nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2019‒04‒15
nine papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. Strategic Ethics: Altruism without the Other-regarding Confound By Giuseppe Attanasi; Kene Boun My; Nikolaos Georgantzís; Miguel Ginés
  2. Behavioral Impediments to Valuing Annuities: Complexity and Choice Bracketing By Brown, Jeffrey R.; Kapteyn, Arie; Luttmer, Erzo F.P.; Mitchell, Olivia S.; Samek, Anya
  3. Learning to cooperate in the shadow of the law By Roberto Galbiati; Emeric Henry; Nicolas Jacquemet
  4. Cognitive stress and learning Economic Order Quantity (EOQ) inventory management: An experimental investigation By Pan, Jinrui; Shachat, Jason; Wei, Sijia
  5. Self-Confidence and Reactions to Subjective Performance Evaluations By Bellemare, Charles; Sebald, Alexander
  6. A Note on the Behavioral Political Economy of Innovation Policy By Jan Schnellenbach; Christian Schubert
  7. Nudging as an Environmental Policy Instrument By Carlsson, Fredrik; Gravert, Christina; Johansson-Stenman, Olof; Kurz, Verena
  8. Optimal Prosocial Nudging By Carlsson, Fredrik; Johansson-Stenman, Olof
  9. Judgments of length in the economics laboratory: Are there brains in choice? By Duffy, Sean; Gussman, Steven; Smith, John

  1. By: Giuseppe Attanasi (Université Côte d'Azur, CNRS, GREDEG, France); Kene Boun My (BETA, Université de Strasbourg); Nikolaos Georgantzís (Burgundy School of Business & Economics Department, Universitat Jaume I); Miguel Ginés (Economics Department, Universitat Jaume I)
    Abstract: In a two-stage investment-effort game, we model altruistic investment in another agent's capacity to benefit from synergies between the two agents' efforts. Contrary to most models in the literature on altruism, we assume that agents who invest in others have no direct utility from their giving behavior, ruling out any genuinely altruistic component in their utility function, i.e., stemming from other-regarding preferences. Furthermore, we disentangle this strategic ethics" from reputational e ects yielding incentives for a more pro-social action in the present in order to favor Pareto-superior outcomes in the future. Isolated consumption of one's own bene ts from own efforts is the worst equilibrium, which is globally stable and is shown to exist independently of the investment cost. However, for a low enough investment cost, there exist two alternative equilibria: an unstable intermediate equilibrium in which both agents make positive complementarity-building investments, and a stable one in which both agents invest all they can to complementarity building. Both equilibria Pareto-dominate the aforementioned no-investment equilibrium. Results of a laboratory experiment con rm our behavioral prediction that, for a low enough investment cost, subjects coordinate on positive complementarity-building investment, which in turn boosts their effort in the second stage. The latter increases in both own and others' complementarity-building investment, as predicted by our model. All this holds independently of subjects' risk and inequity aversion. The latter suggests that complementarity-building investment is not motivated by altruism. Rather, it is purely strategic.
    Keywords: Complementarity-building Investment, Strategic Complementarities, Altruism, Fairness, Risk Aversion
    JEL: C72 C73 C91 D64
    Date: 2019–04
  2. By: Brown, Jeffrey R. (University of Illinois); Kapteyn, Arie (University of Southern California); Luttmer, Erzo F.P. (Dartmouth College); Mitchell, Olivia S. (University of Pennsylvania); Samek, Anya (University of Southern California)
    Abstract: This paper examines two behavioral factors that diminish people's ability to value a life-time income stream or annuity, drawing on a survey of about 4,000 adults in a U.S. nationally representative sample. By experimentally varying the degree of complexity, we provide the first causal evidence that increasing the complexity of the annuity choice reduces respondents' ability to value the annuity, measured by the difference between the sell and buy values people assign to the annuity. We also find that people's ability to value an annuity increases when we experimentally induce them to think jointly about the annuitization decision as well as how quickly or slowly to spend down assets in retirement. Accordingly, we conclude that narrow choice bracketing is an impediment to annuitization, yet this impediment can be mitigated with a relatively straightforward intervention.
    Keywords: pension, annuity, retirement income, Social Security, cognition, behavioral
    JEL: D14 D91 G11 H55
    Date: 2019–03
  3. By: Roberto Galbiati (Département d'économie); Emeric Henry (Département d'économie); Nicolas Jacquemet (Centre d'économie de la Sorbonne (CNRS/UP 1))
    Abstract: How does the exposure to past institutions affect current cooperation? While a growing literature focuses on behavioral channels, we show how cooperation-enforcing institutions affect rational learning about the group’s value. Strong institutions, by inducing members to cooperate, may hinder learning about intrinsic values in the group. We show, using a lab experiment with independent interactions and random rematching, that participants behave in accordance with a learning model, and in particular react differently to actions of past partners whether they were played in an environment with coercive enforcement or not.
    Keywords: Enforcement; Social values; Cooperation; Learning spillovers; Persistence of institutions; Repeated games; Experiments
    JEL: C91 C73 D02 K49 P16 Z1
    Date: 2019–04
  4. By: Pan, Jinrui; Shachat, Jason; Wei, Sijia
    Abstract: We use laboratory experiments to evaluate the effects of cognitive stress on inventory management decisions in a finite horizon Economic Order Quantity (EOQ) model. We manipulate two sources of cognitive stress. First, we vary participants' ability to order inventory from any decision period to only when inventory is depleted. This reduces cognitive stress by restricting the policy choice set. Second we vary participants' participation in a competing pin memorization. This increases cognitive load. Participants complete a sequence of five ``annual'' inventory management tasks, with monthly ordering decisions. Both sources of cognitive stress negatively impact earnings, with the bulk of these impacts occurring in the first year. Participants' choices in all treatments exhibit trends to near optimal policy adoption. But only in the most favorable treatment do the majority of choices reach the optimal policy. We estimate the learning dynamics of monthly order decisions using a Markov switching model. Estimates suggest increased cognitive load reduces the probability of switching to more profitable policies, and that more complex policy choice sets leads to a greater policy lock-in. Our results suggests that inexperienced individuals will perform more poorly when called upon to make inventory management situations in cognitively stressfully environments, and that the benefits of providing support and task simplicity is greatest when the task is first assigned.
    Keywords: Economic Order Quantity, Cognitive load, Choice set complexity, Learning
    JEL: C92 D83 M11
    Date: 2018–04–15
  5. By: Bellemare, Charles (Université Laval); Sebald, Alexander (University of Copenhagen)
    Abstract: Subjective performance evaluations are commonly used to provide feedback and incentives to workers. However, such evaluations can generate significant disagreements and conflicts, the severity of which may be driven by many factors. In this paper we show that a workers' level of self-confidence plays a central role in shaping reactions to subjective evaluations - overconfident agents engage in costly punishment when they receive evaluations below their own, but provide limited rewards to principals when evaluations exceed their own. In contrast, underconfident agents do not significantly react to evaluations below their own, but reward significantly evaluations exceeding their own. Our analysis exploits data from a principal-agent experiment run with a large sample of the Danish working age population, varying the financial consequences associated with the evaluations workers receive. In contrast to existing economic models of reciprocal behavior, reactions to evaluations are weakly related to the financial consequences of the evaluations. These results point towards a behavioral model of reciprocity that intertwines the desire to protect self-perceptions with over-/underconfidence.
    Keywords: subjective performance evaluations, self-confidence, reciprocity
    JEL: D01 D02 D82 D86 J41
    Date: 2019–03
  6. By: Jan Schnellenbach (Brandenburg University of Technology); Christian Schubert (Faculty of Management Technology, German University in Cairo)
    Abstract: We propose that policy-making in the realm of innovation policy can be fruitfully analyzed from the perspective of Behavioral Political Economy. Citizens, policy-makers and also bureaucrats are prone to biases that have been empirically identified in behavioral economic and psychological research. When applied to innovation policy, it can be shown that under certain conditions, policy-makers are willing to support riskier innovative projects and that this tendency is amplified by public sector incentives, such as soft budget constraints. The same holds for a tendency to support ongoing innovative projects even if their profitability becomes increasingly doubtful. Finally, we also highlight how special-interest policies aimed at distorting risk perceptions can slow down the innovation process.
    Keywords: Biases, Heuristics, Sunk Cost Fallacy, Availability Bias, Overconfidence, Loss Aversion
    JEL: O38 D72 D78 H11
    Date: 2019–02
  7. By: Carlsson, Fredrik (Department of Economics, School of Business, Economics and Law, Göteborg University); Gravert, Christina (University of Copenhagen, Department of Economics); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University); Kurz, Verena
    Abstract: We discuss the use of green nudges – nudges intended to reduce negative externalities – as an environmental policy instrument. A review of empirical studies reveals that green nudges can have a sizeable impact on behavior and the environment, but that the effects are context dependent. In the policy discussion, drawing on both the empirical overview and basic welfare-economic models, it is emphasized that while green nudges seem to have a large potential, they offer no panacea for solving environmental problems. Instead, they should be seen as a policy instrument among others in the regulator’s toolbox. In particular, we discuss the potential role of nudging when environmental externalities can be dealt with using optimal Pigovian taxes, and when they cannot. Nudging has a greater potential when such taxes are not available or feasible.
    Keywords: nudge; environmental policy; behavior
    JEL: D90 H21 H23
    Date: 2019–04
  8. By: Carlsson, Fredrik (Department of Economics, School of Business, Economics and Law, Göteborg University); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: While nudges are still mostly associated with affecting individual choices for their own long-run interest, i.e. dealing with internalities, they are increasingly used in order to reduce externalities, such as environmental consequences. While we are gaining increasing insights into when and how nudges work, much less attention has been given to the normative aspects of nudging as a policy instrument to deal with externalities. We investigate optimal prosocial nudging under a number of different settings in a world where a conventional Pigovian tax can be used to a varying extent. We find that nudges typically only play a limited role when optimal taxes can be implemented. What we denote encouraging moral nudges, i.e. nudges where people’s choices are affected by strengthening consumers’ moral norms for doing the right thing, are more likely to play a role even when the tax is optimal compared to purely cognitive nudges. In addition, if a nudge better can target the right consumers, then it might also be optimal to use even when an optimal tax can be implemented. We also present decision rules for the optimal size of a nudge when an optimal tax cannot be implemented.
    Keywords: nudge; environmental policy; behavior
    JEL: D90 H21 H23
    Date: 2019–04
  9. By: Duffy, Sean; Gussman, Steven; Smith, John
    Abstract: We design a choice experiment where the objects are valued according to only a single attribute with a continuous measure and we can observe the true preferences of subjects. However, subjects have an imperfect perception of their own preferences. Subjects are given a choice set involving several lines of various lengths and are told to select one of them. They strive to select the longest line because they are paid an amount that is increasing in the length of their selection. Subjects also make their choices while they are required to remember either a 6-digit number (high cognitive load) or a 1-digit number (low cognitive load). We find that subjects in the high load treatment make inferior line selections and perform worse searches. When we restrict attention to the set of viewed lines, we find evidence that subjects in the high load treatment make worse choices than subjects in the low load treatment. Therefore the low quality searches do not fully explain the low quality choices. Our results suggest that cognition affects choice, even in our idealized choice setting. We also find evidence of choice overload even when the choice set is small and the objects are simple. Further, our experimental design permits a multinomial discrete choice analysis on choice among single-attribute objects with an objective value. The results of our analysis suggest that the errors in our data are better described as having a Gumbel distribution rather than a normal distribution. Finally, we observe the effects of limited cognition, consistent with memory decay and attention.
    Keywords: cognitive load, choice, choice overload, judgment, memory, search
    JEL: C91
    Date: 2019–04–06

This nep-cbe issue is ©2019 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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