nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2020‒07‒13
six papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. The psychological effects of poverty on investments in children’s human capital By Guilherme Lichand; Eric Bettinger; Nina Cunha; Ricardo Madeira
  2. Hierarchies and decision-making in groups: Experimental evidence By Donata, Bessey
  3. A decade of nudging: What have we learned? By Mette T. Damgaard
  4. A Systematic Test of the Independence Axiom Near Certainty By Ritesh Jain; Kirby Nielsen
  5. Tail events, emotions and risk taking By Brice Corgnet; Camille Cornand; Nobuyuki Hanaki
  6. The Usual Suspects: Does Risk Tolerance, Altruism, and Health Predict the Response to COVID-19? By Ketki Sheth; Greg C. Wright

  1. By: Guilherme Lichand; Eric Bettinger; Nina Cunha; Ricardo Madeira
    Abstract: Poverty focuses attention on present needs. Does that mean that poor parents respond inefficiently to future returns on investments in their children's human capital - even when they would have the financial means to invest optimally? We study this question in the context of an educational program in Brazil whose predicted child-specific returns are known to the researchers, allowing us to compute optimal decisions. Using a lab-in-the-field experiment to make some parents worry more than others about pressing financial needs, we find that those in the treatment condition offered the opportunity to invest in that program misallocate resources relative to the control group: they not only invest significantly less when the program has high returns, but also, significantly more when predicted returns are low. We show that such inefficient responses are driven by poverty-induced attention misa/Jocation, since (1) parents in the treatment condition perform better in cognitive tests that yield small but immediate returns, and (2) increasing the salience of returns before the experiment eliminates differential responses by those parents. Our results suggest that poiicy instruments to boost human capital investments among the poor, such as credit lines earmarked for education, may be insufficient to spark such investments when returns are high, and even lead to over-investment by those not expected to benefit from it.
    Keywords: Psychology of poverty, attention misallocation, human capital, poverty trap
    JEL: C93 D91 E24 I25 I26
    Date: 2020–06
  2. By: Donata, Bessey
    Abstract: In this study, I investigate differences in decision-making outcomes for groups under different hierarchies using an experimental approach. Many decisions in firms, households, and other contexts are not taken by individuals, but by groups. In addition, most groups, especially in firms, are characterized by hierarchical organization structures. While research in management, sociology and psychology has been investigating the role of hierarchies for a long time, there is a lack of experimental economic research on the effect of various group structures or hierarchies on decision-making and its quality. I compare the choices of groups in Holt and Laury (2002) type lottery choices and in intellective tasks in five different group types: a group without hierarchy, a hierarchy by age (where the oldest group member decides), by merit (where the winner in a financial literacy quiz decides), by chance (where a randomly determined leader decides) and by election (where an elected leader decides). Experimental results suggest that there are no differences in the number of safe choices between the different hierarchy types. However, groups with a leader assigned on the basis of merit perform better in intellective tasks.
    Keywords: hierarchies; group decision-making; lottery choice; risk attitude; intellective tasks
    JEL: C92
    Date: 2020–05–31
  3. By: Mette T. Damgaard (Department of Economics and Business Economics, Aarhus University)
    Abstract: In the past decade, Nudging as a method to influence behavior has received increased attention both among academics and more generally. Nudges are often low-cost interventions but may nevertheless be surprisingly effective. However, as the research field has matured, it has also become clear that nudges are not always as effective as originally thought. In this paper, I give a selected overview of recent nudging interventions and discuss what we have learned from the past decade of using nudging to affect behavior.
    Keywords: Nudging, Welfare effects, Spillover effects, Heterogeneous effects
    JEL: D04 D61 D91
    Date: 2020–07–03
  4. By: Ritesh Jain (Institute of Economics, Academia Sinica, Taipei, Taiwan); Kirby Nielsen (Department of Economics, Stanford University)
    Abstract: A large literature has documented violations of expected utility consistent with a preference for certainty (the “certainty effect”). We design a laboratory experiment to investigate the role of the certainty effect in explaining violations of the independence axiom. We use lotteries spanning over the entire probability simplex to detect violations systematically. We find that violations of independence consistent with the reverse certainty effect are much more common than violations consistent with the certainty effect. Results hold as we test robustness along two dimensions: varying the mixing lottery and moving slightly away from certainty.
    Keywords: : independence axiom, expected utility theory, certainty effect, Allais Paradox
    JEL: C79 D82
    Date: 2020–06
  5. By: Brice Corgnet (Univ Lyon, emlyon business school, GATE UMR 5824, F-69130 Ecully, France); Camille Cornand (Univ Lyon, CNRS, GATE UMR 5824, F-69130 Ecully, France); Nobuyuki Hanaki (Institute for Social and Economic Research, Osaka University)
    Abstract: Recent works have shown how tail events could account for ?nancial anomalies such as the equity premiumpuzzle. These models do not explore, however, why investors would discount tail risk so heavily. We take on this challenge by designing a novel tail-event experiment to assess both investors’ behavioral and physiological reactions. We show that investors who observe the tail event without su?ering losses tend to decrease their pricing of the asset subsequently. By contrast, loss-averse investors who su?er tail losses tend to increase their bids. This response is especially pronounced for those who exhibit a strong emotional response to tail losses. This demonstrates the key role played by emotions in in?uencing investors’ response to tail events. Finally, investors who exhibit high anticipatory arousal, as measured with electrodermal activity, posted lower bids and were less likely to su?er tail losses and go bankrupt. They also achieved higher earnings when tail events occurred frequently. This ?nding contrasts with the common view that investors should silence their emotions.
    Keywords: tail events, emotions and risk
    JEL: C91 D87 D91
    Date: 2020
  6. By: Ketki Sheth; Greg C. Wright
    Abstract: Using a registered pre-analysis plan, we survey college students during California’s Stay-at-Home order to test whether compliance with social distancing requirements depends on key parameters that affect their marginal benefit from doing so. We find a quarter of students violated the order. Yet, neither risk preference, altruism, nor preexisting health conditions were predictive of compliance. Our findings raise doubt about the efficiency of minimally enforced social distancing policies, as well as commonly assumed motivations for compliance. Our results also imply that that those with pre-existing health conditions may not voluntarily comply, resulting in higher health care congestion than otherwise expected.
    Keywords: COVID-19, risk, altruism, health
    JEL: I10 D80
    Date: 2020

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