nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2017‒02‒05
nine papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. From self-fulfilling mistakes to behavioral learning equilibria By Cars Hommes
  2. Social Motives vs Social Influence: an Experiment on Time Preferences By Rodriguez-Lara, Ismael; Ponti, Giovanni
  3. Contagion in Experimental Financial Markets By Suren Vardanyan
  4. (Im)patience by Proxy: Making Intertemporal Decisions for Others By Angela C.M. de Oliveira; Sarah Jacobson
  5. Anger Management: Aggression and Punishment in the Provision of Public Goods By Gee, Laura Katherine; Lyu, Xinxin; Urry, Heather
  6. The Effect of Early Education on Social Preferences By Alexander Cappelen; John List; Anya Samek; Bertil Tungodden
  7. Identifying the reasons for coordination failure in a laboratory experiment By Külpmann, Philipp; Khantadze, Davit
  8. Cognitive empathy in conflict situations By Gauer, Florian; Kuzmics, Christoph
  9. The Origins and Extent of Entrepreneurial Action-Orientedness: An Experimental Study By Barirani, Ahmad; Sloof, Randolph; van Praag, Mirjam C.

  1. By: Cars Hommes (CeNDEF, University of Amsterdam and Tinbergen Institute, The Netherlands)
    Abstract: This essay links some of my own work on expectations, learning and bounded rationality to the inspiring ideas of Jean-Michel Grandmont. In particular, my work on consistent expectations and behavioral learning equilibria may be seen as formalizations of JMG's ideas of self-fulfilling mistakes. Some of our learning-to-forecast laboratory experiments with human subjects have also been strongly influenced by JMG's ideas. Key features of self-fulfilling mistakes are multiple equilibria, excess volatility and persistence amplification.
    Keywords: expectations; learning; bounded rationality; chaos; almost self-fulfilling equilibria; laboratory experiments
    JEL: D84 D83 E32 C92
    Date: 2017–01–30
  2. By: Rodriguez-Lara, Ismael; Ponti, Giovanni
    Abstract: We report experimental evidence on the effects of social preferences on intertemporal decisions. To this aim, we design an intertemporal Dictator Game to test whether Dictators modify their discounting behavior when their own decision is imposed on their matched Recipients. We run four different treatments to identify the effect of payoffs externalities from those related to information and beliefs. Our descriptive statistics show that heterogeneous social time preferences and information about others’ time preferences are significant determinants of choices: Dictators display a marked propensity to account for the intertemporal preferences of Recipients, both in the presence of externalities (social motives) and/or when they know about the decisions of their matched partners (social influence). We also perform a structural estimation exercise to control for heterogeneity in risk attitudes. As for individual behavior, our estimates confirm previous studies in that high risk aversion is associated with low discounting. As for social behavior, we find that social motives outweigh social influence, especially when we restrict our sample to pairs of Dictators and Recipients who satisfy minimal consistency conditions.
    Keywords: intertemporal choices, time preferences, risk and social preferences, social influence, beliefs (JEL: C91, D70, D81)
    JEL: C9 D70 D81
    Date: 2017–02–01
  3. By: Suren Vardanyan
    Abstract: We experimentally study the possibility that news of a crisis in one market may cause a contagious crisis in another market though there are no links between those markets. Literature provides models of contagion in which news of a crisis may cause contagion in Bandwagon and Strategic risk channels; however, these models lack empirical evidence. The reason may be that it is difficult to isolate the effect of news of a crisis in real data, as markets are linked in many ways. To our knowledge this is the first research into contagious effects of the news of a crisis. We modify the influential experimental design of Smith et al. (1988) to construct an environment in which two separate markets are traded simultaneously, and there is no link between these markets other than possibility of observing prices in the other market. We create a crisis in one market by simulating a price drop in that market and observe whether prices in the other market drop in a contagious manner. Our results show that news of a crisis is a significant source of contagion and the Bandwagon channel is significant, while the Strategic risk channel is not. Further, news of a crisis may cause contagion in channels other than Bandwagon and Strategic risk; however, we do not identify which channels in the present study, leaving it for future research.
    Keywords: asset market; contagion; experiment;
    JEL: C92 G12
    Date: 2016–12
  4. By: Angela C.M. de Oliveira (University of Massachusetts-Amherst); Sarah Jacobson (Williams College)
    Abstract: Decisions with consequences that play out over time are ubiquitous in business, policy, and family relations, and frequently the agent making these decisions is distinct from those who bear the consequences. We use a lab experiment to examine whether individuals make different intertemporal decisions for others of varying social distance than for themselves. Subjects make a series of intertemporal work time allocation decisions for themselves and for another individual, either a friend or a stranger. We find that people who receive no information about their recipient’s preferences choose more impatiently (moving a disutility cost into the future) for others than for themselves. In other words, a decision made for you by proxy is more impatient than a decision you would make for yourself and thus is probably suboptimal. This result contrasts with the literature, and this may be because, as we find from a separate survey, people perceive procrastination of tasks as qualitatively different from other discounting decisions. Survey evidence suggests that individuals believe that they are more patient than the other subjects are, suggesting that these too-impatient decisions are made for others out of benevolence with a mistaken belief. Further, when the decision-maker is given information about the recipient’s own-stated preferences, this bias of excessively impatient decisions, particularly when the recipient is a friend. Taken together, our results imply that given limited information, proxy decision-makers choose more impatiently (pushing more costs into the future) than agents would prefer, but information mitigates this error.
    Keywords: proxy decision-making, intertemporal choice, laboratory experiment
    JEL: D03 D90 D64 C91
    Date: 2017–01
  5. By: Gee, Laura Katherine (Tufts University); Lyu, Xinxin (Tufts University); Urry, Heather (Tufts University)
    Abstract: The ability to punish free-riders can increase the provision of public goods. However, sometimes the benefit of increased public good provision is outweighed by the costs of punishments. One reason a group may punish to the point that net welfare is reduced is that punishment can express anger about free-riding. If this is the case, then tools that regulate emotions could decrease the use of punishments while keeping welfare high, possibly depending on pre-existing levels of aggression. In this lab experiment, we find that adopting an objective attitude (Objective), through a form of emotion regulation called cognitive reappraisal, decreases the use of punishments and makes a statistically insignificant improvement to both net earnings and self-reported emotions compared to a control condition (Natural). Although the interaction between the emotion regulation treatment and level of aggression is not significant, only low aggression types reduce their punishments; the results are of the same direction but statistically insignificant for high aggression types. Overall, our findings suggest that pairing emotion regulation with punishments can decrease the use of punishments without harming monetary and mental welfare.
    Keywords: public goods, punishment, emotions
    JEL: C72 C91 C92 D7 H41
    Date: 2017–01
  6. By: Alexander Cappelen (Norwegian School of Economics); John List (University of Chicago); Anya Samek (University of Wisconsin-Madison); Bertil Tungodden (Norwegian School of Economics)
    Abstract: We present results from the first study to examine the causal impact of early childhood education on social preferences of children. We compare children who, at 3-4 years old, were randomized into either a full-time preschool, a parenting program with incentives, or to a control group. We returned to the same children when they reached 7-8 years old and conducted a series of incentivized experiments to elicit their social preferences. We find that early childhood education has a strong causal impact on social preferences several years after the intervention: attending preschool makes children more egalitarian in their fairness view and the parenting program enhances the importance children place on efficiency relative to fairness. Our findings highlight the importance of taking a broad perspective when designing and evaluating early childhood educational programs, and provide evidence of how differences in institutional exposure may contribute to explaining heterogeneity in social preferences in society.
    Keywords: field experiment, social preferences, child experiment
    JEL: C93 J23 J33
    Date: 2017–01
  7. By: Külpmann, Philipp (Center for Mathematical Economics, Bielefeld University); Khantadze, Davit (Center for Mathematical Economics, Bielefeld University)
    Abstract: We investigate the effect of absence of common knowledge on the outcomes of coordination games in a laboratory experiment. Using cognitive types, we can explain coordination failure in pure coordination games while differentiating between coordination failure due to first- and higher-order beliefs. In our experiment, around 76% of the subjects have chosen the payoff-dominant equilibrium strategy despite the absence of common knowledge. However, 9% of the players had first-order beliefs that lead to coordination failure and another 9% exhibited coordination failure due to higher-order beliefs. Furthermore, we compare our results with predictions of commonly used models of higher-order beliefs.
    Keywords: Higher-order beliefs, coordination failure, cognitive abilities, experimental economics, game theory
    Date: 2016–09–26
  8. By: Gauer, Florian (Center for Mathematical Economics, Bielefeld University); Kuzmics, Christoph (Center for Mathematical Economics, Bielefeld University)
    Abstract: Two individuals are involved in a conflict situation in which preferences are ex ante uncertain. While they eventually learn their own preferences, they have to pay a small cost if they want to learn their opponent’s preferences. We show that, for sufficiently small positive costs of information acquisition, in any Bayesian Nash equilibrium of the resulting game of incomplete information the probability of getting informed about the opponent’s preferences is bounded away from zero and one.
    Keywords: Incomplete Information, Information Acquisition, Theory of Mind, Conflict, Imperfect Empathy
    Date: 2016–01–15
  9. By: Barirani, Ahmad (Copenhagen Business School); Sloof, Randolph (University of Amsterdam); van Praag, Mirjam C. (Copenhagen Business School)
    Abstract: We test the hypothesis, based on popular and theoretical perspectives, that entrepreneurs are more action-oriented than other occupational groups. We compare their playing strategies in an optimal stopping game using a randomized online experiment among 100s of entrepreneurs, managers and employees. Our experimental results show that entrepreneurs are indeed more action-oriented than others. We theorize that this is driven by their lower levels of loss aversion and higher levels of curiosity. Our empirical test results show that (i) entrepreneurs score indeed higher, on average, than managers and employees on curiosity and lower on loss aversion; (ii) the difference in action-orientedness between entrepreneurs and others vanishes when controlling for individual curiosity levels and (iii) an alternative treatment that provides subjects with counterfactual information (about what would have happened in case of stopping) increases their willingness to stop. Under some assumptions, the combination of these results leads to the conclusion that the higher action-orientedness of entrepreneurs can be linked to their greater curiosity, but not to their lower level of loss aversion. Hence, we find support for the intuitive idea that (curiosity driven) action-orientedness enhances the identification and/or exploitation of opportunities.
    Keywords: entrepreneurs, managers, employees, inaction, curiosity, loss aversion, lab-in-the field experiment
    JEL: L26 C93 D03
    Date: 2017–01

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