nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2019‒07‒29
six papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. Precious property or magnificent money? How money salience but not temperature priming affects first-offer anchors in economic transactions By Leusch, Yannik M.; Loschelder, David D.; Basso, Frédéric
  2. Strategic complexity and the value of thinking By Gill, David; Prowse, Victoria
  3. Do On-lookers See Most of the Game? Evaluating Job-seekers' Competitiveness of Oneself versus of Others in a Labor Market Experiment By Hu Sun; Yun Wang
  4. Socio-Economic Status and Inequalities in Children\'s IQ and Economic Preferences By Deckers, Thomas; Falk, Armin; Kosse, Fabian; Pinger, Pia; Schildberg-Hörisch, Hannah
  5. Belief updating: Does the 'good-news, bad-news' asymmetry extend to purely financial domains? By Barron, Kai
  6. Bounded Rationality, Monetary Policy, and Macroeconomic Stability By Francisco Ilabaca; Greta Meggiorini; Fabio Milani

  1. By: Leusch, Yannik M.; Loschelder, David D.; Basso, Frédéric
    Abstract: The present study aims for a better understanding of how individuals’ behavior in monetary price negotiations differs from their behavior in bartering situations. Two contrasting hypotheses were derived from endowment theory and current negotiation research to examine whether negotiators are more susceptible to anchoring in price negotiations versus in bartering transactions. In addition, past research found that cues of coldness enhance cognitive control and reduce anchoring effects. We attempted to replicate these coldness findings for price anchors in a distributive negotiations scenario and to illuminate the potential interplay of coldness priming with a price versus bartering manipulation. Participants (N=219) were recruited for a 2 × 2 between-subjects negotiation experiment manipulating (1) monetary focus and (2) temperature priming. Our data show a higher anchoring susceptibility in price negotiations than in bartering transactions. Despite a successful priming manipulation check, coldness priming did not enhance cognitive control (nor interact with the price/bartering manipulation). Our findings improve our theoretical understanding of how the focus on negotiation resources frames economic transactions as either unidirectional or bidirectional, and how this focus shapes parties’ susceptibility for the anchoring bias and negotiation behavior. Implications for theory and practice are discussed.
    Keywords: anchoring; loss aversion; resource framing; money; embodiment; temperature priming; Bartering
    JEL: J1
    Date: 2018–07–04
  2. By: Gill, David (Purdue University); Prowse, Victoria (Purdue University)
    Abstract: Response times are a simple low-cost indicator of the process of reasoning in strategic games. In this paper, we leverage the dynamic nature of response-time data from repeated strategic interactions to measure the strategic complexity of a situation by how long people think on average whenthey face that situation (where we categorize situations according to the characteristics of play in the previous round). We find that strategic complexity varies significantly across situations, and we find considerable heterogeneity in how responsive subjects’ thinking times are to complexity. We also study how variation in response times at the individual level across rounds affects strategic behavior and success. We find that ‘overthinking’ is detrimental to performance: when a subject thinks for longer than she would normally do in a particular situation, she wins less frequently and earns less. The behavioral mechanism that drives the reduction in performance is a tendency to move away from Nash equilibrium behavior. Overthinking is detrimental even though subjects who think for longer on average tend to be more successful. Finally, cognitive ability and personality have no effect on average response times.
    Keywords: Response time; decision time; thinking time; strategic complexity; game theory; strategic games; repeated games; beauty contest; cognitive ability; personality. JEL Classification: C72; C91.
    Date: 2019
  3. By: Hu Sun (University of Michigan); Yun Wang (Xiamen University)
    Abstract: Competing in the labor market requires job-seekers to evaluate the competitiveness of themselves and of others. Will their evaluations of others be more objective and their evaluations of themselves be more biased? Will successful and unsuccessful job-seekers in the same labor market engage in different patterns while making their evaluations? We design a laboratory experiment to study the dynamics of job-seeking strategies and individuals' belief updating in a labor market. Our experimental treatments feature the decision-making and the evaluation of competitiveness of oneself versus of others. The probability of being accepted for a job depends on external shocks as well as the individuals' ability ranking. We find that subjects are less likely to evaluate others' competitiveness as high as their own in the same situation. Subjects are more inclined to attribute failure to external shocks and attribute success to their own competitiveness. Estimation results from a reinforcement learning model show that, compared to decision-making for others, subjects have a higher tolerance for failure and remain in applying for unsuitable jobs for longer periods when seeking jobs for themselves. Our findings provide evidence for the presence of self-serving attributional bias when individuals' self-image affects their economic decisions.
    Keywords: Decision-making for others; Labor market experiment; Belief updating; Belief elicitation; Reinforcement learning; Self-serving attribution bias
    JEL: C91 D83 D91
    Date: 2019–07–11
  4. By: Deckers, Thomas (University of Bonn); Falk, Armin (University of Bonn); Kosse, Fabian (LMU); Pinger, Pia (University of Bonn); Schildberg-Hörisch, Hannah (DICE)
    Abstract: This paper explores inequalities in IQ and economic preferences between children from high and low socio-economic status (SES) families. We document that children from high SES families are more intelligent, patient and altruistic, as well as less risk-seeking. To understand the underlying causes and mechanisms, we propose a framework of how parental investments as well as maternal IQ and economic preferences influence a child\'s IQ and preferences. Within this framework, we allow SES to influence both the level of parental time and parenting style investments, as well as the productivity of the investment process. Our results indicate that disparities in the level of parental investments hold substantial importance for SES gaps in economic preferences and, to a lesser extent, IQ. In light of the importance of IQ and preferences for behaviors and outcomes, our findings offer an explanation for social immobility
    Keywords: socio-economic status; time preferences; risk preferences; altruism; experiments with children; origins of preferences; human capital;
    JEL: C90 D64 D90 D81 J13 J24 J62
    Date: 2019–07–23
  5. By: Barron, Kai
    Abstract: Bayes' statistical rule remains the status quo for modeling belief updating in both normative and descriptive models of behavior under uncertainty. Some recent research has questioned the use of Bayes' rule in descriptive models of behavior, presenting evidence that people overweight 'good news' relative to 'bad news' when updating ego-relevant beliefs. In this paper, we present experimental evidence testing whether this 'good-news, bad-news' effect is present in a financial decision making context (i.e. a domain that is important for understanding much economic decision making). We find no evidence of asymmetric updating in this domain. In contrast, in our experiment, belief updating is close to the Bayesian benchmark on average. However, we show that this average behavior masks substantial heterogeneity in individual updating behavior. We find no evidence in support of a sizeable subgroup of asymmetric updators.
    Keywords: economic experiments,Bayes' rule,belief updating,belief measurement,proper scoring rules,motivated beliefs
    JEL: C11 C91 D83
    Date: 2019
  6. By: Francisco Ilabaca; Greta Meggiorini; Fabio Milani
    Abstract: This paper estimates a Behavioral New Keynesian model to revisit the evidence that passive US monetary policy in the pre-1979 sample led to indeterminate equilibria and sunspot-driven fluctuations, while active policy after 1982, by satisfying the Taylor principle, was instrumental in restoring macroeconomic stability. The model assumes “cognitive discounting”, i.e., consumers and firms pay less attention to variables further into the future. We estimate the model allowing for both determinacy and indeterminacy. The empirical results show that determinacy is preferred both before and after 1979. Even if monetary policy is found to react only mildly to inflation pre-Volcker, the substantial degrees of bounded rationality that we estimate prevent the economy from falling into indeterminacy.
    Keywords: Behavioral New Keynesian model, cognitive discounting, estimation under determinacy and indeterminacy, Taylor principle, active vs passive monetary policy
    JEL: E31 E32 E52 E58
    Date: 2019

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