nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2016‒08‒28
eight papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. The Surplus Identification Task and Limits to Multi-Attribute Consumer Choice By Lunn, Pete; Bohacek, Marek; McGowan, Feidhlim
  2. No need for more time: Intertemporal allocation decisions under time pressure By Florian Lindner; Julia Rose
  3. Strategic Ambiguity and Decision-making: An Experimental Study By David Kelsey; Sara le Roux
  4. Gender and Redistribution: Experimental Evidence By Thomas Buser; Louis Putterman; Joël van der Weele
  5. Financial literacy: A barrier to seek financial advice but not a shield against following it By Sprenger, Julia
  6. Anchoring in Financial Decision-Making: Evidence from the Field By Jetter, Michael; Walker, Jay K.
  7. The Influence of Personality Traits on Private Retirement Savings in Germany By Schäfer, Konrad C.
  8. Another Solution for Allais Paradox: Preference Imprecision, Dispersion and Pessimism By Bayrak, Oben K.

  1. By: Lunn, Pete; Bohacek, Marek; McGowan, Feidhlim
    Abstract: We present a novel experimental method for investigating consumer choice. The Surplus Identification (S-ID) task is inspired by studies of detection in perceptual psychophysics. It employs a forced-choice procedure, in which participants must decide whether a novel product is worth more or less than the price at which it is being offered, that is, whether there is a positive or negative surplus. The SI-D task reveals how precision, bias and learning vary across attribute and price structures. We illustrate its use by testing for cognitive capacity constraints in multi-attribute choice in three separate experiments, with implications for models of bounded rationality and rational inattention. As the number of product attributes rises from one to four in the S-ID task (Experiment 1), participants cannot integrate additional information efficiently and they display systematic, persistent biases, despite incentivised opportunities to learn. Experiment 2 demonstrates how the S-ID task can be used to track learning and serves as a robustness check for the findings of Experiment 1. Experiment 3 adapts the S-ID task to test accuracy of surplus identification when multiple attributes are perfectly correlated. The S-ID task also has the potential to test multiple aspects of consumer choice models and to test specific hypotheses about the cognitive mechanisms behind surplus identification.
    Date: 2016–07
  2. By: Florian Lindner; Julia Rose
    Abstract: Time preferences drive decisions in many economic situations, such as investment contexts or salary negotiations. These situations are characterized by a very short time frame for decision making. Preferences are potentially susceptible to the confounding effects of time pressure, as proposed by dual-systems theory (Evans, 2006; Kahneman and Frederick, 2002). Results of standard methods of time preference elicitation can therefore not be directly mapped to environments characterized by severe time pressure since the underlying assumption of these models is that preferences are stable. To address the stability of time preferences under time pressure, we conduct a laboratory study with 144 subjects using convex time budgets (Andreoni and Sprenger, 2012) in order to elicit time preferences with and without time pressure in a within-subject design. We find lower present-bias under time pressure compared to the condition without time pressure on the aggregate, whereas utility function curvature and long-run discounting are stable across conditions. The findings are confirmed on the individual level. Embedding our results in dual-systems theory, how information is presented can serve as a potential means to exogenously decrease present-bias under time pressure.
    Keywords: time preferences, time pressure, decision making, allocation decision, budget, experiment
    JEL: C91 D12 D81 D91
    Date: 2016–07
  3. By: David Kelsey (Department of Economics, University of Exeter); Sara le Roux (Department of Economics, Oxford Brookes University)
    Abstract: We conducted a set of experiments to compare the effect of ambiguity in single person decisions and games. Our results suggest that ambiguity has a bigger impact in games than in ball and urn problems. We ?nd that ambiguity has the opposite effect in games of strategic substitutes and complements. This con?rms a theoretical prediction made by Eichberger and Kelsey (2002). The experiments also test whether subjects' ?perception of ambiguity differs when faced by a local opponent as opposed to a foreign one. Our results show that there is little evidence of more in?uence of ambiguity on behaviour when faced by foreign subjects.
    Keywords: Ambiguity; Choquet expected utility; strategic complements; strategic substitutes; Ellsberg urn.
    JEL: C72 C91 D03 D81
    Date: 2016
  4. By: Thomas Buser (University of Amsterdam, The Netherlands); Louis Putterman (Brown University, United States); Joël van der Weele (University of Amsterdam, The Netherlands)
    Abstract: Gender differences in voting patterns and political attitudes towards redistribution are well-documented. The experimental gender literature suggests several plausible behavioral explanations behind these differences, relating to gender differences in confidence concerning future relative income position, risk aversion, and social preferences. We use data from lab experiments on preferences for redistribution conducted in the U.S. and several European countries to disentangle these potential mechanisms. We find that when choosing to redistribute income as a disinterested observer, women choose higher tax rates than men when initial income depends on performance in a task but not when it is randomly allocated. In a veil of ignorance condition with uncertainty about the income position of the decision maker, this effect is even stronger, leading to a 10ppt gender difference in average chosen tax rates in the performance conditions. We find that this gender difference is mainly due to men being more (over)confident about their task performance and the resulting income position, with gender differences in risk aversion and social preferences playing a minor role.
    Keywords: gender; redistribution; overconfidence; risk attitudes; voting; taxation
    JEL: C91 J16 H24 D31
    Date: 2016–08–23
  5. By: Sprenger, Julia
    Abstract: The current study examines individual decision making in the field of personal finance. How do people arrive at a financial decision? A laboratory experiment investigates the way external information is integrated into the decision-making process. Financial literacy shows to lower demand for financial advice but it does not immunize against sunk cost fallacies: High financial literate subjects are not less likely to follow financial advice than less literate subjects, even when the quality of advice is moderate. Overconfidence biases the perceived need for information. Both results point to difficulties in making an informed choice.
    Abstract: Dieses Papier untersucht individuelle Entscheidungsprozesse im Bereich Finanzen. Wie gelangen Menschen zu einer finanziellen Entscheidung? Ein Laborexperiment untersucht, wie externe Informationen in den Entscheidungsprozess integriert werden. Die Ergebnisse zeigen, dass ein hohes Niveau an financial literacy die Nachfrage nach Ratschlägen senkt. Es bewahrt aber nicht davor, einer sunk cost fallacy zu unterliegen. Menschen mit sehr hoher financial literacy sind nicht weniger geneigt einem Ratschlag in einer finanziellen Entscheidungssituation zu folgen als Menschen mit einer geringen financial literacy, und zwar auch dann nicht, wenn die Qualität dieses Ratschlags nur moderat ist. Außerdem zeigen die Ergebnisse, wie der wahrgenommene Bedarf an Informationen durch overconfidence verzerrt wird. Beide Ergebnisse zeigen, inwiefern der Anspruch, eine fundierte Entscheidung zu treffen für Individuen mit Schwierigkeiten verbunden ist, selbst wenn eine Vielzahl externer Informationen verfügbar ist.
    Keywords: Financial literacy,overconfidence,financial decision making,experiment,advice
    JEL: C91 G02 D83
    Date: 2016
  6. By: Jetter, Michael (University of Western Australia); Walker, Jay K. (Niagara University)
    Abstract: This paper analyzes 12,596 wagering decisions of 6,064 contestants in the US game show Jeopardy!, focusing on the anchoring phenomenon in financial decision-making. We find that contestants anchor heavily on the initial dollar value of a clue in their wagering decision, even though there exists no rational reason to do so. More than half of all wagers occur within $500 of the initial dollar value, although the maximum possible wagering value averages $5,914. This anchoring phenomenon remains statistically significant on the one percent level, even after controlling for scores, clue category, time trends, and player-fixed effects. When exploiting within-player variation only and implicitly controlling for a host of individual behavioral attitudes and preferences, raising the anchoring amount by 10 percent translates to an increase of 3.1 percent in the wager. In terms of magnitude, anchoring is marginally more pronounced for women with an elasticity of 0.34 versus 0.28 for males. Finally, this paper is among the first to investigate anchoring among children and teenagers. We find little evidence for anchoring among children under the age of 13, but the effect begins to emerge for teenagers and further manifests itself among college students. Overall, our findings suggest anchoring plays a substantial role in financial decision-making under pressure.
    Keywords: anchoring, behavioral economics, financial decision-making, gender differences, heuristics
    JEL: D03 D81 D83 G11
    Date: 2016–08
  7. By: Schäfer, Konrad C.
    Abstract: This paper analyzes private retirement savings, the amount for German individuals and how these savings are influenced by personality traits. With the 2002 to 2009 cross section of the Socio-Economic Panel for Germany (SOEP), it is investigated how the Big-Five and the Locus of Control influence the decision to have private retirement savings, and the estimated amount of these savings. Results indicate a positive effect for Extraversion and a negative effect for Agreeableness on the probability to have such savings. Extraversion also positively effects the size of retirement related savings as does having an more internal Locus of Control. Similar to the probability to have retirement savings Agreeableness also reduces the expected amount of such savings. Personality traits only seem to influence the retirement savings if the individual has scores further away from the average of the specific trait. Additionally regressions are implemented that include the personality measures as dummies to allow for non-linear effects. Furthermore, other types of wealth accumulation such as house related savings are investigated to study how the effects might differ for different types of wealth accumulation.
    Keywords: Non-cognitive skills; Big-Five; Locus of Control, retirement
    JEL: C34 C35 J26
    Date: 2016–08
  8. By: Bayrak, Oben K. (CERE and the Department of Forest Economics, SLU)
    Abstract: Although there are alternative models which can explain the Allais paradox with non-standard preferences, they do not take the emerging evidence on preference imprecision into account. The imprecision is so far incorporated into these models by adding a stochastic specification implying the errors that subjects make. However, there is also the inherent part of the preference imprecision which does not diminish with experience provided in repeated experiments and these stochastic specifications cannot explain a significant portion of the observed behavior in experiments. Moreover, evidence on imprecision suggests that subjects exhibit higher imprecision for a lottery with a higher variance. This paper presents a new model for decision under risk which takes into account the findings of the literature. Looking at the indifference curves predicted by the new model, the new model acts like a mixture of Expected Utility Theory and Rank Dependent Utility Theory depending on which part of the probability triangle the lottery is located.
    Keywords: Allais Paradox; Independence Axiom; Preference Imprecision; Anomalies; Decision Theory; Decision under Risk and Uncertainty; Alternative Models
    JEL: D81
    Date: 2016–08–16

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