nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2019‒12‒23
seven papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. Fast then slow: A choice process explanation for the attraction effect By Gaudeul, A.; Crosetto, P.
  2. Cognitive Uncertainty By Benjamin Enke; Thomas Graeber
  3. The Structure and Behavioral Effects of Revealed Social Identity Preferences By Florian Hett; Markus Kroell; Mario Mechtel
  4. The Pledging Puzzle: How Can Revocable Promises Increase Charitable Giving By James Andreoni; Marta Serra-Garcia
  5. Human vs. Machine: Disposition Effect Among Algorithmic and Human Day-traders By Karolis Liaudinskas
  6. If You Could Read My Mind—An Experimental Beauty-Contest Game with Children By Hermes, Henning; Schunk, Daniel
  7. Theories Of Reasoning and Focal Point Play With A Non-Student Sample By Zhixin Dai; Jiwei Zheng; Daniel John Zizzo

  1. By: Gaudeul, A.; Crosetto, P.
    Abstract: In this paper we provide choice-process experimental evidence that the attraction effect is a short-term phenomenon, that disappears when individuals are given time and incentives to revise their choices.The attraction (or decoy) effect is the most prominent example of context effects, and it appears when adding a dominated option to a choice set increases the choice share of the now dominant option at the expense of other options. While widely replicated, the attraction effect is usually tested in hypothetical or payoff-irrelevant situations and without following the choice process. We run a laboratory experiment where we incentivize choice, vary the difference in utility between options and track which option participants consider best over time. We find that the effect is a transitory phenomenon that emerges only in the early stages of the choice process to later disappear. Participants are fast then slow: they first choose the dominant option to avoid the dominated decoy and then progressively revise their choices until choice shares come to correspond to price differences only. We expand our analysis by considering differences in utility among options and differences in the presentation of options (numerical or graphical). We also consider differences in the choice processes followed by individuals (intuitive vs. deliberative). This allows us to ascribe more precisely the role of fast and slow cognitive process in the emergence and disappearance of the attraction effect.
    JEL: C91 D12 D83
    Date: 2019
  2. By: Benjamin Enke; Thomas Graeber
    Abstract: This paper introduces a formal definition and an experimental measurement of the concept of cognitive uncertainty: people's subjective uncertainty about what the optimal action is. This concept allows us to bring together and partially explain a set of behavioral anomalies identified across four distinct domains of decision-making: choice under risk, choice under ambiguity, belief updating, and survey expectations about economic variables. In each of these domains, behavior in experiments and surveys tends to be insensitive to variation in probabilities, as in the classical probability weighting function. Building on existing models of noisy Bayesian cognition, we formally propose that cognitive uncertainty generates these patterns by inducing people to compress probabilities towards a mental default of 50:50. We document experimentally that the responses of individuals with higher cognitive uncertainty indeed exhibit stronger compression of probabilities in choice under risk and ambiguity, belief updating, and survey expectations. Our framework makes predictions that we test using exogenous manipulations of both cognitive uncertainty and the location of the mental default. The results provide causal evidence for the role of cognitive uncertainty in belief formation and choice, which we quantify through structural estimations.
    JEL: D01 D03
    Date: 2019–11
  3. By: Florian Hett (Johannes Gutenberg-University Mainz); Markus Kroell (Goethe University Frankfurt); Mario Mechtel (Leuphana University Lueneburg)
    Abstract: A large body of evidence shows that social identity affects behavior. However, our understanding of the substantial variation of these behavioral effects is still limited. We use a novel laboratory experiment to measure differences in preferences for social identities as a potential source of behavioral heterogeneity. Facing a trade-off between monetary payments and belonging to different groups, individuals are willing to forego significant earnings to avoid belonging to certain groups. We then show that individual differences in these foregone earnings correspond to the differences in discriminatory behavior towards these groups. Our results illustrate the importance of considering individual heterogeneity to fully understand the behavioral effects of social identity.
    Keywords: Social Identity, Identiï¬ cation Preferences, Social Preferences, Outgroup Discrimination, Behavioral Heterogeneity, Social Status, Social Distance
    JEL: C91 C92 D90
    Date: 2019–03
  4. By: James Andreoni; Marta Serra-Garcia
    Abstract: What is the value of pledges if they are often reneged upon? In this paper we show - both theoretically and experimentally - that pledges can be used to screen donors and to better understand their motives for giving. In return, nonprofit managers can use the information they glean from pledges to better target future charitable giving appeals and interventions to donors, such as expressions of gratitude. In an experiment, we find that offering the option to pledge gifts induces self-selection. If expressions of gratitude are then targeted to individuals who select into pledges, reneging can be significantly reduced. Our findings provide an explanation for the potential usefulness of pledges.
    Keywords: prosocial behavior, charitable giving, pledging, intertemporal choice
    JEL: D64 D90 C91
    Date: 2019
  5. By: Karolis Liaudinskas
    Abstract: Can humans achieve rationality, as defined by the expected utility theory, by automating their decision making? We use millisecond-stamped transaction-level data from the Copenhagen Stock Exchange to estimate the disposition effect – the tendency to sell winning but not losing stocks – among algorithmic and human professional day-traders. We find that: (1) the disposition effect is substantial among humans but virtually zero among algorithms; (2) this difference is not fully explained by rational explanations and is, at least partially, attributed to prospect theory, realization utility and beliefs in mean-reversion; (3) the disposition effect harms trading performance, which further deems such behavior irrational.
    Keywords: disposition effect, algorithmic trading, financial markets, rationality, automation
    JEL: D8 D91 G11 G12 G23 O3
    Date: 2019–11
  6. By: Hermes, Henning (Dept. of Economics, Norwegian School of Economics and Business Administration); Schunk, Daniel (University of Mainz, Chair of Public and Behavioral Economics)
    Abstract: We develop a new design for the experimental beauty-contest game (BCG) that is suitable for children in school age and test it with 114 schoolchildren aged 9–11 years. In addition, we collect measures on cognitive skills and perspective-taking abilities to identify determinants of successful performance in the game. Results demonstrate that children can successfully understand and play a BCG. Choices start at a slightly higher level than those of adults but learning over time and depth of reasoning are largely comparable with the results of studies run with adults. Cognitive skills are predictive only of whether children choose weakly dominated strategies, whereas measures of perspective-taking abilities are strongly linked to successful performance in the BCG. These findings emphasize the importance of perspective-taking abilities for strategic interaction and economic decision-making. Our new design for the experimental BCG allows further study of the development of strategic interaction skills starting already in school age.
    Keywords: children; experimental beauty-contest game; guessing game; strategic interaction; decision-making; perspective-taking; theory of mind; empathy; noncognitive skills
    JEL: C72 C92
    Date: 2019–11–30
  7. By: Zhixin Dai (University of East Anglia); Jiwei Zheng (University of East Anglia); Daniel John Zizzo (University of East Anglia)
    Abstract: We present a coordination game experiment testing the robustness of the predictive power of level-k reasoning and team reasoning in a sample of Chinese tax administrators. We show how the incidence of coordination game play is virtually identical between Chinese tax administrators and university students, which in turn is comparable with that found in research with a Western university student sample. However, relatively to non-students, students are comparatively more attracted by the focal point under team reasoning when this has equal payoffs and the other outcomes do not.
    Keywords: non-student subjects, focal points, team reasoning, level-k, coordination games.
    JEL: C72 C78 C91
    Date: 2019–12

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