nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2015‒06‒13
fourteen papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale “Amedeo Avogadro”

  1. How do consumers choose health insurance? An experiment on heterogeneity in attribute tastes and risk preferences By Kairies-Schwarz, Nadja; Kokot, Johanna; Vomhof, Markus; Wessling, Jens
  2. Consistent or balanced? On the dynamics of voluntary contributions By Gallier, Carlo; Reif, Christiane; Römer, Daniel
  3. The Emergence of Law and Behavioural Science: A European Perspective By Alemanno , Alberto; Sibony , Anne-Lise
  4. Behavioral Consumers in Industrial Organization By Michael D. Grubb
  5. Income Inequality and Risk Taking By Schmidt, Ulrich; Neyse, Levent; Aleknonyte, Milda
  6. Is it a Fallacy to Believe in the Hot Hand in the NBA Three-Point Contest? By Joshua B. Miller; Adam Sanjurjo
  7. In-group favoritism and discrimination among multiple out-groups By Grimm, Veronika; Utikal, Verena; Valmasoni, Lorenzo
  8. Is financial instability male-driven? Gender and cognitive skills in experimental asset markets By Carlos Cueva Herrero; Aldo Rustichini
  9. A Hybrid Public Good Experiment Eliciting Multi-Dimensional Choice Data By Daniela Di Cagno; Arianna Galliera; Werner Güth; Luca Panaccione
  10. A behavioral approach to water conservation: evidence from Costa Rica By Datta,Saugato; Miranda,Juan José; Zoratto,Laura De Castro; Calvo-Gonzalez,Oscar; Darlingm,Matthew; Lorenzana,Karina Josephine Orduna
  11. A Real-Effort Experiment on Gift Exchange with Temptation By Koch, Alexander K.; Nafziger, Julia
  12. Am I my peer's keeper? Social responsibility in financial decision making By Füllbrunn, Sascha; Luhan, Wolfgang J.
  13. Trust and beliefs among Europeans: Cross-country evidence on perceptions and behavior By Dieckmann, Anja; Fischbacher, Urs; Grimm, Veronika; Unfried, Matthias; Utikal, Verena; Valmasoni, Lorenzo
  14. Overconfident Consumers in the Marketplace By Michael D. Grubb

  1. By: Kairies-Schwarz, Nadja; Kokot, Johanna; Vomhof, Markus; Wessling, Jens
    Abstract: Recent health policy reforms try to increase consumer choice. We use a laboratory experiment to analyze consumers' tastes in typical contract attributes of health insurances and to investigate their relationship with individual risk preferences. First, subjects make consecutive insurance choices varying in the number and types of contracts offered. Then, we elicit individual risk preferences according to Cumulative Prospect Theory. Applying a latent class model to the choice data, reveals five classes of consumers with considerable heterogeneity in tastes for contract attributes. From this, we infer distinct behavioral strategies for each class. The majority of subjects use minimax strategies focusing on contract attributes rather than evaluating probabilities in order to maximize expected payoffs. Moreover, we show that using these strategies helps consumers to choose contracts, which are in line with their individual risk preferences. Our results reveal valuable insights for policy makers of how to achieve efficient consumer choice.
    Abstract: Jüngste Gesundheitsreformen versuchen, Wahlmöglichkeiten für Konsumenten zu verbessern. Wir verwenden ein Laborexperiment, um die Präferenzen von Konsumenten für typische Vertragsattribute von Krankenversicherungen zu analysieren und um ihre Beziehung zu individuellen Risikopräferenzen zu untersuchen. Zuerst treffen Teilnehmer aufeinanderfolgende Versicherungsentscheidungen, die in der Anzahl und der Art der angebotenen Verträge variieren. Anschließend erheben wir individuelle Risikopräferenzen im Sinne der kumulativen Prospect Theory. Ein auf die Entscheidungsdaten angewandtes Latent Class Modell kann fünf Klassen von Konsumenten mit einer beachtlichen Heterogenität in Präferenzen für Vertragsattribute identifizieren. Davon ausgehend leiten wir spezifische Verhaltensstrategien für jede Klasse ab. Die Mehrheit der Teilnehmer wendet Minimax-Strategien an und konzentriert sich auf Vertragsattribute, anstatt Wahrscheinlichkeiten zu bewerten um die erwartenden Auszahlungen zu maximieren. Ferner zeigen wir, dass die Anwendung dieser Strategien Konsumenten hilft, Verträge zu wählen, die mit ihren individuellen Risikopräferenzen übereinstimmen. Unsere Ergebnisse liefern wertvolle Einsichten für politische Entscheidungsträger, wie sie effiziente Wahlmöglichkeiten für Konsumenten erreichen können.
    Keywords: health insurance,risk preferences,heterogeneity,heuristics,laboratory experiment,cumulative prospect theory
    JEL: C91 I13 D81
    Date: 2014
  2. By: Gallier, Carlo; Reif, Christiane; Römer, Daniel
    Abstract: We investigate the dynamic effects of a charitable lottery and an income tax on donations. The analysis is based on a two-round dictator game with the subject's charity of choice as recipient and additional incentives in the first round only. The immediate effect of a charitable lottery leads to higher contributions and we cannot find substantial crowding out of voluntary contributions in the presence of an income tax. These economic interventions weakly spill-over to the subsequent donation decisions without additional incentives. Our results suggest the presence of consistency seeking behaviour. This is especially true for a subgroup of participants with a rule-based mind-set and our research shows the importance of the subjects' moral framework in the context of dynamic pro-social behaviour.
    Keywords: Experiment,Charitable Giving,Lottery,Tax,Modified Dictator Game,Moral Balancing
    JEL: C91 D03 D64 H41
    Date: 2015
  3. By: Alemanno , Alberto; Sibony , Anne-Lise
    Abstract: Nudge and the Law explores the legal implications of the emergent phenomenon of behaviourally informed intervention. It focuses on the challenges and opportunities it may offer to the policymaking of the European Union. This dual focus on law and on Europe characterises our endeavour. This volume has been structured by taking as a point of the departure the current nudging debate, which mainly comprises two strands of enquiry: when is it legitimate for States to use psychology to inform policy? (the legitimacy debate) and, to the extent that it is legitimate, how can behavioural insights in practice be incorporated into the decision making processes? (the practicability debate). Against this backdrop we brought together scholars who could analyse what behavioural insights might bring to EU law, both at a horizontal level and at a sectoral level. This volume endeavours to present the results of their research in a manner that is accessible both to EU law specialists who are not yet familiar with behavioural sciences and to behavioural lawyers who are not specialists in EU law.
    Keywords: EU Law; behavioural sciences; nudges; regulation; libertarian paternalism; regulatory policy; policymaking; behavioural policy; impact assessment; randomized control trials
    JEL: I12 I28 J18 K00 K20 K23 K32 M00
    Date: 2015–02–16
  4. By: Michael D. Grubb (Boston College)
    Abstract: This paper succinctly overviews three primary branches of the industrial organization literature with behavioral consumers. The literature is organized according to whether consumers: (1) have non-standard preferences, (2) are overconfident or otherwise biased such that they systematically misweight different dimensions of price and other product attributes, or (3) fail to choose the best price due to suboptimal search, confusion comparing prices, or excessive inertia. The importance of consumer heterogeneity and equilibrium effects are also highlighted along with recent empirical work.
    Keywords: behavioral industrial organization; bounded rationality; loss aversion; present bias; overconfidence; search; obfuscation; switching; inertia
    JEL: D41 D42 D43 D81 D82 D83 L11 L12 L13 L15
    Date: 2015–05–12
  5. By: Schmidt, Ulrich; Neyse, Levent; Aleknonyte, Milda
    Abstract: Standard economic theory assumes that individual risk taking decisions are independent from the social context. Recent experimental evidence however shows that the income of peers has a systematic impact on observed degrees of risk aversion. In particular, subjects strive for balance in the sense that they take higher risks if this gives them the chance to break even with their peers. The present paper is, to the best of our knowledge, the first systematic analysis of income inequality and risk taking. We perform a real-effort field experiment where inequality is introduced to different wage rates. After the effort phase subjects can invest (part of) their salary into a risky asset. Besides the above mentioned possibility of higher risk taking of low-wage individuals to break even with high-wage individuals, risk taking can be influenced by an income effect consistent with e.g. decreasing absolute risk aversion and a house money effect of high-wage individuals. Our results show that the dominant impact of inequality on risk taking is what can be termed a social house money effect: high-wage individuals take higher risks than low-wage individuals only if they are aware of the inequality in wages.
    Keywords: Risk; Inequality; Real Effort; Field Experiment; Social Comparison
    JEL: C91 C93 D63 D81 J31
    Date: 2015–06–05
  6. By: Joshua B. Miller; Adam Sanjurjo
    Abstract: The hot hand fallacy – the tendency to believe, incorrectly, that good outcomes have a tendency to cluster – has long been considered a massive and widespread cognitive illusion with important implications in economics and finance. The strongest evidence in support of the fallacy remains that from the canonical domain of basketball, where the widespread belief in existence of hot hand shooting among expert coaches and players has been found to have no evidential basis (Gilovich, Vallone, and Tversky 1985). A prominent exhibit of the fallacy in the basketball domain is the Koehler and Conley (2003) study of the NBA Three-Point Contest (1994-1997), a setting which is viewed as ideal for a test of the hot hand (Thaler and Sunstein 2008). In this setting, despite the well-known beliefs of players, coaches, and fans alike, Koehler and Conley find no evidence of hot hand shooting. In the present study, we collect 29 years of shooting data from television broadcasts of the NBA Three-Point Contest (1986-2015), and apply a statistical approach developed in Miller and Sanjurjo (2014) that is more powered,contains an improved set of statistical measures, and corrects for a substantial downward bias in previous estimates of the hot hand effect. In contrast with previous studies, but consistent with recent findings in all previous controlled shooting studies including within the original study of Gilovich, Vallone, and Tversky (Miller and Sanjurjo 2014), there is substantial evidence of hot hand shooting in the NBA Three-Point Contest, which leaves little doubt that the hot hand not only exists, but actually occurs regularly, and thus the belief in the hot hand, in principle, is not a fallacy. JEL Classification Numbers: C12; C14; C91; C93; D03. Keywords: Hot Hand Fallacy; Hot Hand Effect.
    Date: 2015
  7. By: Grimm, Veronika; Utikal, Verena; Valmasoni, Lorenzo
    Abstract: In this study, we investigate how and why people discriminate among different groups, including their own groups and multiple out-groups. In a laboratory experiment, we use dictator games for five groups to compare actual transfers to in-group and out-group agents with the respective beliefs held by dictators and recipients in these groups. We observe both in-group favoritism and discrimination among multiple out-groups. Individuals expect others to be in-group biased, as well as to be treated differently by different out-groups. Dictators' in-group favoritism is positively related to the degree of in-group favoritism they expect other dictators to exhibit. Moreover, we find that a dictator tends to be relatively more generous toward a specific out-group when he or she expects that dictators belonging to that out-group are generous toward members of his or her ingroup.
    Keywords: discrimination,experiment,group identity,dictator game,beliefs
    JEL: C91 C92 D84 D01 D64
    Date: 2015
  8. By: Carlos Cueva Herrero (Dpto. Análisis Económico Aplicado); Aldo Rustichini (University of Minnesota)
    Abstract: The hypothesis that price stability would reliably increase with the fraction of women operating in financial markets has been frequently suggested in policy discussions. To test this hypothesis we conducted 10 male-only, 10 female-only and 10 mixed-gender experimental asset markets, and compared the effects of gender composition, confidence, risk attitude and cognitive skills. Male and female markets have comparable volatility and deviations from fundamentals, whereas mixed-gender markets are substantially more stable. On the other hand, higher average cognitive skills of the group are associated with reduced market volatility. Individual-level analysis shows that subjects with higher cognitive skills trade more rationally and earn significantly higher profits; similarly, mixed markets exhibit more rational behavior, particularly for traders with lower cognitive skills. Our results are demonstrated to hold in other experimental asset market studies, suggesting that a mixed-gender composition reduces mispricing across different types of asset markets.
    Keywords: asset market experiment, mispricing, price bubbles, gender, cognitive ability
    JEL: C91 C92 G02 G11 J16
    Date: 2015–05
  9. By: Daniela Di Cagno (LUISS Guido Carli); Arianna Galliera (LUISS Guido Carli); Werner Güth (Luiss Guido Carli and Frankfurt School of Finance and Management); Luca Panaccione (DEDI and CEIS, Università di Roma "Tor Vergata",)
    Abstract: Similar to Fischbacher and G¨achter (2010) we try to understand and explain the motivation of participants when contributing to a public good. In the Hybrid Public Good experiment each of two interacting contributors chooses an independent contribution level and three adjusted contribution levels when (s)he, as the only adjusting player, learns that the other’s independent contribution is smaller, equal or larger than the own one. We systematically vary the probability that one player can adjust, based on such qualitative information, but maintain that no adaptation at all and adaptation by only one occurs with positive probability. Adaptation is framed in two ways, once by additively changing the own independent contribution and once by stating new contribution levels. Surprisingly, there is a strong framing effect which increases with experience. Reacting to coinciding independent contributions implies impressive conformity in contributing. Reacting to higher, respectively lower independent contributions implies average upward, and, more strongly, downward adaptation.
    Keywords: Public goods, experiments, voluntary contribution mechanism
    JEL: C91 C72 H41
    Date: 2015–05–28
  10. By: Datta,Saugato; Miranda,Juan José; Zoratto,Laura De Castro; Calvo-Gonzalez,Oscar; Darlingm,Matthew; Lorenzana,Karina Josephine Orduna
    Abstract: This paper presents the design a set of three simple and replicable behavioral interventions, which use stickers that can be added to water bills at low cost, and test their impact on water consumption in Belen, Costa Rica, using a randomized control trial. Two of the three interventions were found to decrease water consumption significantly in the months following the intervention. A descriptive social norm intervention using neighborhood comparisons reduces consumption by between 3.7 and 5.6 percent relative to a control group, while a plan-making intervention reduces consumption by between 3.4 and 5.5 percent. While the two interventions have similar results, they are effective on different subpopulations, with the plan-making intervention being most effective for low-consumption households, while the neighborhood comparison intervention is most effective for high-consumption households. The results demonstrate that behavioral interventions, which have hitherto utilized sophisticated software to deliver customized messages, can be effectively implemented by local governments in developing countries, where technology and resource constraints render the sorts of customized messaging that has typically been used to deliver them in developed countries unfeasible. The results further confirm that raising awareness about how much water an individual consumes, and comparing this consumption level with peers, can go a long way in helping change individuals? behavior regarding the use of a finite resource such as water.
    Date: 2015–06–02
  11. By: Koch, Alexander K. (Aarhus University); Nafziger, Julia (Aarhus University)
    Abstract: We conduct a real-effort experiment to test whether workers reciprocate generous wages by managers when workers are tempted to surf the internet. Further, we investigate how an active policy of restricting the usage of the internet affects the workers' motivation. We observe that the temptation of the internet hampers workers' willingness to reciprocate fair wages. Yet, when the manager makes an active choice not to deny internet access, workers perceive the "freedom from control" as a gift which they reciprocate with high effort. Whether the positive "freedom from control" aspect or the negative temptation aspect dominates depends on the worker's reciprocity: for highly reciprocal workers the control aspect dominates; for non-reciprocal workers the temptation aspect dominates.
    Keywords: gift exchange, temptation, hidden costs of control
    JEL: C91 D03 J33 M52
    Date: 2015–05
  12. By: Füllbrunn, Sascha; Luhan, Wolfgang J.
    Abstract: Decision makers often take risky decisions on the behalf of others rather than for themselves. Competing theoretical models predict both, higher as well as lower levels of risk aversion when taking risk for others, and the experimental evidence is mixed. In our within-subject design, money managers have substantial responsibility by taking investment decisions for themselves and for a group of six clients, when payments are either fixed or perfectly aligned. We find that money managers invest significantly less for others than for themselves (cautious shift) which is mainly driven by a less risk averse sub sample. Digging deeper we find money managers to rather act in line with what they believe the clients would invest for themselves. We derive a responsibility weighting function to show that with a perfectly aligned payment the money manager weights egoistic and social preferences. Finally we bring our results in perspective with the mixed experimental literature.
    Abstract: Ein großer Teil risikoreicher, ökonomischer Entscheidungen wird von Dritten anstelle der Betroffenen getroffen. In solchen Fällen sagt die eine Klasse theoretischer Modelle geringere Risikoaversion voraus, eine andere Klasse aber höhere Risikoaversion im Vergleich zur Situation, bei der der Betroffene selbst die Entscheidung trifft. Die bisherigen empirischen Ergebnisse aus Laborexperimenten sind ebenso gemischt oder finden keine Unterschiede zwischen der Entscheidung für sich selbst oder für andere Personen. Wir verwenden ein 'within-subjects' für unser Experiment, bei dem Vermögensverwalter in unterschiedlichen Stufen für sich selbst, für eine Gruppe von Klienten, oder für sich selbst und eine Gruppe von Klienten Investitionsentscheidungen treffen. Wir erhöhen dabei die Soziale Verantwortung über die Größe der Gruppe von Investoren, um Verantwortungseffekte zu verstärken. Unsere Ergebnisse zeigen, dass das Risiko bei der Investition für andere signifikant geringer ist als bei der Investition für sich selbst. Dieses Aggregat-Ergebnis ist allerdings nur durch eine unterdurchschnittlich risikoaverse Subpopulation unserer Stichprobe getrieben. Eine genauere Analyse der Investitionsmotive zeigt, dass die Vermögensverwalter gemäß ihrer Erwartung der Klienten-Präferenzen handeln. Wir passen eine Nutzenfunktion mit Verantwortungs-Gewichten an und finden, dass die beobachtete Riskioaversion bei gemeinschaftlichen Investitionen durch egoistische und soziale Präferenzen erklärt werden kann. Abschließend stellen wir unsere Ergebnisse in den Kontext der bisherigen Literatur und versuchen die gemischten, bisherigen Ergebnisse aufgrund unserer Erkenntnisse zu erklären.
    Keywords: financial decision making,social responsibility,decision making for others,risk preferences,experiment
    JEL: C91 D81 G11
    Date: 2015
  13. By: Dieckmann, Anja; Fischbacher, Urs; Grimm, Veronika; Unfried, Matthias; Utikal, Verena; Valmasoni, Lorenzo
    Abstract: We conduct an experimental study among European citizens regarding cross-cultural perceptions related to trust in two dimensions: volunteerism and honesty. We use representative samples from five major economies of the Euro area: France, Germany, Italy, the Netherlands, and Spain. We find that European citizens rely on nationality to infer behavior. Assessments of behavior show a north/south pattern in which participants from northern countries are perceived to be more honest and to provide more effort in a volunteering game than are participants from southern countries. Actual behavior is, however, not always in line with these assessments. Assessments of honesty show strong evidence of social projection: Participants expect other European citizens to be less honest if they are culturally closer to themselves. Assessments of volunteerism instead show a similar north/south-pattern in which both northern and southern Europeans expect higher performance of northerners than they do of southerners.
    Keywords: Cross-cultural perceptions,Europe,Honesty,Real effort,Representative experiment
    JEL: D82 D84 C93 Z13
    Date: 2015
  14. By: Michael D. Grubb (Boston College)
    Keywords: overconfidence; overoptimism; overprecision; bias; naiveté; three-part tariff; present bias; self-control; prospective memory; inattention; pass-through; nudge; contract; behavioral industrial organization
    JEL: D41 D42 D43 D81 D82 D83 L11 L12 L13 L15
    Date: 2015–03–15

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