorem |
| JEL: | D7 Y8 |
| Date: | 2014–08–13 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:vuecon-sub-00008&r=cbe |
| By: | Hale Koç (Erasmus School of Economics, Erasmus University Rotterdam); Hans van Kippersluis (Erasmus School of Economics, Erasmus University Rotterdam) |
| Abstract: | Higher educated individuals are healthier and live longer than their lower educated peers. One reason is that lower educated individuals engage more in unhealthy behaviours including consumption of a poor diet, but it is not clear why they do so. In this paper we develop an economic theory of unhealthy food choice, and use a Discrete Choice Experiment to discriminate between the theoretical parameters. Differences in health knowledge appear to be responsible for the greatest part of the education disparity in diet. However, when faced with the most explicit health information regarding diet, lower educated individuals still state choices that imply a lower concern for negative health consequences. This is consistent with a theoretical prediction that part of the education differences across health behaviours is driven by the "marginal value of health" rising with education. |
| Keywords: | Health, Education, Diet, Discrete Choice Experiment |
| JEL: | C25 I12 I24 |
| Date: | 2015–03–13 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20150034&r=cbe |
| By: | Carmen Lee (Marketing Department, VU University Amsterdam); Roman Kraeussl (Finance Dept., VU University Amsterdam); André Lucas (Finance Dept., VU University Amsterdam); Leonard J. Paas (Marketing Dept., VU University Amsterdam) |
| Abstract: | We conduct an experiment to test whether the size of a loss and the time in a losing position affect investors’ adaptation to the loss situation and, subsequently, whether this adaptation affects future investment decisions. As investors adapt to losses, their neutral reference point shifts downwards causing losses to become psychologically less painful. This shift in reference point is a dynamic process that is updated every time new information is received about the stock’s performance. The dynamically changing reference point, together with changing perceptions on the stock’s expected future performance, together influence the decision to hold on to or to capitulate on an investment. We study the relative contribution of each of these components as well as their inter-relationships in a dynamic experimental design. Our results indicated that a larger loss size and a longer time in a losing position are related to higher adaptation levels. These higher adaptation levels relate to less positive emotions and less optimistic expectations about future price changes. The actual decision to capitulate an investment, however, only depends directly on the expectation about the stock’s future performance. The adaptation level, by contrast, affects the actual investment decision indirectly via its impact on expectations. |
| Keywords: | adaptation, capitulation, selling decisions, investment |
| JEL: | C91 D03 D81 |
| Date: | 2008–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20080112&r=cbe |
| By: | Michael Kosfeld (Goethe University Frankfurt , Germany); Susanne Neckermann (Erasmus University Rotterdam, the Netherlands, ZEW, Germany); Xiaolan Yang (Zhejiang University, Hangzhou , P R China) |
| Abstract: | We manipulate workers' perceived meaning of a job in a field experiment. Half of the workers are informed that their job is important, the other half are told that their job is of no relevance. Results show that workers exert more effort when meaning is high, corroborating previous findings on the relationship between meaning and work effort. We then compare the effect of meaning to the effect of monetary incentives and of worker recognition via symbolic awards. We also look at interaction effects. While meaning outperforms monetary incentives, the latter have a robust positive effect on performance that is independent of meaning. In contrast, meaning and recognition have largely similar effects but interact negatively. Our results are in line with image-reward theory (Benabou and Tirole 2006) and suggest that meaning and worker recognition operate via the same channel, namely image seeking. |
| Keywords: | Meaning, monetary incentives, worker recognition, field experiment |
| JEL: | C93 J33 M12 M52 |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20140043&r=cbe |
| By: | Pedro Robalo (CREED, University of Amsterdam); Arthur Schram (CREED, University of Amsterdam); Joep Sonnemans (CREED, University of Amsterdam) |
| Abstract: | We experimentally study the relationship between other-regarding preferences, group identity and political participation. In doing so, we propose a novel group identity induction procedure that succeeds in creating environments where in-group bias is either high or low. At the individual level, we find that both altruistic subjects and group identifiers participate above average. The most competitive subjects participate much less often than other types, while the most altruistic subjects manage to sustain high participation levels. At the aggregate level, we observe only few statistically significant differences between environments where group identity is high and low. This suggests that the higher participation observed in field settings for close-knit (political) groups might be due to underlying mobilization processes rather than a heightened sense of group-belonging. |
| Keywords: | Group identity, Other-regarding preferences, Political participation, Participation Game, Experiment |
| JEL: | A13 C91 C92 D72 |
| Date: | 2013–06–11 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20130079&r=cbe |
| By: | Eszter Czibor (University of Amsterdam); Sander Onderstal (University of Amsterdam); Randolph Sloof (University of Amsterdam); Mirjam van Praag (Copenhagen Business School, Denmark) |
| Abstract: | The provision of non-pecuniary incentives in education is a topic that has received much scholarly attention lately. Our paper contributes to this discussion by investigating the effectiveness of grade incentives in increasing student performance. We perform a direct comparison of the two most commonly used grading practices: the absolute (i.e., criterion-referenced) and the relative (i.e., norm-referenced) grading schemes in a large-scale field experiment at a university. We hypothesize that relative grading, by creating a rank-order tournament in the classroom, provides stronger incentives for male students than absolute grading. In the full sample, we find weak support for our hypothesis. Among the more motivated students we find evidence that men indeed score significantly higher on the test when graded on a curve. Female students, irrespective of their motivation, do not increase their scores under relative grading. Since women slightly outperform men under absolute grading, grading on a curve actually narrows the gender gap in performance. |
| Keywords: | Education, Test performance, Grade incentives, Competition, Gender, Field experiment |
| JEL: | I21 I23 A22 D03 C93 |
| Date: | 2014–08–28 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20140116&r=cbe |
| By: | Aurélien Baillon (Erasmus University Rotterdam); Philipp Koellinger (University of Amsterdam); Theresa Treffers (Technical University Eindhoven) |
| Abstract: | Many important decisions are made without precise information about the probabilities of the outcomes. In such situations, individual ambiguity attitudes influence decision making. The present study identifies affective states as a transient cause of ambiguity attitudes. We conducted two random-assignment, incentive-compatible laboratory experiments, varying subjects’ affective states. We find that sadness induces choices that are closer to ambiguity-neutral attitudes compared with the joy, fear, and control groups, where decision makers deviate more from payoff-maximizing behaviors and are more susceptible to likelihood insensitivity. We also find a similar pattern in a representative population sample where cloudy weather conditions on the day of the survey - a proxy for sad affect - correlate with more ambiguity-neutral attitudes. Our results may help explain re al-world phenomena such as financial markets that react to regular fluctuations in weather conditions. |
| Keywords: | Ambiguity attitude, affect, joy, fear, sadness, weather, experiment. |
| JEL: | D03 D81 |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20140044&r=cbe |
| By: | Sander Hoogendoorn (CPB Netherlands Bureau for Economic Policy Analysis, the Netherlands); Simon C. Parker (Ivey Business School, Western University, London, Canada); Mirjam van Praag (Copenhagen Business School, Denmark) |
| Abstract: | What is the effect of dispersed levels of cognitive ability of members of a (business) team on their team’s performance? This paper reports the results of a field experiment in which 573 students in 49 teams start up and manage real companies under identical circumstances. We ensured exogenous variation in — otherwise random — team composition by assigning students to teams based on their measured cognitive abilities (Raven test). Each team performs a variety of tasks, often involving complex decision making. The key result of the experiment is that the performance of business teams first increases and then decreases with ability dispersion. We seek to understand this finding by developing a model in which team members of different ability levels form sub-teams with other team members with similar ability levels to specialize in different productive tasks. Diversity spreads production over different tasks in order to escape diminishing marginal returns under specialization. The model comes with a boundary condition: our experimental finding is most likely to emerge in settings where different tasks exhibit moderate differences in their productive contributions to total output. |
| Keywords: | Ability dispersion, team performance, field experiment, entrepreneurship |
| JEL: | C93 D83 J24 L25 L26 M13 M54 |
| Date: | 2014–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20140053&r=cbe |
| By: | Martin Koudstaal (University of Amsterdam); Randolph Sloof (University of Amsterdam, the Netherlands); Mirjam van Praag (Copenhagen Business School, Denmark) |
| 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 |
| Date: | 2014–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20140136&r=cbe |
| By: | Peter Duersch (University of Heidelberg); Julia Müller (Erasmus University Rotterdam) |
| Abstract: | In a punishment experiment, we separate the demand for punishment in general from the demand to conduct punishment personally. Subjects experience an unfair split of their earnings from a real effort task and have to decide on the punishment of the person who determines the distribution. First, it is established whether the allocator's payoff is reduced and, afterwards, subjects take part in a second price auction for the right to (physically) carry out the act of payoff reduction themselves. Subjects bid positive amounts and are happier if they get to punish personally. |
| Keywords: | personal punishment, real effort task, experiment, auction |
| JEL: | C92 D03 |
| Date: | 2013–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20130071&r=cbe |
| By: | Roel van Veldhuizen (WZB Berlin Social Science Center); Hessel Oosterbeek (Universiteit van Amsterdam); Joep Sonnemans (Universiteit van Amsterdam) |
| Abstract: | In an influential study, Mas and Moretti (2009) find that “worker effort is positively related to the productivity of workers who see him, but not workers who do not see him”. They interpret this as evidence that social pressure can reduce free riding. In this paper we report an attempt to reproduce the findings of Mas and Moretti in a lab experiment. Lab experiments have the advantage that they can shut down alternative channels through which workers can influence the productivity of colleagues whom they observe. Although the subjects in our experiment are aware of the productivity of others and although there is sufficient scope for subjects to vary their productivity, we find no evidence of the type of peer effects reported by Mas and Moretti. This suggests that their findings are less generalizable than has been assumed. |
| Keywords: | peer effects, experiment, laboratory experiment |
| JEL: | C91 J24 |
| Date: | 2014–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20140051&r=cbe |