nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2016‒10‒16
eight papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. Dual Process Utility Theory: A Model of Decisions Under Risk and Over Time By Mark Schneider
  2. Experimental Evidence on Tax Salience and Tax Incidence By Morone, Andrea; Nemore, Francesco; Nuzzo, Simone
  3. Public-private partnerships, incomplete contracts, and distributional fairness – when payments matter By Yildiz, Özgür
  4. Taring all investors with the same brush? Evidence for heterogeneity in individual preferences from a maximum likelihood approach By Hackethal, Andreas; Jakusch, Sven Thorsten; Meyer, Steffen
  5. Nudging Museums Attendance: A field experiment with high school teens By Laura Razzolini; Marco Mariani; Patrizia Lattarulo
  6. The hidden costs of nudging: Experimental evidence from reminders in fundraising By Christina Gravert; Mette Trier Damgaard
  7. Cognitive Reflection Predicts Decision Quality in Individual and Strategic Decisions By Mark Schneider; David Porter
  8. Decisions under uncertainty in social contexts By Müller, Stephan; Rau, Holger A.

  1. By: Mark Schneider (Economic Science Institute, Chapman University)
    Abstract: The Discounted Expected Utility model has been a major workhorse for analyzing individual behavior for over half a century. However, it cannot account for evidence that risk interacts with time preference, that time interacts with risk preference, that many people are averse to timing risk and do not discount the future exponentially, that discounting depends on the magnitude of outcomes, that risk preferences are not time preferences, and that risk and time preferences are correlated with cognitive ability. Here we address these issues in a decision model based on the interaction of an affective and a reflective valuation process. The resulting Dual Process Utility theory provides a unified approach to modeling risk preference, time preference, and interactions between risk and time preferences. It also provides a unification of models based on a rational economic agent, models based on prospect theory or rankdependent utility, and dual system models of decision making.
    Keywords: Risk preference, Time preference, Cognitive Ability, System 1, System 2
    JEL: D01 D03 D81 D90
    Date: 2016
  2. By: Morone, Andrea; Nemore, Francesco; Nuzzo, Simone
    Abstract: While a basic theoretical principle in public economics assumes that individuals’ behaviour is fully-optimizer with respect to the introduction of a tax, an increasing body of research is presenting evidence that agents decision making is often affected by non-negligible cognitive biases, which could be responsible for lower market performance as well as for deviations from standard theoretical predictions. This paper extends the latter strand of research focusing on two trend topics in public economics: tax salience and tax incidence. While the former refers to the prominence of the tax, the latter places emphasis on the statutory vs. factual division of tax payments. Is market performance affected by the salience of the tax? Is the incidence of a tax independent of which side of the market it is levied on (Liability Side Equivalence Principle, LES)? We address these questions through a laboratory experiment in which one unit of a fictitious good is traded through a double-auction market institution. Based on a panel data analysis, our contribution shows that a non-salient tax reduces both the allocational and informational efficiency of the market with respect to the instance in which the tax is salient. Moreover, we show that the Liability Side Equivalence Principle does not hold in practice.
    Keywords: Tax incidence, Tax salience, Liability Side Equivalence, choice behaviour, laboratory.
    JEL: C91 H2 H21 H30
    Date: 2016–10–06
  3. By: Yildiz, Özgür
    Abstract: The German energy sector’s transition toward the more distributed production of energy has given rise to various forms of decentralized energy production. Within the framework of decentralized infrastructure, the relation between the involved agents is often characterized by a high degree of social proximity. Thus, the spatial and social closeness usually emphasizes aspects of decision-making such as pro-social behavior that can have significant effects on the involved parties’ response to agency problems and their investment incentives. This essay applies behavioral economics’ finding on so-called social preferences to fundamental insights from incomplete contract theory regarding economic agents’ investment behavior. Specifically, it will be analyzed how a contractor’s investment incentives develop in a public-private partnership setting given incomplete contracts when the contractor disposes of preferences for distributional fairness. It will be shown that the investment incentives of the contractor are significantly different from those of the standard model assuming neoclassical preferences. Another important finding is that in contrast to the standard model in which only the allocation of property rights can set different investment incentives, payments can also influence an economic agent’s behavior when social preferences apply as the distribution of payments determines whether the psychological influences of envy or a sense of guilt are affecting the contractor.
    Keywords: Incomplete contracts; public-private partnerships; fairness; social preferences; behavioral economics
    JEL: D02 D03 D23 L2 L32
    Date: 2016–10–13
  4. By: Hackethal, Andreas; Jakusch, Sven Thorsten; Meyer, Steffen
    Abstract: Microeconomic modeling of investors behavior in financial markets and its results crucially depends on assumptions about the mathematical shape of the underlying preference functions as well as their parameterizations. With the purpose to shed some light on the question, which preferences towards risky financial outcomes prevail in stock markets, we adopted and applied a maximum likelihood approach from the field of experimental economics on a randomly selected dataset of 656 private investors of a large German discount brokerage firm. According to our analysis we find evidence that the majority of these clients follow trading pattern in accordance with Prospect Theory (Kahneman and Tversky (1979)). We also find that observable sociodemographic and personal characteristics such as gender or age don't seem to correlate with specific preference types. With respect to the overall impact of preferences on trading behavior, we find a moderate impact of preferences on trading decisions of individual investors. A classification of investors according to various utility types reveals that the strength of the impact of preferences on an investors' rading behavior is not connected to most personal characteristics, but seems to be related to round-trip length.
    Keywords: Utility Theory,Maximum Likelihood,Individual Investors
    JEL: C35 C51 C52 G02 G11
    Date: 2016
  5. By: Laura Razzolini; Marco Mariani; Patrizia Lattarulo
    Abstract: This paper reports results from a field experiment conducted to study the effect of incentives offered to high school teens to motivate them to visit art museums. A vast literature exists on the design of incentives to modify the behavior of firms and consumers, but not much is known about incentives offered to adolescents and young adults to affect their cultural consumption behavior. Students in the first treatment receive a flier with basic information and opening hours of a main museum in Florence, Italy-Palazzo Vecchio. Students in the second treatment receive the flier and a short presentation conducted by an art expert about the exhibit; students in the third treatment, in addition to the flier and the presentation, receive also a non-financial reward in the form of extra-credit points toward their school grade. The analysis yields two main findings. First, non-financial reward is more effective at inducing the students to undertake the encouraged visit than either the simple presentation or the basic information with the flier. Second, over a longer time horizon the non-financial reward does not induce a significant change in behavior with respect to the simple presentation.
    Date: 2016
  6. By: Christina Gravert; Mette Trier Damgaard
    Abstract: We document the hidden costs of one of the most policy-relevant nudges, reminders. Sending reminders, while proven effective in facilitating behavior change, may come at a cost for both senders and receivers. Using a large scale field experiment with a charity, we find that reminders increase donations, but they also substantially increase unsubscriptions from the mailing list. To understand this novel finding, we develop a dynamic model of donation and unsubscription behavior with limited attention which is tested in reduced-form using a second field experiment. We also estimate our model structurally to perform a welfare analysis. We show that when not accounting for the hidden costs of reminders the average welfare effects for donors are overstated by a factor of ten and depending on the discount factor the welfare effects of the charity may be negative. Our results show the need to evaluate nudges on their intended as well as unintended consequences.
    Date: 2016
  7. By: Mark Schneider (Economic Science Institute, Chapman University); David Porter (Economic Science Institute, Chapman University)
    Abstract: Cognitive reflection has been shown to be an important trait which is correlated with the propensity to: take risks, delay gratification, and form accurate beliefs about others’ behavior. However, previous research has not cleanly identified whether reflective thinkers make ‘better’ decisions than intuitive thinkers, since inferences of decision quality are confounded by inferences regarding risk preferences, time preferences, and beliefs. We directly test for differences in decision quality between reflective thinkers and intuitive thinkers in both individual and strategic decisions using a design which makes it possible to objectively rank risky and strategic choices, independent of one’s attitudes toward risk or one’s beliefs about the strategic sophistication or altruism of other decision makers. Employing a lottery choice task involving a dominant and a dominated alternative, and implementing multiple rounds of a second price auction, we find that the tendency to cognitively reflect has strong predictive power across domains (reasoning tasks, choices between lotteries, bidding behavior in auctions), and across time (as the tasks were administered on separate dates). In particular, the same subjects who engaged in reflective thinking on simple reasoning problems were also more likely to choose optimally in the lottery choice task and to bid closer to the dominant strategy equilibrium in second price auctions. We also find that experience helps to narrow the gap in performance between reflective and intuitive thinkers.
    Keywords: Cognitive Reflection, Stochastic Dominance, Second Price Auction
    Date: 2016
  8. By: Müller, Stephan; Rau, Holger A.
    Abstract: This paper theoretically and experimentally studies decision-making in risky and social environments. We explore the interdependence of individual risk attitudes and social preferences in form of inequality aversion as two decisive behavioral determinants in such contexts. Our model and the data demonstrate that individual risk aversion is attenuated when lagging behind peers, whereas it is amplified under favorable income inequality. People's choices are not only context-dependent, but are sensitive to their degree of inequality aversion. The findings contribute to the understanding of decision-making in environments like trading at stock markets, the saving patterns of households or charitable giving under uncertainty.
    Keywords: Choice under Uncertainty,Social Comparison,Inequality Aversion,Risk Preferences
    JEL: C91 D03 D63 D81
    Date: 2016

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