nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2020‒05‒04
seven papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. Shaking Things Up: On the Stability of Risk and Time Preferences By Michel Beine; Gary Charness; Arnaud Dupuy; Majlinda Joxhe
  2. Stochastic representation decision theory: How probabilities and values are entangled dual characteristics in cognitive processes By Giuseppe Ferro; Didier Sornette
  3. Measuring efficiency and risk preferences in dynamic portfolio choice By Jacopo Magnani; Jean Paul Rabanal; Olga A. Rud; Yabin Wang
  4. Observability, Social Proximity, and the Erosion of Norm Compliance By Cristina Bicchieri; Eugen Dimant; Simon Gaechter; Daniele Nosenzo
  5. Neither Punishments nor Rewards: Fostering Tax Compliance through the Rawlsian Veil of Ignorance in a Laboratory Experiment By Klaudijo Klaser; Luigi Mittone
  6. Locus of Control, Saving and Propensity to Save By Alessandro Bucciol; Serena Trucchi
  7. Economic preferences and compliance in the social stress test of the Corona crisis By Müller, Stephan; Rau, Holger A.

  1. By: Michel Beine; Gary Charness; Arnaud Dupuy; Majlinda Joxhe
    Abstract: We conduct a survey and incentivized lab-in-the-field experimental tasks in Tirana, Albania. While the original purpose of our study was to examine whether and how deep parameters such as time and risk preferences affect the intention to migrate, our study was transformed into a natural experiment owing to two large earthquakes that shook the Tirana area during our data-collection period. These events provide us with a rare opportunity to gather evidence (including a pre-earthquake control) on the effect of natural disasters on time and risk preferences. We find unambiguous effects towards more risk aversion and impatience for affected individuals. Moreover, as it turns out, the second earthquake amplified the effect of the first one, suggesting that experiences cumulate in their influence on these preferences.
    Keywords: time preferences, risk preferences, natural disaster, Albania, migration
    JEL: B49 C90 D91 F22
    Date: 2020
  2. By: Giuseppe Ferro (ETH Zürich - Department of Management, Technology, and Economics (D-MTEC)); Didier Sornette (ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute)
    Abstract: Humans are notoriously bad at understanding probabilities, exhibiting a host of biases and distortions that are context dependent. This has serious consequences on how we assess risks and make decisions. Several theories have been developed to replace the normative rational expectation theory at the foundation of economics. These approaches essentially assume that (subjective) probabilities weight multiplicatively the utilities of the alternatives offered to the decision maker, although evidence suggest that probability weights and utilities are often not separable in the mind of the decision maker. In this context, we introduce a simple and efficient framework on how to describe the inherently probabilistic human decision-making process, based on a representation of the deliberation activity leading to a choice through stochastic processes, the simplest of which is a random walk. Our model leads naturally to the hypothesis that probabilities and utilities are entangled dual characteristics of the real human decision making process. It derives two previously postulated features of prospect theory (Kahneman and Tversky, 1979): the inverse S-shaped subjective probability as a function of the objective probability and risk-seeking behaviour in the loss domain. It also predicts observed violations of stochastic dominance (Birnbaum and Navarrete, 1998) while it does not when the dominance is “evident”. Our theory, which offers many more predictions for future tests, has strong implications for psychology, economics and artificial intelligence.
    Keywords: stochastic decision theory, duality of probability and value, subjective probability, risk-seeking behaviour, stochastic dominance
    JEL: A12 C44 D81
    Date: 2020–04
  3. By: Jacopo Magnani (EM Lyon); Jean Paul Rabanal (Monash University); Olga A. Rud (RMIT); Yabin Wang (Hong Kong Monetary Authority)
    Abstract: This paper uses non-parametric methods to study the efficiency (Dybvig, 1988) and risk-profile (Varian, 1988) of dynamic portfolio choices. We design an experiment which varies the number of states (complexity), and includes an equivalent static Arrow-Debreu problem. The results suggest that complexity reduces efficiency, as does lower cognitive ability. Efficiency is also lower in the static problem, and in the dynamic task it is mostly driven by a form of stop-loss strategy. Further, we find that a representative agent exhibits decreasing absolute risk aversion and constant relative risk aversion, despite significant individual heterogeneity.
    Date: 2020–04
  4. By: Cristina Bicchieri; Eugen Dimant; Simon Gaechter; Daniele Nosenzo
    Abstract: We study how an individual‘s compliance with social norms is inuenced by other actors‘ norm compliance. In a repeated non-strategic Take-or-Give donation experiment we show that giving is considered socially appropriate while taking is socially inappropriate. Observing norm violations erodes an individual‘s own norm compliance. We show that the erosion of norm compliance is led by a change in norm-related beliefs. This change has a major effect on individuals who initially obey the norm, driving them to non-compliance, whereas initially non-compliant individuals do not change their taking behavior. Erosion is halted when individuals have even minimal social proximity to those they observe: individuals now also pay attention to norm followers.
    Keywords: norm compliance, social norms, social proximity
    JEL: C92 D64 D90
    Date: 2020
  5. By: Klaudijo Klaser; Luigi Mittone
    Abstract: It is well known that different deterministic mechanisms (like formal audits and material punishments) can stem free riding behaviour in social dilemmas. The behaviouralist literature identified then several other environmental and psychological variables which can influence agents’ attitude to cooperate. By means of a repeated tax compliance game run in an experimental laboratory, our study measures the effects of a Rawlsian veil of ignorance on cooperation over time. In particular we found that in our experimental design the (laboratory) veil of ignorance has an effect both on the ex-ante distribution of votes concerning the adoption of a specific tax regime and on the ex-post tax compliance level between treatments, but not on compliance across rounds, which shows to be decreasing.
    Keywords: Experimental Economics, Inequality, John Rawls, Tax Compliance, Veil of Ignorance
    JEL: D63 C91 H26
    Date: 2020
  6. By: Alessandro Bucciol (Department of Economics (University of Verona)); Serena Trucchi (Cardiff University)
    Abstract: We study the relationship between (internal and external) locus of control and saving choices using data from a longitudinal household survey representative of the Dutch population. Our findings show that individuals with more internal locus of control and less external locus of control save more, both at the extensive (probability to save) and intensive margins (amount of saving). We also investigate the mechanisms behind the relationship, assessing the role of propensity to save as a mediator. This way the effects on saving of internal and external locus can be split in direct and indirect components; the latter, which is found to be significant although less sizeable than the direct component, means that locus of control has an impact on the propensity to save which, in turn, affects saving.
    Keywords: Locus of Control, Saving decisions, Propensity to Save, Mediation analysis.
    JEL: D14 D91
    Date: 2020–04
  7. By: Müller, Stephan; Rau, Holger A.
    Abstract: We test in a survey the impact of economic preferences on compliance and perception during the Corona pandemic. Results show that economic preferences crucially impact citizens' compliance to policies fighting the crisis. Risk tolerance negatively a↵ects citizens' avoidance of crowds, whereas patience helps to do so and to stay home. Present-biased subjects engage in panic buying. Risk tolerance is negatively related with the Corona threat and trust positively resonates with positive media perception. Exploiting data from before the crisis allows us to infer causality and to deduce valuable insights for crisis management by identifying target groups or regions for the allocation of scare medical or surveillance resources.
    Keywords: Compliance,Covid-19,Experiment,Preferences,Social Responsibility
    JEL: C91 D81 H12 H41
    Date: 2020

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