nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2018‒07‒16
eight papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. Three Layers of Uncertainty: an Experiment By Ilke Aydogan; Lo?c Berger; Valentina Bosetti; Ning Liu
  2. Hidden Persuaders: Do Small Gifts Lubricate Business Negotiations? By Michel André Maréchal; Christian Thöni
  3. Framing and repetition effects on risky choices: A behavioral approach By Noemí Herranz-Zarzoso; Gerardo Sabater-Grande
  4. Mind, Body, Bubble! Psychological and Biophysical Dimensions of Behavior in Experimental Asset Markets By Butler, David; Cheung, Stephen L.
  5. Social Preferences and Social Curiosity By Weiwei Tasch; Daniel Houser
  6. Nudgital: Critique of Behavioral Political Economy By Julia M. Puaschunder
  7. Revision or Revolution? A Note on Behavioral vs. Neoclassical Economics By Ronald Schettkat
  8. Inclusive Cognitive Hierarchy in Collective Decisions By Yukio Koriyama; Ali Ozkes

  1. By: Ilke Aydogan (Department of Economics, Bocconi University); Lo?c Berger (IESEG School of Management and Bocconi University); Valentina Bosetti (Department of Economics, Bocconi University and Fondazione Eni Enrico Mattei (FEEM)); Ning Liu (Department of Economics, Bocconi University)
    Abstract: We experimentally explore decision-making under uncertainty using a framework that decomposes uncertainty into three distinct layers: (1) physical uncertainty, entailing inherent randomness within a given probability model, (2) model uncertainty, entailing subjective uncertainty about the probability model to be used and (3) model misspecification, entailing uncertainty about the presence of the true probability model among the set of models considered. Using a new experimental design, we measure individual attitudes towards these different layers of uncertainty and study the distinct role of each of them in characterizing ambiguity attitudes. In addition to providing new insights into the underlying processes behind ambiguity aversion -failure to reduce compound probabilities or distinct attitudes towards unknown probabilities- our study provides the first empirical evidence for the intermediate role of model misspecification between model uncertainty and Ellsberg in decision-making under uncertainty.
    Keywords: Ambiguity Aversion, Reduction of Compound Lotteries, Non-expected Utility, Model Uncertainty, Model Misspecification
    JEL: D81
    Date: 2018–07
  2. By: Michel André Maréchal; Christian Thöni
    Abstract: Gift-giving customs are ubiquitous in social, political, and business life. Legal regulation and industry guidelines for gifts are often based on the assumption that large gifts potentially influence behavior and create conflicts of interest, but small gifts do not. However, scientific evidence on the impact of small gifts on business relationships is scarce. We conducted a natural field experiment in collaboration with sales agents of a multinational consumer products company to study the influence of small gifts on the outcome of business negotiations. We find that small gifts matter. On average, sales representatives generate more than twice as much revenue when they distribute a small gift at the onset of their negotiations. However, we also find that small gifts tend to be counterproductive when purchasing and sales agents meet for the first time, suggesting that the nature of the business relationship crucially affects the profitability of gifts.
    Keywords: reciprocity, gift exchange, field experiment, negotiations
    JEL: D63 C93
    Date: 2018
  3. By: Noemí Herranz-Zarzoso (LEE and Department of Economics, Universitat Jaume I, Castellón, Spain); Gerardo Sabater-Grande (LEE and Department of Economics, Universitat Jaume I, Castellón, Spain)
    Abstract: In this study we analyze framing effects caused by two versions of the choice (multiple price) list procedure used to elicitate individual risk preferences. In the probability equivalence (PE) version, subjects face pairwise choices between lotteries within a choice list. In the certainty equivalence (CE) version, subjects are asked to state a minimum selling price to give up the lottery they cope to. We implement a within-subjects experiment allowing for preference imprecision and preference for compound lotteries, by means of repetition of identical risk tasks. Introducing different variations in the number of lottery options offered with and without decreasing their range, we find that changes in the framework disturb subject’s risk preferences only in the CE version.
    Keywords: risk aversion, framing effects, risk task repetition, preference imprecision, preference for compound lotteries, choice list procedure
    JEL: C93 D03 D81
    Date: 2018
  4. By: Butler, David (Griffith University); Cheung, Stephen L. (University of Sydney)
    Abstract: Asset market bubbles and crashes are a major source of economic instability and inefficiency. Sometimes ascribed to animal spirits or irrational exuberance, their source remains imperfectly understood. Experimental methods can isolate systematic deviations from an asset's fundamental value in a manner not possible on the trading floor. In this chapter, we review evidence from dozens of laboratory experiments that investigate the measurement and manipulation of an array of psychological and biophysical attributes. Measures of emotion self‐regulation and interoceptive ability are informative, as is cognitive ability and the level and fluctuation of hormones. Rules that promote deliberative decision making can improve market efficiency, while incidental emotions can impair it. Signals in specific brain areas can be a trigger precipitating a bubble's collapse. We conclude that trading decisions are profoundly biophysical in a manner not captured by efficient markets models, and close with speculations on implications for algorithmic trading.
    Keywords: efficient markets hypothesis, emotions, experimental asset markets, price bubbles and crashes, somatic marker hypothesis
    JEL: C92 D91 G12
    Date: 2018–05
  5. By: Weiwei Tasch (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University); Daniel Houser (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University)
    Abstract: Over the last two decades social preferences have been implicated in a wide variety of key economic behaviors. Here we investigate connections between social preferences and the demand for information about others’ economic decisions and outcomes, which we denote “social curiosity.†Our analysis is within the context of the inequality aversion model of Fehr and Schmidt (1999). Using data from laboratory experiments with sequential public goods games, we estimate social preferences at the individual level, and then correlate social preferences with one’s willingness to pay to make visible others’ contribution decisions. Our investigation enables us to shed light on how costs to knowing others’ economic decisions and outcomes impact decisions among people with different social preferences, and in particular the extent to which such costs impact the willingness for groups to cooperate.
    Keywords: Laboratory Experiment, Inequality Aversion, Social Curiosity, Information, Sequential Public Goods Game
    JEL: C91 D83 D91 H41
    Date: 2018–07
  6. By: Julia M. Puaschunder (The New School, Department of Economics)
    Abstract: Behavioral Economics revolutionized mainstream neo-classical economics. A wide range of psychological, economic and sociological laboratory and field experiments proved human beings deviating from rational choices as standard neo-classical profit maximization axioms failed to explain how human actually behave. Human beings rather use heuristics in their day-to-day decision making. These mental short cuts enable to cope with a complex world yet also often leave individuals biased and falling astray to decision making failures. What followed was the powerful extension of these behavioral insights for public administration and public policy making. Behavioral economists proposed to nudge and wink citizens to make better choices for them and the community. Many different applications of rational coordination followed ranging from improved organ donations, health, wealth and time management, to name a few. Yet completely undescribed remains that the implicit hidden persuasion opens a gate to deception and is an unprecedented social class division means. Social media forces are captures as unfolding a class dividing nudgital society, in which the provider of social communication tools can reap surplus value from the information shared of social media users. The social media provider is outlined as capitalist-industrialist, who benefits from the information shared by social media users, or so-called consumer-workers, who share private information in their wish to interact with friends and communicate to public.
    Keywords: Behavioral Economics, Behavioral Political Economy, Democratisation of information, Education, Exchange value, Governance, Libertarian Paternalism, Nudging
    Date: 2018–05
  7. By: Ronald Schettkat
    Abstract: Behavioral economics, the analysis of economic decisions, has made enormous progress over the last decades and become accepted as a major field in economics. How is behavioral economics to be compared to the neoclassical model? As a revision of the neoclassical model enhancing the set of variables for motivation such as fairness in the utility function which is then to be maximized? Or is behavioral economics a revolution, a departure from the neoclassical axioms, a new model? This paper argues that many of the findings in behavioral economics are incompatible with the neoclassical model and have paved the way for a revolution in economics.
    Date: 2018–06
  8. By: Yukio Koriyama (CREST, Ecole Polytechnique, Université Paris-Saclay); Ali Ozkes (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE)
    Abstract: We study the implications of structural models of non-equilibrium thinking, in which players best respond while holding heterogeneous beliefs on the cognitive levels of others. We introduce an inclusive cognitive hierarchy model, in which players are capable of projecting the self to others in regard to their cognitive level. The model is tested in a laboratory experiment of collective decision-making, which supports inclusiveness. Our theoretical results show that inclusiveness is a key factor for asymptotic properties of deviations from equilibrium behavior. Asymptotic behavior can be categorized into three distinct types: naïve, Savage rational with inconsistent beliefs, and sophisticated.
    Keywords: collective decision-making, bounded rationality, cognitive hierarchy, information aggregation
    JEL: C92 D72 D91
    Date: 2018–06

This nep-cbe issue is ©2018 by Marco Novarese. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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