nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2015‒07‒18
thirteen papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale “Amedeo Avogadro”

  1. " Facta non verba " : an experiment on pledging and giving By Grolleau, Gilles; Mateu, Guillermo; Sutan, Angela; Vranceanu, Radu
  2. A conceptual foundation for the theory of risk aversion By Yonatan Aumann
  3. Social Preferences under Risk: Ex-Post Fairness vs. Efficiency By Alexia Gaudeul
  4. Inequality and Trade: A Behavioral-Economics Perspective By Sugata Marjit; Punarjit Roychowdhury
  5. Compliance with Endogenous Audit Probabilities By Kai A. Konrad; Tim Lohse; Salmai Qari
  6. More effort with less pay: On information avoidance, belief design and performance By Huck, Steffen; Szech, Nora; Wenner, Lukas M.
  7. Risky Environments, Hidden Knowledge, and Preferences for Contract Flexibility: An Artefactual Field Experiment By Kunte, Sebastian; Wollni, Meike
  8. The effect of opportunistic behavior on trust: An experimental approach By Romero, Christina; Wollni, Meike
  9. One Sided Matching: Choice Selection With Rival Uncertain Outcomes By David B. Johnson; Matthew Webb
  10. Gender Interaction in Teams: Experimental Evidence on Performance and Punishment Behavior By Jung , Seeun; Vranceanu, Radu
  11. Expectation-Based Loss Aversion and Strategic Interaction By Simon Dato; Andreas Grunewald; Daniel Müller
  12. Demanding or Deferring? The Economic Value of Communication with Attitude By Siyu Wang; Daniel Houser
  13. Surprised by the Gambler’s and Hot Hand Fallacies? A Truth in the Law of Small Numbers By Joshua B. Miller; Adam Sanjurjo

  1. By: Grolleau, Gilles (SupAgro LAMETA (Laboratoire Montpelliérain d’Économie Théorique et Appliquée) and LESSAC, ESC Dijon); Mateu, Guillermo (LESSAC, ESC Dijon); Sutan, Angela (LESSAC, ESC Dijon, and LAMETA); Vranceanu, Radu (ESSEC Business School and THEMA, Cergy)
    Abstract: This paper builds an experiment to investigate whether asking people to state how much they will donate to a charity (to pledge) can increase their actual donation. Individuals’ endowment is either certain or a random variable. We study different types of pledges, namely private, public and irrevocable ones, which differ in individual cost of not keeping a promise. Public pledges appear to be associated to lower donation levels. Irrevocable pledges ensure an amount of donations equal to donations in absence of pledges. Moreover, a significant number of individuals keep their promises, in presence of either private or public pledges. A higher risk attached to the endowment increases donations.
    Keywords: Charity giving; Pledge; Commitment; Communication; Experiments
    JEL: C91 D03 D64
    Date: 2015–06
  2. By: Yonatan Aumann
    Abstract: Classically, risk aversion is equated with concavity of the utility function. In this work we explore the conceptual foundations of this definition. In accordance with neo-classical economics, we seek an ordinal definition, based on the decisions maker’s preference order, independent of numerical values. We present two such definitions, based on simple, conceptually appealing interpretations of the notion of risk-aversion. We then show that when cast in quantitative form these ordinal definitions coincide with the classical Arrow-Pratt definition (once the latter is defined with respect to the appropriate units), thus providing a conceptual foundation for the classical definition. The implications of the theory are discussed, including, in particular, to the understanding of insurance. The entire study is within the expected utility framework.
    Keywords: Risk aversion, Utility theory, Ordinal preferences, Multiple objectives decision making
    Date: 2015–06
  3. By: Alexia Gaudeul (DFG Research Training Group 1411: The Economics of Innovative Change, Friedrich-Schiller-Universität, Jena)
    Abstract: Social lotteries are lotteries that are played along with someone else. The experimental literature indicates that risk attitudes depend on how one's situation in the safe alternative compares to that of a peer. Evaluation of the risky alternative also depends on whether the lottery gives equal payoffs ex-post. Experiments usually present payoffs side-by-side (payoff for me, payoff for the other). This draws attention to inequality in payoffs and thus gives weight to fairness concerns. We consider whether showing own payoff as a share of the total payoff changes risk preferences. Showing total payoffs explicitly draws attention to risk at the level of the pair and may thus moderate dislike for negatively correlated lotteries, as those are less risky at the level of the group. We find that a significant minority of subjects keeps on disliking lotteries that lead to ex-post unequal distributions of payoffs. Subjects also tend to prefer taking a risk rather than obtaining safe but unequal payoff distributions. Beyond reconciling findings from the previous literature, we also discuss differences in sensitivity to the social setting across individuals and the relation between social value orientation in safe and in risky settings.
    Keywords: Altruism, Choice under risk, Efficiency, Experiment, Fairness, Inequality aversion, Lotteries, Social lotteries, Social preferences
    JEL: C91 D63 D81
    Date: 2015–07–09
  4. By: Sugata Marjit; Punarjit Roychowdhury
    Abstract: In this paper we present a version of the Mitra and Trindade (CJE, 38: 1253-1271, 2005) model to examine how differences in preexisiting levels of inequality between countries may determine the pattern of international trade when individual preferences are non-homothetic. In particular, using a standard 2x2x2 Heckscher-Ohlin framework, we propose a behavioral linkage between asset inequality and trade pattern by endogenizing non-homotheticity in terms of status dependent preferences. We show that for sufficiently high ratios of capital to labor earnings, there exists a critical level of inequality such that specificities of the pattern of trade that emerge between the two countries are contingent upon whether the inequality levels prevailing in the countries are above or below this level. For sufficiently low ratios of capital to labor earnings, however, the trade pattern is independent of the exisiting levels of inequality relative to the critical level. Based on our model, we examine the impact of the resultant trade pattern on the levels of income inequality. Finally, we discuss some interesting international spillover effects of redistributive policies.
    Keywords: Heckscher-Ohlin Model, Income Inequality, Non-homothetic preferences, Social Status, Status good, Trade pattern. JEL Classification: D11, F11, Z13
    Date: 2015
  5. By: Kai A. Konrad; Tim Lohse; Salmai Qari
    Abstract: This paper studies the effect of endogenous audit probabilities on reporting behavior in a face-to-face compliance situation such as at customs. In an experimental setting in which underreporting has a higher expected payoff than truthful reporting we find an increase in compliance of about 80% if subjects have reason to believe that their behavior towards an officer influences their endogenous audit probability. Higher compliance is driven by considerations about how own appearance and performance affect their audit probability, rather than by social and psychological effects of face-to-face contact.
    Keywords: Compliance, audit probability, tax evasion, face value, customs
    JEL: H26 H31 C91 K42
    Date: 2015
  6. By: Huck, Steffen; Szech, Nora; Wenner, Lukas M.
    Abstract: In a tedious real effort task, agents can choose to receive information about their piece rate that is either low or ten times higher. One third of subjects deliberately decide to forego this instrumental information, revealing a preference for information avoidance. Strikingly, agents who face uncertainty about their wage outperform all others, including those who know that their wage is high. This also holds for enforced uncertainty. We demonstrate that all our findings can be captured by a model of optimally distorted expectations following Brunnermeier and Parker (2005).
    Keywords: Optimal Expectations,Belief Design,Performance,,Real Effort Task
    JEL: D83 D84 J31 M52
    Date: 2015
  7. By: Kunte, Sebastian; Wollni, Meike
    Abstract: Contract flexibility can be expedient for economic exchange in environments with high ambiguity and risk, but may also encourage opportunistic behavior. We run a modified investment game, including the choice between two different contract designs and asymmetric information about the realized surplus (i.e., hidden knowledge). We examine if Nairobi slum dwellers choose flexible over rigid contracts when interacting in risky environments and whether preferences for contract flexibility are sensitive to the exogenous probability of experiencing a negative shock. We find that most interaction is realized through flexible agreements. Principals offer a higher level of flexibility if the likelihood of a shock is high, relative to the low-risk environment. Agents are somewhat more reluctant to sign rigid agreements when facing the threat of a bad state. While agents and the overall efficiency benefit from higher flexibility, principals always do better by opting for a rigid contract.
    Keywords: contract flexibility, risk sharing, hidden knowledge, artefactual field experiment, investment game, Nairobi slums, Kenya, Institutional and Behavioral Economics, Risk and Uncertainty, C72, D82, L14, O12,
    Date: 2015–05
  8. By: Romero, Christina; Wollni, Meike
    Abstract: Linking small farmers to global markets through contract farming has become an important policy recommendation aiming to increase farmers’ income and foster rural development. Nevertheless, some of the arrangements involving small farmers have been reported to loose participants or collapse over time. Trust is an informal institution that can discourage opportunism and facilitate the compliance of contracts in a setting with an expensive and weak legal system. Nevertheless, the study of trust has been addressed mostly in lab experiments, but in the agribusiness context it has been addressed only by a few authors in a rather descriptive way. We use a framed field experiment with prior signaling on a sample of 180 small broccoli farmers in the highlands of Ecuador to explore the effect of opportunistic behavior on small farmers´ trust. The results reveal that this group of farmers has lower than average trust towards unknown people. Furthermore, we use a signal that mimics the payment of a loan by the B partner as treatment in the predesigned trust game. Results show that a positive signal increases trust, but a negative signal has no effect on it. Reacting slowly to external negative signs can threaten individuals who will not protect themselves towards opportunism. If farmers do not react quickly enough, they might face larger losses and will not be able to stay in business. In addition, if informal norms include weak sanctions, contract farming will be less likely and individuals will prefer the spot market were only one-time exchanges take place.
    Keywords: small farmers, trust, experiments, signaling, delay on payment, Institutional and Behavioral Economics, D02, Q13,
    Date: 2015–06
  9. By: David B. Johnson; Matthew Webb (University of Calgary)
    Abstract: We examine decision making in the context of one sided matching: where individuals simultaneously submit several applications to vacancies, each match has an exogenous probability of forming, but each applicant can only fill one vacancy. In these environments individuals choose among interdependent, rival, uncertain outcomes. We design an experiment that has individuals choose a varying number of interdependent lotteries from a fixed set. We find that: 1) with few choices, subjects make safer and riskier choices, 2) subjects behave in a manner inconsistent with expected utility maximizing behavior. We discuss these findings in the context of college application decisions.
    Date: 2015–07–09
  10. By: Jung , Seeun (ESSEC Business School and THEMA); Vranceanu, Radu (ESSEC Business School and THEMA)
    Abstract: This paper reports results from a real-eort experiment in which men and women are paired to form a two-member team and asked to execute a real-effort task. Each participant receives an equal share of the team's output. Workers who perform better than their partner can punish him/her by imposing a fi ne. We manipulate the teams' gender composition (man-man, man-woman, and woman-woman) to analyze whether an individual's performance and sanctioning behavior depends on his/her gender and the gender interaction within the team. The data show that, on average, men perform slightly better than women. A man's performance will deteriorate when paired with a woman, while a woman's performance will improve when paired with a woman. When underperforming, women are sanctioned more often and more heavily than men; if sanctioned, men tend to improve their performance, while women's performance does not change.
    Keywords: Gender studies; Real-effort task; Team production; Performance; Punishment; Discrimination
    JEL: C91 J16 M52
    Date: 2015–07
  11. By: Simon Dato; Andreas Grunewald; Daniel Müller
    Abstract: This paper provides a comprehensive analysis regarding strategic interaction under expectation-based loss-aversion. First, we develop a coherent framework for the analysis by extending the equilibrium concepts of Koszegi and Rabin (2006, 2007) to strategic interaction and demonstrate how to derive equilibria. Second, we delineate how expectation-based loss-averse players differ in their strategic behavior from their counterparts with standard expected-utility preferences. Third, we analyze equilibrium play under expectation-based loss aversion and comment on the existence of equilibria.
    Keywords: Non-Cooperative Games, Expectation-Based Loss Aversion, Reference-Dependent Preferences, Mixed Strategies
    JEL: C72 D01 D03 D81
  12. By: Siyu Wang (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University); Daniel Houser (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University)
    Abstract: This paper investigates why cheap-talk natural language communication is systematically found to promote coordination better than predetermined intention signaling. We hypothesize the reason is that, when communicating with natural language, people both use and respond to intentions and attitudes, where attitude indicates the strength of a message sender’s desire to have her message followed. We test our hypothesis using controlled laboratory experiments in both the United States and China. We find (i) free-form messages do include both signaled intentions and attitudes; (ii) people respond both to intentions and attitudes when making decisions; and (iii) the use of attitude significantly improves coordination. Moreover, while males and females recognize and respond to intentions and attitudes equally well, we find females are more likely to send more demanding signals than males, while males send messages focused more on the equilibrium outcome than attitude. Length: 45
    Keywords: communication; coordination; experiment; attitude; gender
    Date: 2015–07
  13. By: Joshua B. Miller; Adam Sanjurjo
    Abstract: We find a subtle but substantial bias in a standard measure of the conditional dependence of present outcomes on streaks of past outcomes in sequential data. The mechanism is driven by a form of selection bias, which leads to an underestimate of the true conditional probability of a given outcome when conditioning on prior outcomes of the same kind. The biased measure has been used prominently in the literature that investigates incorrect beliefs in sequential decision making—most notably the Gambler’s Fallacy and the Hot Hand Fallacy. Upon correcting for the bias, the conclusions of some prominent studies in the literature are reversed. The bias also provides a structural explanation of why the belief in the law of small numbers persists, as repeated experience with finite sequences can only reinforce these beliefs, on average. JEL Classification Numbers: C12; C14; C18;C19; C91; D03; G02. Keywords: Law of Small Numbers; Alternation Bias; Negative Recency Bias; Gambler’s Fallacy; Hot Hand Fallacy; Hot Hand Effect; Sequential Decision Making; Sequential Data; Selection Bias; Finite Sample Bias; Small Sample Bias.
    Date: 2015

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