nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2015‒08‒13
fifteen papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale “Amedeo Avogadro”

  1. The impact of financial education on adolescents' intertemporal choices By Melanie Lührmann; Marta Serra-Garcia; Joachim Winter
  2. The Impact of Monitoring in Infinitely Repeated Games: Perfect, Public, and Private By Masaki Aoyagi; V. Bhaskar; Guillaume R. Frechette
  3. Comparing Decisions under Compound Risk and Ambiguity: The Importance of Cognitive Skills By Sasha Prokosheva
  4. Dealing with risk: Gender, stakes, and probability effects By Irene Comeig; Charles A. Holt; Ainhoa Jaramillo-Gutiérrez
  5. Anticipating Preference Reversal" By Le Yaouanq, Yves
  6. Who knows it is a game? On strategic awareness and cognitive ability By Fehr, Dietmar; Huck, Steffen
  7. Political Identity and Trust By Pablo Hernandez; Dylan Minor
  8. Time-Varying Risk Aversion during World War II: Evidence from Belgian Lottery Bond Prices By Matthieu Gilson; Kim Oosterlinck; Andrey Ukhov
  9. Does an Uncertain Tax System Encourage "Aggressive Tax Planning"? By James Alm
  10. A theory of wage setting behavior By Marco Fongoni; Alex Dickson
  11. Overconfidence, Stability and Investments By Dessi, Roberta; Zhao, Xiaojian
  12. Stability in Network Formation Games with Streams of Payoffs: An Experimental Study By Mariya Teteryatnikova; James Tremewan
  13. Now you see it, now you don’t: How to make the Allais Paradox appear, disappear, or reverse By Pavlo Blavatskyy; Andreas Ortmann; Valentyn Panchenko
  14. Let Bygones Be Bygones? Socialist Regimes and Personalities in Germany By Tim Friehe; Markus Pannenberg; Michael Wedow
  15. For love or reward? Characterising preference for giving to parents in an experimental setting By Maria Porter; Abi Adams

  1. By: Melanie Lührmann (Institute for Fiscal Studies); Marta Serra-Garcia (Institute for Fiscal Studies); Joachim Winter (Institute for Fiscal Studies and Ludwig-Maximilians-Universität München)
    Abstract: We study the impact of financial education on intertemporal choice in adolescence. The program was randomly assigned among high-school students and intertemporal choices were measured using an incentivized experiment. Students who participated in the program display a decrease in time inconsistency; an increase in the allocation of payment to a single payment date, compared to spreading payment across two dates; and increased consistency of choice with the law of demand. These findings suggest that the effect of such educational programs is to increase comprehension and decrease bracketing in intertemporal choice. This working paper was updated in May 2015.
    JEL: D14 D91 C93
    Date: 2014–07
  2. By: Masaki Aoyagi; V. Bhaskar; Guillaume R. Frechette
    Abstract: This paper uses a laboratory experiment to study the effect of a monitoring structure on the play of the infinitely repeated prisoner's dilemma. Keeping the stage game fixed, we examine the behavior of subjects when information about past actions is perfect (perfect monitoring), noisy but public (public monitoring), and noisy and private (private monitoring). We find that the subjects sustain cooperation in every treatment, but that their strategies differ substantially in the three treatments. Specifically, we observe that the strategies are more complex under public and private monitoring than under perfect monitoring. We also find that the strategies under private monitoring are more lenient than under perfect monitoring, and less forgiving than under public monitoring.
    Date: 2015–07
  3. By: Sasha Prokosheva
    Abstract: I investigate the relationship between attitudes towards ambiguity and ability to reduce compound risks. The evidence from an experiment on adolescents shows that patterns identified in the previous literature are susceptible to experimental design and subject sample characteristics. Overall for a 20% of my subject sample, I do not observe a significant relationship between ambiguity-neutral behavior and reduction of compound lotteries. The relationship also varies with subjects' cognitive skills and the way lotteries are presented. My results caution about theoretical studies which model ambiguity preferences by relaxing the assumption of compound risk reduction, and add to the evidence against the use of compound lotteries to represent ambiguity in experiments.
    Keywords: ambiguity; cognitive ability; reduction of compound lotteries;
    JEL: C91 D81
    Date: 2014–12
  4. By: Irene Comeig (ERICES and University of Valencia); Charles A. Holt (University of Virginia); Ainhoa Jaramillo-Gutiérrez (ERICES and Jaume I University, Castellón)
    Abstract: This paper investigates how subjects deal with financial risk, both "upside" (with a small chance of a high payoff) and "downside" (with a small chance of a low payoff). We find that the same people who avoid risk in the downside setting tend to make more risky choices in the upside one. The experiment is designed to disentangle the probability-weighting and utility-curvature components of risk attitudes, and to differentiate settings in which gender differences arise from those in which they do not. Women are more risk averse for downside risks, but gender differences are diminished for upside risks.
    Keywords: risk aversion, probability weighting, rank-dependent utility, gender differences, experiments
    JEL: C91 G02
    Date: 2015–03
  5. By: Le Yaouanq, Yves
    Abstract: This paper studies the consistency between a decision-maker's choices over menus in a first period and inside menus at a later date. The main result shows that the comparison of commitment decisions and actual subsequent choices reveals whether future taste contingencies are correctly anticipated: a sophisticated individual chooses exactly the right commitment options, whereas a naive decision-maker overlooks some profitable opportunities. The paper provides absolute and comparative measures of naivete and shows under which conditions pessimistic behavior can be attributed to the presence of self-control costs. Finally, I implement an experimental protocol based on the theoretical analysis and find substantial evidence of naivete at the individual level.
    Keywords: Self-control, Naivete, Temptation, Stochastic choice, Random Strotz
    JEL: C91 D81 D90
    Date: 2015–06
  6. By: Fehr, Dietmar; Huck, Steffen
    Abstract: We introduce the notion of strategic awareness in experimental games which captures the idea that subjects realize they are playing a game and thus have to form beliefs about others' actions. The concept differs from both, rule understanding and rationality. We then turn to experimental evidence from a beauty contest game where we elicit measures of cognitive ability and beliefs about others' cognitive ability. We show that the effect of cognitive ability is highly non-linear. Subjects' behavior below a certain threshold choose numbers in the whole interval and does not correlate with beliefs about others ability. In contrast, choices of subjects who exceed the threshold avoid choices above 50 and react very sensitively to beliefs about others' cognitive ability.
    Abstract: In diesem kurzen Artikel führen wir das Konzept von strategic awareness in Experimenten ein. Dieses neue Konzept beschreibt die Fähigkeit von Experimentteilnehmer, strategische Situationen zu erkennen und daher Erwartungen über das Verhalten von anderen zu bilden. Das Konzept unterscheidet sich sowohl von Rationalität als auch vom bloßen Verstehen von den Regeln eines Experiments. Wir demonstrieren das Konzept empirisch mit Hilfe von Daten eines Beauty Contest Games, in dem wir die kognitiven Fähigkeiten der Teilnehmer und ihre Einschätzungen über die kognitiven Fähigkeiten der anderen Teilnehmer erheben. Die Resultate zeigen, dass kognitive Fähigkeiten einen starken nicht-linearen Effekt auf die Entscheidungen in dem Beauty Contest Game haben. Das Verhalten von Experimentteilnehmer, die unter einer bestimmten Schwelle liegen, kann nicht von zufälligen Entscheidungen unterschieden werden und korreliert auch nicht mit deren Einschätzung über die kognitiven Fähigkeiten der anderen Teilnehmer. Im Gegensatz dazu vermeiden Teilnehmer, die über dieser Schwelle liegen, dominierte Entscheidungen und basieren ihre Entscheidungen auf ihrer Einschätzung über die kognitiven Fähigkeiten der anderen Teilnehmer.
    Keywords: strategic awareness,cognitive ability,beauty contest
    JEL: C7 C9 D0
    Date: 2014
  7. By: Pablo Hernandez (New York University AD); Dylan Minor (Harvard Business School, Strategy Unit)
    Abstract: We explore how political identity affects trust. Using an incentivized experimental survey conducted on a representative sample of the U.S. population, we vary information about partners' partisan identity to elicit trust behavior, beliefs about trustworthiness, and actual reciprocation. By eliciting beliefs, we are able to assess whether differences in trust rates are due to stereotyping or a "taste for discrimination." By measuring actual trustworthiness, we are able to determine whether beliefs are statistically correct. We find that trust is pervasive and depends on the partisan identity of the trustee. Differential trust rates are explained by incorrect stereotypes about the other's lack of trustworthiness rather than by a "taste for discrimination." Given the importance of beliefs, we run additional treatments in which we disclose previous reciprocation rates before participants decide whether to trust. We find that beliefs are slightly more optimistic compared with the previous treatments, suggesting that incorrect stereotypes are hard to change.
    Keywords: Trust, Beliefs, Social Preferences, Political Ideology
    Date: 2015–07
  8. By: Matthieu Gilson; Kim Oosterlinck; Andrey Ukhov
    Abstract: Although of paramount importance in finance, empirical evidence on time-varying risk aversion remains mixed. This paper contributes to the existing literature by analyzing how investors’ risk preferences change under extreme circumstances. Using the market prices of a Belgian lottery bond, we build an index that tracks the attitude toward risk of financial markets’ participants during the Second World War. Results show that risk aversion dramatically changed during the Occupation period. Before 1943, investors showed strong signs of risk aversion; yet, in 1943 and 1944, they exhibited a risk-seeking attitude. After 1943, investors agreed to pay more and more for the lottery feature, and much more than the lottery’s expected payoff. In line with the behavioral finance literature, this puzzling result is attributed to psychological factors, most importantly the euphoria brought by the prospect of the war’s end.
    Date: 2015–07–31
  9. By: James Alm (Department of Economics, Tulane University)
    Abstract: "Aggressive tax planning" (ATP) is typically characterized as a tax scheme that reduces the effective tax rate of a particular type of income to a level below the one sought by fiscal policy for this income. One motivation often suggested for its use is the uncertainty in tax liabilities introduced by a complicated and ever changing tax system. In this paper, I examine the impact of an uncertainty on the use of such tax schemes; by implication, I also examine how a simpler and more stable tax system that reduced this uncertainty might affect ATP. In this analysis, I draw upon some of my own work on tax avoidance and tax evasion, and then I extend this work to the related but separate area of ATP. Importantly, I introduce and model both individual and group motivations, incorporating insights from behavioral economics in these new analyses. Taxpayers are clearly motivated in part by narrowly defined financial considerations as shaped by the tax, audit, and penalty rates that they face, all of which I classify as individual motivations. However, individuals are also often influenced by many other factors that go beyond self-interest and that have as their main foundation some aspects of social norms, morality, altruism, fairness, or the like. In their entirety, I lump these factors together as group motivations, and I argue that they are shaped by the dynamic social context in which, and the process by which, decisions emerge. My main conclusion is that there is much in theory to suggest that uncertainty leads to more use of ATP, especially when both individual and group motivations are considered.
    Keywords: tax avoidance, tax evasion, uncertainty, risk, behavioral economics, experimental economics
    JEL: H2 H26 D03 C9
    Date: 2014–02
  10. By: Marco Fongoni (Department of Economics, University of Strathyclyde); Alex Dickson (Department of Economics, University of Strathyclyde)
    Abstract: Concerns for fairness, workers' morale and reciprocity influence firms' wage setting policy. In this paper we formalize a theory of wage setting behavior in a simple and tractable model that explicitly considers these behavioral aspects. A worker is assumed to have reference-dependent preferences and displays loss aversion when evaluating the fairness of a wage contract. The theory establishes a wage-effort relationship that captures the worker's reference-dependent reciprocity, which in turn influences the firm's optimal wage policy. The paper makes two key contributions: it identifies loss aversion as an explanation for a worker's asymmetric reciprocity; and it provides realistic and generalized microfoundation for downward wage rigidity. We further illustrate the implications of our theory for both wage setting and hiring behavior. Downward wage rigidity generates several implications for the outcome of the initial employment contract. The worker's reference wage, his extent of negative reciprocity and the firms’ expectations are key drivers of the propositions derived.
    Keywords: reference dependence, loss aversion, morale, reciprocity, employment contract, downward wage rigidity, wage setting behavior
    JEL: C78 J30 J41
    Date: 2015–07
  11. By: Dessi, Roberta; Zhao, Xiaojian
    Abstract: The available evidence from numerous studies suggests that overconfidence varies significantly across countries. We develop a model that endogenizes these differences and examines their economic consequences. A crucial determinant of difierences in overconfidence is the degree of expected stability of the environment, with greater changefulness giving rise to more overconfident beliefs. When stability is endogenized, multiple equilibria can emerge, \dynamism" and overconfidence reinforcing each other in one case, stability and realistic self-assessment in another. Evidence from 38 countries is consistent with this relationship. Finally, our model also sheds some light on differences in overconfidence within countries, as well as exploring the interaction between overconfidence and sensitivity to shame.
    Keywords: Self-confidence, investment, cultural differences, cultural transmission, shame.
    JEL: D03 D83 Z1
    Date: 2015–05
  12. By: Mariya Teteryatnikova; James Tremewan
    Abstract: We run a novel network formation experiment with a stream of payos and relatively unstructured link formation process, and test the performance of a number of theoretical stability concepts in this environment. We focus especially on the issue of myopic versus farsighted behaviour in network formation. A subtle treatment variation demonstrates clearly the power of myopic stability concepts in identifying the most stable networks. However, we also nd support for farsighted concepts of stability, especially those that assume players are pessimistic about the eventual outcome of a deviation.
    JEL: A14 C71 C92 D85
    Date: 2015–07
  13. By: Pavlo Blavatskyy (School of Management and Governance, Murdoch University); Andreas Ortmann (School of Economics, UNSW Business School, UNSW); Valentyn Panchenko (School of Economics, UNSW Business School, UNSW)
    Abstract: The Allais Paradox, or Common Consequence Effect to be precise, is one of the most wellknown behavioral regularities in individual decision making under risk. A common perception in the literature, which motivated the development of numerous generalized non‐expected utility theories, is that the Allais Paradox is a robust empirical finding. We argue that such a perception does not accurately reflect the experimental evidence on the Allais Paradox and show how specific choices of parameters can make it appear, disappear, or reverse. For example, our results suggest that the Allais Paradox is likely to disappear when lotteries involve relatively small outcomes under real financial incentives and probability distributions are described as compound lotteries or in a frequency format (rather than as reduced‐form simple lotteries). We also find that the Allais Paradox is likely to get reversed when lotteries are designed with an even division of the probability mass between the lowest and the highest outcomes.
    Keywords: Decision under risk; the Allais Paradox; Common Consequence Effect; Expected Utility; Fanning-out; Experimental Practices
    JEL: D01 D81
    Date: 2015–07
  14. By: Tim Friehe; Markus Pannenberg; Michael Wedow
    Abstract: This paper investigates the influence of political regimes on personality, using the separation of Germany into the socialist GDR and the democratic FRG and its reunification in 1990 as a natural experiment. We show that there are significant differences between former GDR and FRG residents regarding important attributes of personality (particularly the locus of control, neuroticism, conscientiousness, and openness). To understand the influence of the GDR's socialist regime on personality, we test an important channel by exploiting regional variation in the number of unofficial state-security collaborators across East German counties. Our results indicate that local surveillance intensity is indeed an important determinant of the personality of former GDR citizens. The differences in personality imply that former citizens of the GDR have economic prospects rather different from former FRG citizens and help to understand behavioral differences established in the prior literature.
    Keywords: personality, political regime, East Germany, socialism, Big Five, locus of control, SOEP
    JEL: D03 D12 D63
    Date: 2015
  15. By: Maria Porter (Institute for Fiscal Studies); Abi Adams (Institute for Fiscal Studies and University of Oxford)
    Abstract: This paper examines the motivation for intergenerational transfers between adult children and their parents, and the nature of preferences for such giving behaviour, in an experimental setting. Participants in our experiment play a series of dictator games with parents and strangers, in which we vary endowments and prices for giving to each recipient. We fiÂ…nd that preferences for giving are typically rational. When parents are recipients as opposed to strangers, participants display greater sensitivity to the price of giving, and a higher relative proclivity for giving. Our Â…findings also provide evidence of reciprocal motivations for giving, as players give more to parents who have full information regarding the context in which giving occurs.
    Date: 2014–07

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