nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2016‒04‒09
sixteen papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. Categorization and Coordination By Vessela Daskalova; Nicolaas J. Vriend; ;
  2. Corruption, Norm Violation and Decay in Social Capital By Banerjee, Ritwik
  3. Count To Ten Before YouTrade: Evidence On The Role Of Deliberation In Experimental Financial Markets By Giovanni Ferri; Matteo Ploner; Matteo Rizzolli
  4. Psychological Momentum and Gender By Cohen-Zada, Danny; Krumer, Alex; Shtudiner, Ze'ev
  5. Network Cognition By Roberta Dessi; Edoardo Gallo; Sanjeev Goyal;
  6. Smart-Dating in Speed-Dating: How a Simple Search Model Can Explain Matching Decisions By Lucas Herrenbrueck; Xiaoyu Xia; Paul Eastwick; Eli Finkel; Chin Ming Hui
  7. The Sensitive Nature of Social Trust to Intelligence By Kodila-Tedika, Oasis; Asongu, Simplice; Azia-Dimbu, Florentin
  8. What You Don't Know... Can't Hurt You? A Field Experiment on Relative Performance Feedback in Higher Education By Azmat, Ghazala; Bagues, Manuel F.; Cabrales, Antonio; Iriberri, Nagore
  9. Unleashing Animal Spirits - Self-Control and Overpricing in Experimental Asset Markets By Kocher, Martin G.; Lucks, Konstantin E.; Schindler, David
  10. How Do Agents React to Dynamic Wage Increases? An Experimental Study By Sliwka, Dirk; Werner, Peter
  11. Procedures for Eliciting Time Preferences By Freeman, David; Manzini, Paola; Mariotti, Marco; Mittone, Luigi
  12. First-place loving and last-place loathing: How rank in the distribution of performance affects effort provision By David Gill; Victoria Prowse; Zdenka Kissova; Jaesun Lee
  13. Efficiency Measurement via Revealed Thresholds, Without Knowing Valuations By Ronald M. Harstad
  14. Weather and the Psychology of Purchasing Outdoor-Movie Tickets By Buchheim, Lukas; Kolaska, Thomas
  15. Do not incentivize eco-friendly behavior - Go for a competition to go green! By Christoph Bühren; Maria Daskalakis
  16. Social Comparisons and Attitudes towards Foreigners. Evidence from the ‘Fall of the Iron Curtain’ By Walter Hyll; Lutz Schneider

  1. By: Vessela Daskalova; Nicolaas J. Vriend; ;
    Abstract: The use of coarse categories is prevalent in various situations and has been linked to biased economic outcomes, ranging from discrimination against minorities to empirical anomalies in financial markets. In this paper we study economic rationales for categorizing coarsely. We think of the way one categorizes one's past experiences as a model of the world that is used to make predictions about unobservable attributes in new situations. We first show that coarse categorization may be optimal for making predictions in stochastic environments in which an individual has a limited number of past experiences. Building on this result, and this is a key new insight from our paper, we show formally that cases in which people have a motive to coordinate their predictions with others may provide an economic rationale for categorizing coarsely. Our analysis explains the intuition behind this rationale.
    Keywords: categorization, prediction, decision-making, coordination, learning.
    JEL: D83 C72
    Date: 2014–06–30
  2. By: Banerjee, Ritwik (Indian Institute of Management)
    Abstract: The paper studies the link between corruption and social capital (measured as trust), using data from a lab experiment. Subjects play either a harassment bribery game or a strategically identical but differently framed ultimatum game, followed by a trust game. In a second experiment, we elicit social appropriateness norm of actions in the bribery game and the ultimatum game treatments. Our experimental design allows us to examine whether subjects, who have been asked to pay a bribe, are less likely to trust than those in an isomorphic role in the ultimatum game. We also uncover the underlying mechanism behind any such behavioral spillover. Results suggest that a) there is a negative spillover effect of corruption on trust and the effect increases with decrease in social appropriateness norm of the bribe demand; b) lower trust in the bribery game treatment is explained by lower expected return on trust; c) surprisingly, for both the bribery and the ultimatum game treatments, social appropriateness norm violation engenders the decay in trust through its adverse effect on belief about trustworthiness.
    Keywords: corruption, social capital, social norm, trust games
    JEL: C91 C92 D03
    Date: 2016–03
  3. By: Giovanni Ferri (LUMSA University); Matteo Ploner (University of Trento); Matteo Rizzolli (LUMSA University)
    Abstract: Financial bubbles cause misallocation of resources and even systemic crises. Experimental finance has long tested both the determinant of financial bubbles’ formation and institutional designs meant at solving such bubbles. In line with this literature we explore whether the dual process theory proposed by Kahneman (2011) can explain bubbles’ formation. As compared with our benchmark FAST treatment, we deliberately slow down the decision making process in our SLOW treatment and thus we induce more System-2 type reasoning. We show that high volatility and extreme realizations are greatly reduced and average prices remain consistently aligned with the expected fundamental value once risk-aversion is considered. We also show that the main differences are driven by abnormal ask prices in the FAST treatment that are consistently withdrawn in the SLOW treatment. We also show that the SLOW condition clears out the hot-hand fallacy. We finally derive some tentative policy implications concerning slowing down finance.
    Keywords: Rational vs. emotional choice; Slow vs. fast trading; Dual process theory; System-1 and System-2; Speculative bubbles; Behavioral finance.
    Date: 2016–03
  4. By: Cohen-Zada, Danny (Ben Gurion University); Krumer, Alex (University of St. Gallen); Shtudiner, Ze'ev (Ariel University)
    Abstract: We exploit a natural experiment in which two professionals compete in a one-stage contest without strategic motives and where one contestant has a clear exogenous psychological momentum advantage over the other in order to estimate the causal effect of psychological momentum on performance. We find that men's performance is significantly affected by psychological momentum, while women's is not. This result is robust to different specifications and estimation strategies. Our results are in line with evidence in the biological literature that testosterone, which is known to enhance performance of both men and women, commonly increases following victory and decreases following loss only among men. Implications of our findings for contest design are also discussed.
    Keywords: psychological momentum, contest, gender differences, performance
    JEL: J16 J24 L83
    Date: 2016–03
  5. By: Roberta Dessi; Edoardo Gallo; Sanjeev Goyal;
    Abstract: We study individual ability to memorize and recall information about friendship networks using a combination of experiments and survey-based data. In the experiment subjects are shown a network, in which their location is exogenously assigned, and they are then asked questions about the network after it disappears. We find that subjects exhibit three main cognitive biases: (i) they underestimate the mean degree compared to the actual network; (ii) they overestimate the number of rare degrees; (iii) they underestimate the number of frequent degrees. We then analyse survey data from two `real' friendship networks from a Silicon Valley firm and from a University Research Center. We find, somewhat remarkably, that individuals in these real networks also exhibit these biases. The experiments yield three further: findings: (iv) network cognition is a affected by the subject's location, (v) the accuracy of network cognition varies with the nature of the network, and (vi) network cognition has a significant effect on economic decisions.
    Date: 2014–08–27
  6. By: Lucas Herrenbrueck (Simon Fraser University); Xiaoyu Xia (Chinese University of Hong Kong); Paul Eastwick (University of Texas); Eli Finkel (Northwestern University); Chin Ming Hui (Chinese University of Hong Kong)
    Abstract: How do people in a romantic matching situation choose a potential partner? We study this question in a new model of matching under search frictions, which we estimate using data from an existing speed dating experiment. We find that attraction is mostly in the eye of the beholder and that the attraction between two potential partners has a tendency to be mutual. These results are supported by a direct measure of subjective attraction. We also simulate the estimated model, and it predicts rejection patterns, matching rates, and sorting outcomes that fit the data very well. Our results are consistent with the hypothesis that people in a romantic matching situation act strategically and have at least an implicit understanding of the nature of the frictions and of the strategic equilibrium.
    Keywords: Search and matching theory; heterogeneous preferences; decisions under uncertainty; attraction and attractiveness
    JEL: D83 J12
    Date: 2016–03–25
  7. By: Kodila-Tedika, Oasis; Asongu, Simplice; Azia-Dimbu, Florentin
    Abstract: This study investigates the relationship between social trust and intelligence. The extreme bound analysis of Levine and Renelt is employed to directly assess the strength of the nexus. The findings confirm the positive and robust nexus between social trust and intelligence. We have contributed to the literature by confirming that the previously established positive linkage between intelligence and trust is not statistically fragile. In fact the nexus withstands further empirical scrutiny with more robust empirical strategies.
    Keywords: Trust; Intelligence; Human Capital; Extreme Bound Analysis
    JEL: G20 I20 I29 J24 P48 Z13
    Date: 2016–02
  8. By: Azmat, Ghazala (Queen Mary, University of London); Bagues, Manuel F. (Aalto University); Cabrales, Antonio (University College London); Iriberri, Nagore (University of the Basque Country)
    Abstract: This paper studies the effect of providing feedback to college students on their position in the grade distribution by using a randomized control experiment. This information was updated every six months during a three-year period. In the absence of treatment, students' underestimate their position in the grade distribution. The treatment significantly improves the students' self-assessment. We find that treated students experience a significant decrease in their educational performance, as measured by their accumulated GPA and number of exams passed, and a significant improvement in their self-reported satisfaction, as measured by survey responses obtained after information is provided but before students take their exams. Those effects, however, are short lived, as students catch up in subsequent periods. Moreover, the negative effect on performance is driven by those students who underestimate their position in the absence of feedback. Those students who overestimate initially their position, if anything, respond positively.
    Keywords: relative performance feedback, ranking, randomized field experiment, school performance
    JEL: J71 J44
    Date: 2016–03
  9. By: Kocher, Martin G.; Lucks, Konstantin E.; Schindler, David
    Abstract: One possible determinant of overpricing on asset markets is a lack of self-control abilities of traders. Self-control is the individual capacity to override or inhibit undesired behavioral tendencies such as impulses and to refrain from acting on them. We implement the first experiment that is able to address a potential causal relationship between self-control abilities and systematic overpricing on financial markets by introducing an exogenous variation of self-control abilities. Our experimental conditions seek to detect some of the channels through which individual self-control problems could transmit into irrational exuberance on the aggregate level. We observe a strong effect of inhibited self-control abilities on market overpricing. Our findings are furthermore robust to reducing self-control abilities only for a moderate share of traders in a market. Low self-control traders engage in more speculative behavior early on, but because others imitate their trading patterns, they do not end up earning less and are not driven out of the market.
    Keywords: Behavioral finance; trader behavior; self control; experimental asset markets; overpricing
    JEL: G02 G11 G12 D53 D84
    Date: 2016–02–29
  10. By: Sliwka, Dirk (University of Cologne); Werner, Peter (University of Cologne)
    Abstract: We investigate how workers' performance is affected by the timing of wages in a real-effort experiment. In all treatments agents earn the same wage sum but wage increases are distributed differently over time. We find that agents work harder under increasing wage profiles if they do not know these profiles in advance. A profile that continuously increases wages by small amounts raises performance by about 15% relative to a constant wage. The effort reactions can be organized by a model in which agents reciprocally respond to wage impulses, comparing wages to an adaptive reference standard determined by the previous wage.
    Keywords: wage, reciprocity, reference point
    JEL: M12 C91
    Date: 2016–03
  11. By: Freeman, David (Simon Fraser University); Manzini, Paola (University of St. Andrews); Mariotti, Marco (Queen Mary, University of London); Mittone, Luigi (University of Trento)
    Abstract: We study three procedures to elicit attitudes towards delayed payments: the Becker-DeGroot-Marschak procedure; the second price auction; and the multiple price list. The payment mechanisms associated with these methods are widely considered as incentive compatible, thus if preferences satisfy Procedure Invariance, which is also widely (and often implicitly) assumed, they should yield identical time preference distributions. We find instead that the monetary discount rates elicited using the Becker-DeGroot-Marschak procedure are significantly lower than those elicited with a multiple price list. We show that the behavior we observe is consistent with an existing psychological explanation of preference reversals.
    Keywords: time preferences, elicitation methods, Becker-DeGroot-Marschak procedure, auctions, multiple price list
    JEL: C91 D9
    Date: 2016–03
  12. By: David Gill; Victoria Prowse; Zdenka Kissova; Jaesun Lee
    Abstract: Rank-order relative-performance evaluation, in which pay, promotion and symbolic awards depend on the rank of workers in the distribution of performance, is ubiquitous. Whenever firms use rank-order relative-performance evaluation, workers receive feedback about their rank. Using a real-effort experiment, we aim to discover whether workers respond to the specific rank that they achieve. In particular, we leverage random variation in the allocation of rank among subjects who exerted the same effort to obtain a causal estimate of the rank response function that describes how effort provision responds to the content of rank-order feedback. We find that the rank response function is U-shaped. Subjects exhibit 'first-place loving' and 'last-place loathing', that is subjects work hardest after being ranked first or last. We discuss implications of our findings for the optimal design of firms' performance feedback policies, workplace organizational structures and incentives schemes.
    Keywords: Relative performance evaluation, Relative performance feedback, Rank order feedback, Dynamic effort provision, Real effort experiment, Flat wage, Fixed wage, Taste for rank, Status seeking,Social esteem, Self esteem, Public feedback, Private feedback.
    JEL: C23 C91 J22 M12
    Date: 2016–03–03
  13. By: Ronald M. Harstad (Department of Economics, University of Missouri-Columbia)
    Abstract: Laboratory experiments employing an induced-values methodology often report on allocative efficiencies observed. That methodology requires experimenters know subjects’ motivations precisely, questionable in labs, impossible in field experiments. Allocative efficiency implies a hypothetical costless aftermarket would be inactive. An allocation mechanism’s outcome is defined to be behaviorally efficient if an appropriate aftermarket is actually appended to the mechanism and measures at most a negligible size of remaining mutually beneficial gains. Methodological requirements for an appropriate aftermarket are specified. A first demonstration observes more frequent and ex-ante larger behavioral inefficiencies in second- than in first-price auctions. A simple field demonstration indicates when a public-good increase can be observed to cover marginal cost to subjects’ mutual benefit, without knowing valuations. A wide variety of empirical economic-policy studies can utilize this methodology to observe comparative evidence of alternative policies’ allocativeefficiency shortfalls.
    Keywords: revealed thresholds, behavioral efficiency, aftermarkets, field experiment methodology, allocative efficiency, empirical political economy, valuation revelation
    JEL: C9 C93 D01 D61 D03 D46
    Date: 2014–02–02
  14. By: Buchheim, Lukas; Kolaska, Thomas
    Abstract: The consequences of many economic decisions only materialize in the future. To make informed choices in such decision problems, consumers need to anticipate the likelihood of future states of the world, the state-dependence of their preferences, and the choice alternatives that may become relevant. This complex task may expose consumers to psychological biases like extrapolative expectations, projection bias, or salience. We test whether customers are affected by such biases when they buy advance tickets for an outdoor movie theater, a real-world situation that, due to the availability of reliable weather forecasts, closely resembles a stylized decision problem under risk. We find that customers’ decisions are heavily influenced by the weather at the time of purchase, even though the latter is irrelevant for the experience of visiting the theater in the future. The empirical evidence cannot be fully explained by a range of candidate rational explanations, but is consistent with the presence of the aforementioned psychological mechanisms.
    Keywords: Projection Bias; Salience; Extrapolative Expectations; Behavioral Economics; Consumer Behavior
    JEL: D03 D12 D81
    Date: 2016–01–12
  15. By: Christoph Bühren (University of Kassel); Maria Daskalakis (University of Kassel)
    Abstract: Which behavior-based interventions are more appropriate to induce energy saving: energy saving goals with or without incentive, energy saving products, environmentally related information, social comparison or competition? We try to answer this question in a comprehensive study. First, we designed energy bills with different behavioral interventions. Second, we evaluated their appropriateness in an empirical survey with 457 participants. Third, we tested behavioral consequences in real effort lab experiments with 550 subjects in 11 treatments and one baseline. Our results indicate that monetary incentives to save energy might foster the intention to invest effort in energy saving but backfire if factual performance is required. Instead, fostering non-incentivized self-set goals and providing social comparison induced substantial effort to protect the environment. Non-incentivized competition to save energy provided the best results. Our study concludes with implications for practical policy design and further need of research.
    Keywords: Environmental behavior; Goals; Incentives; Social Comparison; Competition; Experiment
    JEL: D03 D12 C91
    Date: 2015
  16. By: Walter Hyll; Lutz Schneider
    Abstract: We exploit the natural experiment of German re-unification to address the question whether distress from social (income) comparisons results in negative attitudes towards foreigners. Our empirical approach rests upon East German individuals who have West German peers. We use the exogenous variation of wealth of West German peers shortly after the fall of the Berlin Wall as an instrument to identify the effect of distress from social comparisons on East Germans’ attitudes. We find robust evidence that East Germans expose strong negative attitudes towards foreigners, particularly from low-wage countries, if they worry about their economic status compared to better-off peers.
    Keywords: social comparisons, attitudes towards foreigners, natural experiment
    JEL: D31 J61 N34
    Date: 2016–03

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