nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2020‒01‒27
eight papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. Trust, Trustworthiness, and the Behavioral Foundations of Corporate Law By Blair, Margaret M; Stout, Lynn; Library, Cornell
  2. The Evolution of Morals under Indirect Reciprocity By Alexia Gaudeul; Claudia Keser; Stephan Müller
  3. (Im)patience by Proxy: Making Intertemporal Decisions for Others By Angela C.M. de Oliveira; Sarah Jacobson
  4. Media Bias and Tax Compliance: Experimental Evidence By Miloš Fišar; Tommaso Reggiani; Fabio Sabatini; Jiří Špalek
  5. Cognitive Bias Mitigation: How to Make Decision-Making Rational? By Tomas Kucera
  6. From Meaning to Money: Translating Injury into Dollars By Hans, Valerie P.; Helm, Rebecca K.; Library, Cornell; Reyna, Valerie
  7. The Doors of Perception By Gary Charness; Alessandro Sontuoso
  8. Importance of Critical Thinking in Solving Society’s Problems By Abdulrahman Alshahrani

  1. By: Blair, Margaret M; Stout, Lynn; Library, Cornell
    Abstract: 149 University of Pennsylvania Law Review 1735 (2001) Conventional legal and economic analysis assumes that opportunistic behavior is discouraged and that cooperation is encouraged within firms primarily through the use of legal and market incentives. This presumption is embedded in the modern view that the corporation is best described as a "nexus of contracts, " a collection of explicit and implicit agreements voluntarily negotiated among the rationally selfish parties who join in the corporate enterprise. In this Article we take a different approach. We start from the observation that, in many circumstances, legal and market sanctions provide, at best, imperfect means of regulating behavior within the firm. We consider an alternate hypothesis: that corporate participants often cooperate with each other not because of external constraints but because of internal ones. In particular, we argue that the behavioral phenomena of internalized trust and trustworthiness play important roles in encouraging cooperation within films. In support of this claim, we survey the extensive experimental evidence that has been produced over the past four decades on human behavior in "social dilemmas." This evidence demonstrates that internalized trust is a common phenomenon, that it is at least in part learned rather than innate, and that different individuals vary in their inclinations toward trust. Most importantly, the experimental evidence indicates that decisions whether or not to trust others are in large part determined by social context rather than external payoffs. By altering social con text-subjects' perceptions of others' beliefs, expectations, likely actions, and relationships to themselves-experimenters can reliably produce in subjects in social dilemmas everything from nearly universal trust to an almost complete absence of trust. In other words, most people behave as if they have two personalities or preference functions. One is competitive and self-regarding. The other is cooperative and other-regarding. Social framing is key in triggering when the cooperative personality emerges. These behavioral findings carry important implications for corporate law. For example, in this Article we demonstrate first that the phenomenon of trust offers insight into the substantive structure of corporate law and particularly into the nature and purpose of that elusive legal concept, fiduciary duty. Second, the experimental evidence on trust sheds light on how corporate law works, by suggesting that judicial opinions in corporate cases influence corporate office' and directors' behavior not only by altering their external incentives but also by changing their internalized preferences. This possibility helps explain the notoriously puzzling relationship between the duty of care and the business judgment rule. Third, trust highlights the limits of law by explaining how cooperative patterns of behavior can sometimes develop within firms even when external incentives, such as legal sanctions, are unavailable or ineffective. In the process, it underscores the dangers of the contractarian approach by suggesting that an excessive emphasis on external sanctions - including formal contract and even the rhetoric of contract - may be not only ineffective but counterproductive, serving to undermine trust and trustworthiness within the firm.
    Date: 2018–04–15
  2. By: Alexia Gaudeul; Claudia Keser; Stephan Müller
    Abstract: We theoretically and experimentally study the evolution of strategies reflecting different moral judgments under indirect reciprocity. We fully characterize the evolutionary stable equilibria. In all cooperative equilibria multiple strategies coexist. This offers an explanation for the heterogeneity in moral judgments among humans. The prescribed behavior of the equilibrium strategies can rationalize the design of empirical examples of reputation systems, which are set up to resolve problems of moral hazard. In our laboratory experiment, we find that more than 75% of participants play strategies that belong to the predicted equilibrium set.
    Keywords: Indirect Reciprocity,Cooperation,Evolution,Experiment,
    JEL: C73 C91 D83
    Date: 2019–12–10
  3. By: Angela C.M. de Oliveira (University of Massachusetts-Amherst); Sarah Jacobson (Williams College)
    Abstract: Decisions with consequences that play out over time are ubiquitous in business, policy, and family relations, and frequently the agent making such a decision is not the one who bears the consequences. We use a lab experiment to examine whether individuals make different intertemporal decisions for others of varying social distance than for themselves. Subjects make a series of intertemporal work time allocation decisions for themselves and for another individual, either a friend or a stranger. We find that if they do not receive information about the decision recipient, people choose more impatiently (moving more disutility cost into the future) for others than for themselves. In other words, a decision made for you by an uninformed proxy is more impatient than a decision you would make for yourself and thus is probably suboptimal. This result contrasts with some of the literature, a divergence that may be because most of those studies are in the benefit domain while ours is in the cost domain and because (as we find in a separate survey) people perceive procrastination as qualitatively different from other discounting decisions. We provide evidence that this bias in proxy decisions exists because benevolent decision-makers believe their decision recipients to be more impatient than they actually are. First, survey evidence suggests that uninformed individuals believe that they are more patient than other subjects. Second, when the decision-maker sees information about how patient the recipient believes herself to be, this impatience bias disappears if the recipient is a friend. Taken together, our results show that given limited information, proxy decision-makers choose more impatiently than principals would prefer, but information can mitigate this suboptimal choice if social distance is low. Our results also suggest that intertemporal choice may not be behaviorally the same over time as over money.
    Keywords: proxy decision-making, intertemporal choice, laboratory experiment
    JEL: D03 D90 D64 C91
    Date: 2020–01–07
  4. By: Miloš Fišar (Vienna University of Economics and Business & Masaryk University); Tommaso Reggiani (Cardiff University, Masaryk University & IZA); Fabio Sabatini (Sapienza University of Rome & IZA); Jiří Špalek (Masaryk University)
    Abstract: We study the impact of media bias on tax compliance. Through a framed laboratory experiment, we assess how the exposure to biased news about government action affects compliance in a repeated taxation game. Subjects treated with positive news are significantly more compliant than the control group. The exposure to negative news, instead, does not prompt any significant reaction in respect to the neutral condition, suggesting that participants perceive the media negativity bias in the selection and tonality of news as the norm rather than the exception. Overall, our results suggest that biased news act as a constant source of psychological priming and play a vital role in taxpayers' compliance decisions.
    Keywords: Tax compliance, media bias, taxation game, laboratory experiment.
    JEL: C91 D70 H26 H31
    Date: 2020–01–23
  5. By: Tomas Kucera (Czech National Bank, Na prikope 28, 115 03 Prague 1, Czech Republic)
    Abstract: Cognitive biases distort judgement and adversely impact decision-making, which results in economic inefficiencies. Initial attempts to mitigate these biases met with little success. However, recent studies which used computer games and educational videos to train people to avoid biases (Clegg et al., 2014; Morewedge et al., 2015) showed that this form of training reduced selected cognitive biases by 30 %. In this work I report results of an experiment which investigated the debiasing effects of training on confirmation bias. The debiasing training took the form of a short video which contained information about confirmation bias, its impact on judgement, and mitigation strategies. The results show that participants exhibited confirmation bias both in the selection and processing of information, and that debiasing training effectively decreased the level of confirmation bias by 33 % at the 5% significance level.
    Keywords: Behavioural economics, cognitive bias, confirmation bias, cognitive bias mitigation, confirmation bias mitigation, debiasing
    JEL: D03 D81 Y80
    Date: 2020–01
  6. By: Hans, Valerie P.; Helm, Rebecca K.; Library, Cornell; Reyna, Valerie
    Abstract: Legal systems often require the translation of qualitative assessments into quantitative judgments, yet the qualitative-to-quantitative conversion is a challenging, understudied process. We conducted an experimental test of predictions from a new theory of juror damage award decision making, examining how 154 lay people engaged in the translation process in recommending money damages for pain and suffering in a personal injury tort case. The experiment varied the presence, size, and meaningfulness of an anchor number to determine how these factors influenced monetary award judgments, perceived difficulty, and subjective meaningfulness of awards. As predicted, variability in awards was high, with awards participants considered to be “medium” (rather than “low” or “high”) having the most dispersion. The gist of awards as low, medium, or high fully mediated the relationship between perceived pain/suffering and award amount. Moreover, controlling for participants’ perceptions of plaintiffs and defendants, as well as their desire to punish and to take economic losses into account, meaningful anchors predicted unique variance in award judgments: A meaningful large anchor number drove awards up and a meaningful small anchor drove them down, whereas meaningless large and small anchors did not differ significantly. Numeracy did not predict award magnitudes or variability, but surprisingly, more numerate participants reported that it was more difficult to pick an exact figure to compensate the plaintiff for pain and suffering. The results support predictions of the theory about qualitative gist and meaningful anchors, and suggest that we can assist jurors to arrive at damage awards by providing meaningful numbers.
    Date: 2018–02–15
  7. By: Gary Charness (Department of Economics, University of California, Santa Barbara); Alessandro Sontuoso (Smith Institute for Political Economy and Philosophy, Chapman University; Philosophy, Politics and Economics, University of Pennsylvania)
    Abstract: We investigate how a player’s strategic behavior is affected by the set of notions she uses in thinking about the game, i.e., the “frame”. To do so, we consider matching games where two players are presented with a set of objects, from which each player must privately choose one (with the goal of matching the counterpart’s choice). We propose a novel theory positing that different player types are aware of different attributes of the strategy options, hence different frames; we then rationalize why differences in players’ frames may lead to differences in choice behavior. Unlike previous theories of framing, our model features an epistemic structure allowing for the case in which an individual learns new frames, given some initial unawareness (of the fact that her perception of attributes may be incomplete). To test our model, we introduce an experimental design in which we bring about different frames by manipulating subjects’ awareness of various attributes. The experimental results provide strong support for our theory.
    Keywords: Frames; Unawareness; Focal Points; Coordination Games
    JEL: C72 C91
    Date: 2019
  8. By: Abdulrahman Alshahrani (Graduate Student, Wright State University, Fairborn, United States)
    Abstract: Critical thinking is essential in making a sound judgment and addressing concerns in real life. The importance of this seemingly small sphere hinges on its philosophical aspects and ability to blend one's common sense with reason, intellectual empathy, perseverance, and knowledge. From this perspective, my paper demonstrates how critical thinking can be practically used to solve society's issues. It articulates the best way of changing people's perception of this broad discipline. By examining relevant articles, specifically, The Bell by Iris Murdoch, I demonstrate how society can gain a precise sense of reality. Also, I delve on how people can solve their problems without assumptions and clouded misgivings. Fictitious characters are vastly used to illustrate how critical thinkers can design appropriate solutions to overcome society's competitive scenarios through situational analysis and evaluation of the environment. I review Murdoch's symbolism to explain the benefits of using critical thinking in any contemporary society. The article constructs a practical narrative that moral vision is equally or, arguably, more important in any problem-solving or decision-making process. Further, it focuses on the necessary critical thinking steps that can ensure independent thinking without emotional distractions. The steps are essential in guaranteeing that communities make the single best solution to each of their problems. The study relies on the connection between philosophy and fiction to create valid arguments and explore how society can embrace courage, intellectualism, and unbiased judgment to solve most, if not all, of its inherent problems.
    Keywords: : critical thinking, intellectualism, The Bell, society, morality
    Date: 2019–11

This nep-cbe issue is ©2020 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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