nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2017‒10‒29
twelve papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. Pleasing or Fighting Future Tastes? Projection Bias versus Conflict of Selves By Krügel, Sebastian; Uhl, Matthias
  2. Does Voluntary Risk Taking Affect Solidarity? Experimental Evidence from Kenya By Renate Strobl; Conny Wunsch
  3. Sharing responsibility with a machine By Strobel, Christina; Kirchkamp, Oliver
  4. Risk Aversion as a Perceptual Bias By Mel Win Khaw; Ziang Li; Michael Woodford
  5. Referential Revealed Preference Theory By Hassan Nosratabadi
  6. Prospect Theory and Earnings Manipulation: Examination of the Non-Uniform Relationship between Earnings Manipulation and Stock Returns Using Quantile Regression By Leon Li; Nen-Chen Richard Hwang
  7. Spot On For Liars! How Public Scrutiny Influences Ethical Behavior By Ostermaier, Andreas; Uhl, Matthias
  8. Deception Under Time Pressure: Conscious Decision or a Problem of Awareness? By Kai A. Konrad; Tim Lohse; Sven A. Simon
  9. Nice to You, Nicer to Me: Does Self-Serving Generosity Diminish the Reciprocal Response? By Woods, Daniel; Servátka, Maroš
  10. Subjective Performance Evaluation of Employees with Biased Beliefs By FOSCHI, Matteo; SANTOS-PINTO, Luís Pedro
  11. Cooperation through Coordination in Two Stages By Todd R. Kaplan, Bradley J. Ruffle, Ze'ev Shtudiner
  12. Group Influence in Sharing Experiments By Daniela Di Cagno; Werner Güth; Marcello Puca; Patrizia Sbriglia

  1. By: Krügel, Sebastian; Uhl, Matthias
    Abstract: Previous studies apparently demonstrate that people systematically mispredict future tastes. This evidence, however, is also consistent with the idea that people understand, but do not approve of their future tastes. To disentangle both approaches, we conducted a framed field experiment with commitment option. In our experiment, commitment was a judgment which a planner imposed on another planner. The results suggest that people may sometimes experience a conflict between two far-sighted selves.
    JEL: D03
    Date: 2017
  2. By: Renate Strobl; Conny Wunsch
    Abstract: In this study we experimentally investigate whether solidarity, which is a crucial base for informal insurance arrangements in developing countries, is sensitive to the extent to which in-dividuals can influence their risk exposure. With slum dwellers of Nairobi our design measures subjects’ willingness to share income with a worse-off partner both in a setting where partici-pants could either deliberately choose or were randomly assigned to a safe or a risky project. We find that when risk exposure is a choice, willingness to give is roughly 9 percentage points lower compared to when it is exogenously assigned to subjects. The reduction of solidarity is driven by a change in giving behaviour of persons with the risky project. Compared to their counterparts in the random treatment, voluntary risk takers are seemingly less motivated to share their high payoff with their partner, especially if this person failed after choosing the risky project. This suggests that the willingness to show solidarity is influenced by both the desire for own compensation and attributions of responsibility. Our findings have important implications for policies that interact with existing informal insurance arrangements.
    Keywords: solidarity, risk taking, Kenya
    JEL: D81 C91 O12 D63
    Date: 2017
  3. By: Strobel, Christina; Kirchkamp, Oliver
    Abstract: More and more often the partner in this decision is not another human but, instead, a machine. Here we ask whether a machine partner affects our responsibility, our perception of the choice and our choice differently from a human partner. We use a modified dictator game with two joint decision makers: either two humans or one human and one machine. We find a strong treatment effect on perceived responsibility. We do, however, find only a small and insignificant effect on actual choices.
    JEL: C91 C92
    Date: 2017
  4. By: Mel Win Khaw; Ziang Li; Michael Woodford
    Abstract: The theory of expected utility maximization (EUM) proposed by Bernoulli explains risk aversion as a consequence of diminishing marginal utility of wealth. However, observed choices between risky lotteries are difficult to reconcile with EUM: for example, in the laboratory, subjects’ responses on individual trials involve a random element, and cannot be predicted purely from the terms offered; and subjects often appear to be too risk averse with regard to small gambles (while still accepting sufficiently favorable large gambles) to be consistent with any utility-of-wealth function. We propose a unified explanation for both anomalies, similar to the explanation given for related phenomena in the case of perceptual judgments: they result from judgments based on imprecise (and noisy) mental representation of the decision situation. In this model, risk aversion is predicted without any need for a nonlinear utility-of-wealth function, and instead results from a sort of perceptual bias | but one that represents an optimal Bayesian decision, given the limitations of the mental representation of the situation. We propose a specific quantitative model of the mental representation of a simple lottery choice problem, based on other evidence regarding numerical cognition, and test its ability to explain the choice frequencies that we observe in a laboratory experiment.
    JEL: C91 D80 D81 D87
    Date: 2017
  5. By: Hassan Nosratabadi (Rutgers, The State University Of New Jersey)
    Abstract: References can influence choice. One of the well-studied cases is when a decoy is added to the menu. However small in magnitude, decoy effect violates the weak axiom of revealed preferences (WARP). In order to explain the small deviation from the classical revealed preference theory, I decompose WARP into independent axioms in order to only remove the ones which are inconsistent with the this effect. This minimal deviation produces the referential revealed preference theory that keeps the strong predictive power offered in the classical theory while explaining the referential effect.
    Keywords: Reference-Dependent Choice, Reference Preferences, Decoy Effect, Attraction Effect, WARP Decomposition
    JEL: D11 D81
    Date: 2017–10–20
  6. By: Leon Li (University of Waikato); Nen-Chen Richard Hwang (California State University, San Marcos)
    Abstract: Using the prospect theory as a research framework, this paper makes contributions by demonstrating that managerial risk preference and stock return may influence a firm’s earnings manipulation behavior. Specifically, this study argues that corporate executives may develop risk-averting (risk-seeking) attitudes because of high and positive (low and negative) stock returns. Under this scenario, managers may decide to actively manage the reported earnings in order to preserve gain (gamble on loss) on stock returns. On the other hand, firm executives may not actively manipulate their reported incomes when experiencing average and close-to-zero stock returns. Using quantile regression method to examine the relation between earnings manipulation and stock returns, this study finds that there is a significantly positive (negative) relation between earnings manipulation and stock returns at the high (low) stock returns quantiles. As predicated, such relation is not significant at the middle range of stock returns. To ensure the findings reported in this study are robust, we conduct several tests. In conclusion, we offer policy implications to regulators.
    Keywords: prospect theory; quantile regression; earnings manipulation; stock return; discretionary accruals
    JEL: G12 G32
    Date: 2017–10–27
  7. By: Ostermaier, Andreas; Uhl, Matthias
    Abstract: We examine in a lab experiment whether people are more honest in public than in private. We find that outcome-minded subjects lie less in public to conform with expectations about others' behavior, which are ironically false. Rule-minded subjects, in turn, do not respond to public scrutiny. These findings challenge the common faith in public scrutiny to promote ethical behavior. While public scrutiny can improve ethical behavior, this effect is contingent on people's mindsets and expectations.
    JEL: D63
    Date: 2017
  8. By: Kai A. Konrad; Tim Lohse; Sven A. Simon
    Abstract: Time is a crucial determinant of deception, since some misreporting opportunities come as a surprise and require an intuitive decision while others allow for extensive reflection time. To be able to pursue a deceptive strategy, however, a subject must be aware of the misreporting opportunity. This paper provides experimental evidence on the role of the time dimension for dishonest decision-making and for the cognition process of the chance to deceive. We conduct a laboratory experiment of self-serving deceptive behavior which combines two exogenously varied levels of reflection time with a cognition process about the deception opportunity. We find that time pressure leads to more honesty compared to sufficient contemplation time. More importantly, decomposing misreporting into its two components, i.e., the cognition process of the misreporting opportunity and the conscious decision to misreport, reveals that more reflection time increases awareness of the misreporting opportunity. However, more time has no effect on the conscious decision of whether to misreport or not. Due to subjects’ lack of awareness under time pressure we conclude that honesty is the intuitive response.
    Keywords: time pressure, awareness, deception, contemplation, cognitive process, laboratory experiment
    JEL: C91 D83 K42
    Date: 2017
  9. By: Woods, Daniel; Servátka, Maroš
    Abstract: Reciprocity has been shown to be sensitive to perceived intentions, however, not much is known about the intensity of reciprocal responses to the precise nature of those intentions. For example, a person can strategically appear to be kind while being self-serving or can be selflessly (genuinely) kind. Do these two intentions elicit different reciprocal reactions? We propose a conjecture that self-serving but generous actions diminish the positively reciprocal response, compared to selfless generous actions. We classify actions that increase a recipient’s maximum payoff, but by less than the giver’s maximum payoff, as being self-serving generous actions, while classifying actions that increase a recipient’s maximum payoff by more than the giver’s as selfless generous actions. We hypothesize that selfless generous actions are considered more generous than self-serving generous actions, and that self-serving generous actions will therefore result in a diminished reciprocal response. We test this conjecture using two novel experimental designs. We find some evidence that subjects perceive self-serving generous actions as being less generous than selfless generous actions, but no empirical support for our conjecture on the diminished reciprocal response.
    Keywords: Reciprocity, generosity, self-serving, genuine, experiment, Revealed Altruism, lost wallet game, investment game
    JEL: C7 C72 C9 C91
    Date: 2017–09–26
  10. By: FOSCHI, Matteo; SANTOS-PINTO, Luís Pedro
    Abstract: This paper analyses how worker optimism (and pessimism) affects subjective performance evaluation (SPE) contracts. We let an optimistic (pessimistic) worker overestimate (underestimate) the probability of observing an acceptable performance. The firm is better informed about performance than the worker and knows the worker's bias. We show that optimism (and pessimism): i) changes the optimal incentive scheme under SPE, ii) lowers the deadweight loss associated with SPE contracts, iii) can lead to a Pareto improvement by simultaneously lowering the firm's expected wage cost and raising the worker's expected compensation. In addition, we show that worker pessimism can lead to SPE contracts without a deadweight loss, in contrast to the standard case in the literature.
    Keywords: Optimism, Overconfidence, Contract, Moral Hazard, Biased Beliefs, Mechanism Design.
    JEL: D82 D84 D86 J41 J7
    Date: 2017
  11. By: Todd R. Kaplan, Bradley J. Ruffle, Ze'ev Shtudiner (Wilfrid Laurier University)
    Abstract: Efficient cooperation often requires coordination, such that exactly one of two players takes an available action. If the decisions whether to pursue the action are made simultaneously, then neither or both may acquiesce leading to an inefficient outcome. However, inefficiency may be reduced if players move sequentially. We test this experimentally by introducing repeated two-stage versions of such a game where the action is individually profitable. In one version, players may wait in the first stage to see what their partner did and then coordinate in the second stage. In another version, sequential decision-making is imposed by assigning one player to move in stage one and the other in stage two. Although there are fewer cooperative decisions in the two-stage treatments, we show that overall subjects coordinate better on efficient cooperation and on avoiding both acquiescing. Yet, only some pairs actually achieve higher profits, while the least cooperative pairs do worse in the two-stage games than their single-stage counterparts. For these, rather than facilitating coordination, the additional stage invites attempts to disguise uncooperative play, which are met with punishment.
    Keywords: experimental economics, cooperation, efficiency, two-stage games, turntaking
    JEL: C90 Z13
    Date: 2017–09–30
  12. By: Daniela Di Cagno; Werner Güth; Marcello Puca; Patrizia Sbriglia
    Abstract: We experimentally study how group identity and social influence affect proposers and recipients in Ultimatum and Impunity Games. To induce group identity and social effects, we assign individuals to different color groups and inform them about the median choice of their own group. When testing the relevance of this social signal for intentions and decisions we distinguish uni- and bi-dimensional behavior, the latter to let individuals select on which rule of conduct of the others to condition own behavior. When disagreement and conflicting views are possible, coordinating with group behavior may be less important and individuals may prefer self-serving. The bi-dimensional design apparently allows for more variety: tracking both group medians, only one or none.Social influence significantly affects behavior in Ultimatum but has much weaker impact in Impunity experiments. Social information seems to act in two ways: as a coordination device and as a learning device. However, the marginal impact of the signal and the direction of its influence is strongly role dependent.
    Keywords: ultimatum Game, impunity game, social influence, group identity, fairness, experiments.
    JEL: C90 C91
    Date: 2017–10

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