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on Cognitive and Behavioural Economics |
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Issue of 2018‒12‒10
thirteen papers chosen by Marco Novarese Università degli Studi del Piemonte Orientale |
| By: | TAQADUS BASHIR (BAHRIA UNIVERSITY, ISLAMABAD CAMPUS); Taimoor Hassan (University of Gujrat) |
| Abstract: | Economics and conventional investment theory assumes that people are rational while markets are efficient, but people often think and act irrationally, and financial markets rarely follow textbook models of efficiency. Whereas behavioral finance uses knowledge from psychological studies in context of decision making in comparison to the so called predictable models popular in standard finance. Most oftenly investor behavior diverges from logics and rationality as investors are victim of numerous behavioral errors that intervene while they form up investment decision. Decison making is complicated due to the intervention of emotional attachments & avoidances, cognitive errors, and personality traits of decision makers. In developing country like Pakistan where the environment is unstable due to factors like security threats, terrorism, inflation, energy crises and are affecting the thinking pattern of people and the ratio of educated entrepreneur is very less, decisions are based on gut feelings, there is a need to study the impact of self-control, self-attribution along with cognitive dissonance and confirmation bias on investment decision and the current aimed to do so. The present study collected primary data through questionnaire from stock and bond investors. Significant positive relationship is found between the study biases and their impact on investment decisions of investors. Almost all the subjects were found to be the victims of confirmation bias, self-control bias, self-attribution & cognitive dissonance bias. Financial advisors are recommended to be first trained and then consulted for the detection & moderation of these biases before making investment decisions. |
| Keywords: | Behavioral Finance, confirmation bias, self-control bias, self-attribution, cognitive dissonance bias, financial advisors, investment decisions. |
| JEL: | G02 G11 D23 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:7009887&r=cbe |
| By: | Schmidt, Robert J.; Schwieren, Christiane; Sproten, Alec N. |
| Abstract: | We study whether social norm perception in economic laboratory experiments differs between subjects that participate for the first time and subjects that already participated many times. Consistent with previous studies, inexperienced subjects pronounce egalitarianism, while experienced subjects pronounce efficiency and the maximization of their own earnings. Moreover, experienced subjects evaluate exploitation and deception of other individuals in the lab as more appropriate than inexperienced subjects. Field norms also slightly differ between the two groups, but to a lower extent than lab norms. We therefore conclude that learning effects are more important than selection effects for explaining differences between inexperienced and experienced participants. We also conduct exploratory analyses on the relation between lab and field norms and find that behaving unsocial in the lab is considered substantially more appropriate than in the field. This appears inconsistent with the hypothesis that social preferences measured in economic experiments are inflated and indicates a distinction between revealed social preferences and the elicitation of normatively appropriate behavior. |
| Keywords: | laboratory experiments; selection effects; learning; generalizability; methodology |
| Date: | 2018–11–28 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0656&r=cbe |
| By: | Chen, Xi (Yale University) |
| Abstract: | Cognitive functioning is critical as in our daily life a host of real-world complex decisions in high-stakes markets have to be made. The decision-making process can be vulnerable to environmental stressors. Summarizing the growing economic and epidemiologic evidence linking air pollution, cognition performance and real-world decision making, we first illustrate key physiological and psychological pathways between air pollution and cognition. We then document the main patterns of air pollution affecting cognitive test performance by type of cognitive tests, gender, window of exposure, age profile, and educational attainment. We further extend to a review of real-world decision making that has been found to be affected by air pollution and the resulting cognitive impairments. Finally, rich implications on environmental health policies are drawn based on existing evaluations of social costs of air pollution. |
| Keywords: | decision making, air pollution, cognitive performance, intelligence |
| JEL: | I24 Q53 Q51 G11 J24 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp11921&r=cbe |
| By: | Dutcher, E. Glenn; Rodet, Cortney S. |
| Abstract: | Creative teams drive the idea-economy, yet the determinants of a team's ability to create new ideas are not universally agreed upon. Group-level diversity has gained the most traction as an explanation, where a team's performance is usually attributed to diversity over observed characteristics such as race, gender, or functional expertise. Most agree that these characteristics are not especially important, but rather serve as an indicator of diversity in experiences, which is the actual mechanism that improves team ability. We formalize and test if experientially diverse groups produce more ideas. Because group assignment to projects in the field is rarely exogenous, and experiential diversity is not measured in observational data, we use a laboratory experiment to test our proposal. We find that experientially diverse teams create more ideas and also find no additional effect for gender, racial, socioeconomic, or personality diversity. Our general finding for why diversity may be important indicates that if a correlation exists between characteristic diversity and experiential diversity, the characteristically diverse team will have a higher ability. This generalization can be used to unify divergent results from prior studies and can help explain how dissimilar corporate diversity policies could be equally successful. |
| Keywords: | Diversity, Creativity, Group Production, Experimental Economics |
| JEL: | C90 C92 J24 M50 O30 O31 O34 |
| Date: | 2018–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:89982&r=cbe |
| By: | Assenza, Tiziana; Heemeijer, P.; Hommes, C.H.; Massaro, D. |
| Abstract: | The New Keynesian theory of inflation determination is tested in this paper by means of laboratory experiments. We find that the Taylor principle is a necessary condition to ensure convergence to the inflation target, but it is not sufficient. Using a behavioral model of expectation formation, we show how heterogeneous expectations tend to self-organize on different forecasting strategies depending on monetary policy. Finally, we link the central bank ability to control inflation to the impact that monetary policy has on the type of feedback {positive or negative{ between expectations and realizations of aggregate variables and in turn on the composition of subjects with respect to the type of forecasting rules they use. |
| Keywords: | Laboratory Experiments; Monetary Policy; Expectations; Taylor principle |
| JEL: | C91 C92 D84 E52 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:33074&r=cbe |
| By: | Christoph Engel (Max Planck Institute for Research on Collective Goods); Alexandra Fedorets (German Institute for Economic Research (DIW Berlin)); Olga Gorelkina (University of Liverpool - Management School) |
| Abstract: | Individuals often have to decide to which degree of risk they want to expose others, or how much risk to accept if their choice has an externality on third parties. One typical application is a household. We run an experiment in the German Socio-Economic Panel with two members from 494 households. Participants have a good estimate of each other’s risk preferences, even if not explicitly informed. They do not simply match this preference when deciding on behalf of the other household member, but shy away from exposing others to risk. We model the situation, and we find four distinct types of individuals, and two distinct types of households. |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2018_14&r=cbe |
| By: | Hanna Fromell (Department of Economics, Econometrics, and Finance, University of Groningen); Daniele Nosenzo (Luxembourg Institute of Socio-Economic Research (LISER) and School of Economics, University of Nottingham); Trudy Owens (University of Nottingham) |
| Abstract: | Can we use the lens of dual-system theories to explain altruistic behavior? In recent years this question has attracted the interest of both economists and psychologists. We contribute to this emerging literature, by reporting both the results of a meta-study of the literature and a new experiment. Our meta-study is based on 19 experimental studies conducted with nearly 11,000 subjects. We show that the overall effect of manipulating cognitive resources to promote the “intuitive†system at the expense of the 'deliberative' system is very close to zero. We argue that this null result could be because the interventions used in the existing literature to manipulate cognitive resources are vulnerable to the presence of heterogeneity in the direction of the effect of the intervention. We design a new experiment that is not vulnerable to this potential heterogeneity. We still fail to find support for the notion that altruistic choices are the result of a conflict between the intuitive and deliberative systems. Taken together, the findings of our meta-study and the new experiment offer little support for dual-system theories of altruistic behavior. |
| Keywords: | altruism; giving; dictator game; dual-system model; intuition; deliberation; selfcontrol; willpower; depletion; Stroop task |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcdx:2018-13&r=cbe |
| By: | Hubert Janos Kiss (Momentum (LD-004/2010) Game Theory Research Group Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Department of Economics, Eötvös Loránd University, Budapest, Hungary); Ismael Rodriguez-Lara (Departamento de Teoría e Historia Económica Universidad de Granada); Alfonso Rosa-Garcia (Facultad de Ciencias Jurídicas y de la Empresa, Universidad Católica San Antonio, Murcia, Spain) |
| Abstract: | We study how lines form endogenously in front of banks when depositors differ in their liquidity needs. Our model has two stages. In the first one, depositors choose the level of costly effort they want to exert to arrive early at the bank which determines the order of decisions. In the second stage, depositors decide whether to withdraw or to keep the funds deposited. We consider two different informational environments (simultaneous and sequential) that differ in whether or not depositors can observe the decision of others during the second stage of the game. We show theoretically that the informational environment affects the emergence of bank runs and thus should influence the willingness to rush to the bank. We test the predictions in the lab, where we gather extensive data on individual traits to account for depositors' heterogeneity; e.g. socio-demographics, uncertainty attitudes or personality traits. We find no significant differences in the costly effort to arrive early at the bank neither across the informational environments, nor according to the liquidity needs of the depositors. In the sequential environment, some depositors rush to the bank because they are irrational and do not recognize the benefits of observability in fostering the coordination on the no-bank run outcome. There is also evidence that some depositors rush to keep their funds deposited and to facilitate coordination on the efficient outcome. Finally, we document that loss aversion is an important factor in the formation of the line. |
| Keywords: | bank runs, coordination problems, endogenous formation of lines, loss aversion, risk aversion, experimental economics, game theory, sequential games, simultaneous games |
| JEL: | C91 D03 D8 G02 J16 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:1826&r=cbe |
| By: | Cavalli, Fausto; Naimzada, Ahmad; Pecora, Nicolò; Pireddu, Marina |
| Abstract: | We study a financial market populated by heterogeneous fundamentalists, whose decisions are driven by ``animal spirits''. Each agent may have optimistic or pessimistic beliefs about the fundamental value, which are selected from time to time on the basis of an evolutionary mechanism. The evolutionary selection depends on a weighted evaluation of the general market sentiment perceived by the agents and on a profitability measure of the existent strategies. As the relevance given to the sentiment index increases, a herding phenomenon in agents behavior may take place and the animal spirits can drive the market toward polarized economic regimes, which coexist and are characterized by persistent high or low levels of optimism and pessimism. This conduct is detectable from agents polarized shares and beliefs, which in turn influence the price level. Such polarized economic regimes can consist in stable steady states or can be characterized by endogenous complex dynamics, generating persistent alternating waves of optimism and pessimism, as well as return distributions displaying fat tails and excess volatility. |
| Keywords: | heterogeneous fundamentalists; animal spirits; behavioral finance; sentiment index; complex dynamics |
| JEL: | B52 C62 D84 |
| Date: | 2018–11–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:90289&r=cbe |
| By: | Robertson, Matthew J. (Coventry University) |
| Abstract: | When can a prosecutor persuade a loss-averse judge to increase her rate of conviction? Motivated by empirical evidence, I study a model of persuasion in which the loss a judge incurs from wrongful conviction looms larger than the gain from a just verdict. I show that, surprisingly, the prosecutor benefits from persuasion even when the judge is extremely loss-averse. However, a necessary condition is that the prosecutor does not underestimate the judge’s loss aversion. I draw on experimental findings to quantify the effectiveness of persuasion under loss aversion. JEL classification numbers: D72 ; D82 ; D91 ; K40 |
| Keywords: | information design ; loss aversion ; wrongful conviction |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:wcreta:48&r=cbe |
| By: | Harin, Alexander |
| Abstract: | A theorem, mathematical method and model are introduced in the present article. Inequalities, allowed and forbidden zones, their relations, consequences, and applications are considered for the expectations of random variables. The method and model are based on the inequalities and zones of the theorem. The article is motivated by the need for theoretical support for the practical analysis performed for the purposes of behavioral economics. |
| Keywords: | probability; variance; noise; bias; measurement; utility theory; prospect theory; behavioral economics; psychology; social sciences; |
| JEL: | C02 C1 D8 D81 D84 |
| Date: | 2018–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:90326&r=cbe |
| By: | Bartling, Björn (University of Zurich); Fehr, Ernst (University of Zurich); Huffman, David B. (University of Pittsburgh); Netzer, Nick (University of Zurich) |
| Abstract: | Trust affects almost all human relationships – in families, organizations, markets and politics. However, identifying the conditions under which trust, defined as people's beliefs in the trustworthiness of others, has a causal effect on the efficiency of human interactions has proven to be difficult. We show experimentally and theoretically that trust indeed has a causal effect. The duration of the effect depends, however, on whether initial trust variations are supported by multiple equilibria. We study a repeated principal-agent game with multiple equilibria and document empirically that an efficient equilibrium is selected if principals believe that agents are trustworthy, while players coordinate on an inefficient equilibrium if principals believe that agents are untrustworthy. Yet, if we change the institutional environment such that there is a unique equilibrium, initial variations in trust have short-run effects only. Moreover, if we weaken contract enforcement in the latter environment, exogenous variations in trust do not even have a short-run effect. The institutional environment thus appears to be key for whether trust has causal effects and whether the effects are transient or persistent. |
| Keywords: | trust, causality, equilibrium selection, belief distortions, incomplete contracts, screening, institutions |
| JEL: | C91 D02 D91 E02 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp11917&r=cbe |
| By: | Hommes, Cars |
| Abstract: | This survey discusses behavioral and experimental macroeconomics emphasizing a complex systems perspective. The economy consists of boundedly rational heterogeneous agents who do not fully understand their complex environment and use simple decision heuristics. Central to our survey is the question under which conditions a complex macro-system of interacting agents may or may not coordinate on the rational equilibrium outcome. A general finding is that under positive expectations feedback (strategic complementarity) – where optimistic (pessimistic) expectations can cause a boom (bust) – coordination failures are quite common. The economy is then rather unstable and persistent aggregate fluctuations arise strongly amplified by coordination on trend-following behavior leading to (almost-)self-fulfilling equilibria. Heterogeneous expectations and heuristics switching models match this observed micro and macro behaviour surprisingly well. We also discuss policy implications of this coordination failure on the perfectly rational aggregate outcome and how policy can help to manage the self-organization process of a complex economic system. JEL Classification: D84, D83, E32, C92 |
| Keywords: | almost self-fulfilling equilibria, coordination failure, expectations feedback, experimental & behavioral macro-economics, learning, simple heuristics |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182201&r=cbe |