nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2015‒09‒18
thirteen papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale “Amedeo Avogadro”

  1. Incentive Contracts for Teams: Experimental Evidence By Landeo, Claudia; Spier, Kathryn
  2. "Risk Behavior, Risk Perception and Online Shopping: An Experimental Approach" By Zafer Akýn; Ý. Erdem Seçilmiþ
  3. Law and Economics and Tort Litigation Institutions: Theory and Experiments By Landeo, Claudia
  4. Heterogeneous Adaptive Expectations and Coordination in a Learning-to-Forecast Experiment By Colasante, Annarita; Palestrini, Antonio; Russo, Alberto; Gallegati, Mauro
  5. Cognition biases in real estate investment decisions. Empirical evidence from the german development market By K. Meyer; A. Pfnür
  6. "Reputation Transmission without Benefit to the Reporter: a Behavioral Underpinning of Markets in Experimental Focus" By Kenju Kamei; Louis Putterman
  7. Clever enough to tell the truth By Bradley J. Ruffle, Yossef Tobol
  8. The disposition effect in team investment decisions: Experimental evidence By Rau, Holger A.
  9. No discounting as a moral virtue in intertemporal choice models By Vipul Bhatt
  10. Preference Cloud Theory: Imprecise Preferences and Preference Reversals By Bayrak, Oben K.; Hey, John D.
  11. Behavioural biases among real estate investment decision makersHas anyone seen my neo-cortex? I’m sure I left it here somewhere. By S. Ryan; M. Richardson
  12. Estimating the Relationship between Skill and Overconfidence By Feld, Jan; Sauermann, Jan; De Grip, Andries
  13. The order of knowledge and robust action: How to deal with economic uncertainty? By Falkinger, Josef

  1. By: Landeo, Claudia (University of Alberta, Department of Economics); Spier, Kathryn (Harvard Law School)
    Abstract: This paper reports the results of an experiment on incentive contracts for teams. The agents, whose efforts are complementary, are rewarded according to a sharing rule chosen by the principal. Depending on the sharing rule, the agents confront endogenous prisoner's dilemma or stag-hunt environments. Our main findings are as follows. First, we demonstrate that ongoing interaction among team members positively affects the principal's payoff . Greater team cooperation is successfully induced with less generous sharing rules in infinitely-repeated environments. Second, we provide evidence of the positive effects of communication on team cooperation in the absence of ongoing team interaction. Fostering communication among team members does not significantly affect the principal's payoff , suggesting that agents' communication is an imperfect substitute for ongoing team interaction. Third, we show that offering low sharing rules can back re. The agents are willing to engage in costly punishment (shirking) as retaliation for low offers from the principal. Our findings suggest that offering low sharing rules is perceived by the agents as unkind behavior and hence, triggers negative reciprocity.
    Keywords: Moral Hazard in Teams; Prisoners Dilemma; Stag-Hunt Games; Infinitely-Repeated Games; Communication; Reciprocity; Laboratory Experiments
    JEL: C72 C90 D86 K10 L23
    Date: 2015–08–25
  2. By: Zafer Akýn (Department of Economics, Ipek University); Ý. Erdem Seçilmiþ (Department of Public Finance, Hacettepe University)
    Abstract: In this paper, we analyze and link self-reported risk perception data obtained from surveys and experimentally elicited risk parameters and use them to explain online shopping behavior. We find that self-reported risk data turn out to be not correlated with the actual risk parameters. Although risk perceptions do not play a significant role in explaining binary online shopping behavior, risk parameters of the subjects elicited via a new hybrid experimental methodology play a very important role. The data also reveals that actually risk-averse subjects tend to report themselves to be just as risk-loving as the ones who exhibit risk-loving behavior.
    Keywords: Perceived Risk, Risk Elicitation, Experiment, Survey, Online Purchasing
    Date: 2015–09
  3. By: Landeo, Claudia (University of Alberta, Department of Economics)
    Abstract: In tort litigation, delayed settlement or impasse imposes high costs on the parties and society. Litigation institutions might influence social welfare by affecting the likelihood of out-of-court settlement and the potential injurers’ investment in product safety. An appropriate design of litigation institutions and tort reform requires good knowledge of the factors that affect litigants’ behavior. The combination of theoretical and experimental law and economics, which represents the cornerstone of the application of the scientific method, might enhance our understanding of the effects of litigation institutions and tort reform on settlement and deterrence. We evaluate the interaction between theoretical and experimental law and economics in the study of tort litigation institutions. Special attention is devoted to liability, litigation and tort reform institutions, and behavioral factors that might affect impasse. Our analysis suggests a productive interaction between theoretical and experimental law and economics. In particular, findings from experimental economics work on litigation institutions indicate the presence and robustness of cognitive biases, and provide evidence of the effects of litigants’ biased beliefs on the likelihood of impasse. These findings have motivated the construction of new economic models of litigation involving more empirically-relevant assumptions about litigants’ beliefs. As a result of the application of the scientific method, the contributions of law and economics to the design of legal institutions might be strengthened.
    Keywords: Law and Economics; Experimental Law and Economics; Scientific Method; Civil Litigation; Institutional Design; Settlement; Litigation; Asymmetric Information; Self-Serving Bias; Pretrial Bargaining; Incentives for Care; Experiments; Caps on Non-Economic Damages; Motivated Reasoning; Divergent Beliefs; Motivated Anchoring; Non-Cooperative Games; Disputes
    JEL: C72 C90 C91 D62 D82 D86 J52 J58 K12 K21 K41 L12 L40 L42
    Date: 2015–01–01
  4. By: Colasante, Annarita; Palestrini, Antonio; Russo, Alberto; Gallegati, Mauro
    Abstract: The present work analyzes the individual behavior in an experimental asset market in which the only task of each player is to predict the future price of an asset. To form their expectations, players see the past realization of the asset price in the market and the current information about the mean dividend and the interest rate. We investigate the mechanism of expectation formation in two different contexts: one with a constant fundamental value, and one in which the fundamental price increases over repetitions. Results show that there is heterogeneity both within and between Treatments. Considering an increasing fundamental value has no impact on the individual expectations but it increases the volatility of the market price. We investigate in depth the reasons behind the observed heterogeneity between groups in the same treatment and results show that the heterogeneity of players' expectations is the main cause of the heterogeneity in the realized price. Looking at the coordination, we find out that homogeneous expectations is not a sufficient condition to have high degree of coordination. We analyze the individual forecasting errors as a determinant of the coordination within group and results show that a positive and significant correlation between individual errors strongly influence the level of coordination.
    Keywords: Laboratory experiment, expectations, forecasting, heterogeneity, coordination.
    JEL: C91 C92 D84 G12
    Date: 2015–09–11
  5. By: K. Meyer; A. Pfnür
    Abstract: Cognitive biases have been intensely studied in security markets so far (Simon 1987). Flyvberg (2005) also found, that project management decisions in the construction of infrastructure suffer from cognitive biases. In the field of real estate development investment decisions no empirical analysis of these social-psychological effects like miscalibration (e.g. Zacharakis/Sheperd, 2001), over optimism (e.g. Heating, 2002) or escalating commitment (Staw/Ross 1987) are known so far. A lot of actual large scale projects like the new Berlin Brandenburg Airport or the new Hamburg Opera House Elbphilharmonie, which is one of the 10 most expensive single building project developments of the last years gives a lot of impressionistically evidence, that the cognition bias of project investment decision makers is one of the most important reasons for running out of time and costs. Therefore we develop a model of cognition biases in real estate development decision situations containing the most relevant biases and the key types of decision makers and situations. Real estate development decisions differ from security investments, because there are several parties who work together in one relatively long lasting project, while they can physically see the project and it's success grow. In a large-scale empirical survey among all types of real estate project decision makers (e.g. sector, hierarchy, personal experience) we analyze and compare the individual degrees of cognition biases with methods coming from the empirical social research. We measure cognition biases and their specific reasons. The results of several univariate and multivariate analyses show heavily cognition biases in real estate investment decisions, which vary intensely between different types of decision makers. Especially in real estate development decisions the degree of bias depends on the individual objective and subjective knowledge and the incentives of the decision maker. We also found evidence, that the degree of the bias in decision situations, which results in inefficiency, is not given, but can reduced by far. So we are able to derive some methodological implications for theory and practice in the field of efficient institutionalizing the project.
    Keywords: Cognition Bias; Decicion Making; Real Estate Development; Real Estate Invesmtent; Risk Management
    JEL: R3
    Date: 2015–07–01
  6. By: Kenju Kamei; Louis Putterman
    Abstract: Reputation is a commonly cited check on opportunism in economic and social interactions. But it is often unclear what would motivate an agent to report another’s behavior when the pool of potential partners is large and it is easy enough for an aggrieved player to move on. We argue that behavioral or social preference motivations may solve this conundrum. In a laboratory experiment in which subjects lack any private material incentive to report partners’ actions, we find that most cooperators incur a cost to report a defecting partner when this has the potential to deprive the latter of future gains and to help his next partner.
    Date: 2015
  7. By: Bradley J. Ruffle, Yossef Tobol (Wilfrid Laurier University)
    Abstract: We conduct a field experiment on 427 Israeli soldiers who each rolled a six-sided die in private and reported the outcome. For every point reported, the soldier received an additional half-hour early release from the army base on Thursday afternoon. We find that the higher a soldier’s military entrance score, the more honest he is on average. We replicate this finding on a sample of 156 civilians paid in cash for their die reports. Furthermore, the civilian experiments reveal that two measures of cognitive ability predict honesty, whereas self-report honesty questions and a consistency check among them are of no value. We provide a rationale for the relationship between cognitive ability and honesty and discuss the generalizability of this result.
    Keywords: honesty, cognitive ability, soldiers, high non-monetary stakes, regression discontinuity design
    JEL: C93 M51
    Date: 2015–09–01
  8. By: Rau, Holger A.
    Abstract: This paper experimentally studies the disposition effects of teams and individuals. The disposition effect describes the phenomenon that investors are reluctant to realize losses, whereas winners are sold too early. Our experiments compare the investments of two-person teams to a setting where investors trade alone. We find that subjects investing jointly exhibit more pronounced disposition effects than individuals. A closer look reveals that investor teams hardly realize losses and predominately sell winners. The data suggest that decision-dependent emotions may explain the differences. That is, teams reporting high levels of regret exhibit significantly higher disposition effects than individuals.
    Keywords: Decision-dependent emotions,Disposition Effect,Experiment,Team Decision Making
    JEL: C92 D70 G12
    Date: 2015
  9. By: Vipul Bhatt (Department of Economics, James Madison University)
    Abstract: Should we discount our own future or should we apply an equal concern to all parts of our life? Many moral philosophers regard no discounting as a virtue. We present arguments on both sides of this debate. A critical comparison of the two conflicting viewpoints on the issue of discounting yields two conclusions. First, no discounting may have undesirable implications in certain economic settings and is often inconsistent with observed individual behavior. Although important in its own right, such an argument falls short of providing a moral basis for discounting. Second, from a normative perspective, there is a strong ethical foundation for no discounting in models of intertemporal choice.
    Keywords: Intertemporal discounting, Moral virtues, Time Preference, Discount Factor, Ethics
    JEL: D91 H43
    Date: 2014–08
  10. By: Bayrak, Oben K. (CERE and Department of Forest Economics, SLU); Hey, John D. (Department of Economics, University of York)
    Abstract: This paper presents a new theory, called Preference Cloud Theory, of decision-making under uncertainty. This new theory provides an explanation for empirically-observed Preference reversals. Central to the theory is the incorporation of preference imprecision which arises because of individuals’ vague understanding of numerical probabilities. We combine this concept with the use of the Alpha model (which builds on Hurwicz’s criterion) and construct a simple model which helps us to understand various anomalies discovered in the experimental economics literature that standard models cannot explain.
    Keywords: Imprecise Preferences; Preference Reversals; Decision under Uncertainty; Anomalies in Expected Utility Theory
    JEL: D81
    Date: 2015–09–08
  11. By: S. Ryan; M. Richardson
    Abstract: Purpose –  To examine whether investors in commercial real estate exhibit some important behavioural biases, namely: anchoring, herding, framing/nudging, loss aversion and over-confidence. If so, are there steps that investors and their agents ( fund managers and advisors) could take (a) to temper the effects of their own biases and (b) to exploit the presence of such biases in other market participants? Design/methodology/approach –  Analysis of historic data sources at asset and market levels and over different time periods, with focus on identifying the specific biases listed above, singly and in combination Findings –  Understanding of behavioural bias merits greater attention. Research limitations/implications –  Reliance on inferences from historic data Practical implications –  May help develop clearer understanding of market drivers and improved decision-making for market participants. Originality/value –  New research within the real estate industry that could help investors understand the highly cyclical nature of commercial real estate investment markets Keywords: behavioural biases –  anchoring –  herding –  framing - loss aversion –  over-confidence Article Classification: Viewpoint
    Keywords: Anchoring; Framing; Herding; Loss aversion; Over-Confidence
    JEL: R3
    Date: 2015–07–01
  12. By: Feld, Jan (Department of Economics, School of Business, Economics and Law, Göteborg University); Sauermann, Jan (Research Centre for Education and the Labour Market (ROA), Maastricht University. c Swedish Institute for Social Research (SOFI), Stockholm University d Institute for the Study of Labour (IZA), Bonn); De Grip, Andries (Research Centre for Education and the Labour Market (ROA), Maastricht University and Institute for the Study of Labour (IZA), Bonn)
    Abstract: The Dunning–Kruger effect states that the low skilled are overconfident while the high skilled are more accurate in assessing their skill. In apparent support of this effect, many studies have shown that low performers overestimate their performance while high performers are more accurate. This empirical pattern, however, might be a statistical artifact caused by measurement error. We are the first paper to consistently estimate the Dunning–Kruger effect using an instrumental variable approach. In the context of exam grade predictions of economics students, we use students’ grade point average as an instrument for their skill. Our results support the existence of the Dunning–Kruger effect.<p>
    Keywords: Overconfidence; judgment error; measurement error; instrumental variable
    JEL: D03 I23
    Date: 2015–09
  13. By: Falkinger, Josef
    Abstract: Economic uncertainty has to do with the consequences of actions under different circumstances. This raises two questions: First, how sensitive are the outcomes of actions to variations in the environment? Second, how clearly can we distinguish between environments? Robustness comes at the price of targeting actions less narrowly to specific conditions, so we lose gains from specialization. Need for robustness comes from our limited knowledge. Rational dealing with uncertainty requires to accord the degree of specialization to the reliability of knowledge about the relevant circumstances. In practical terms, under such an approach acting under uncertainty is related to guidelines for strategic thinking: Focus on priorities on a broader scale; the most refined set of actions is not always the best one.
    Keywords: limited knowledge,robustness,reliable information,risk and uncertainty,crisis tolerance
    JEL: D80 D81 D83
    Date: 2015

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