nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2020‒11‒02
five papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. Still in Search of the Sunk Cost Bias By Marcello Negrini; Arno Riedl; Matthias Wibral
  2. Beliefs, learning, and personality in the indefinitely repeated prisoner’s dilemma By Gill, David; Rosokha, Yaroslav
  3. Social Identity, Behavior, and Personality By Utteeyo Dasgupta; Subha Mani; Smriti Sharma; Saurabh Singhal
  4. Social Framing Effects in Leadership: Preferences or Beliefs? By Edward Cartwright; Michalis Drouvelis
  5. Who complies with COVID-19 transmission mitigation behavioral guidelines? By Ahmed Maged Nofal; Gabriella Cacciotti; Nick Lee

  1. By: Marcello Negrini; Arno Riedl; Matthias Wibral
    Abstract: Evidence from hypothetical scenarios strongly suggests the existence of a sunk cost bias, the tendency to ‘throw good money after bad money.’ However, the few studies using incentives are inconclusive. In addition, evidence on potential psychological channels underlying such a bias is scarce. We present a laboratory experiment designed to investigate the sunk cost bias and to test some prominent psychological mechanisms. Inspired by the hypothetical scenarios, we use a two-stage investment task in which an initial investment needs to be made to start a project. In the initial investment stage, the size of the investment and the responsibility of the investor are exogenously varied. In the second investment stage, participants can either decide to terminate the project or to make an additional investment to finish the project. We do not find evidence for the sunk cost bias. To the contrary, we observe a robust reverse sunk cost bias. That is, the larger the initial investment, the lower the likelihood to continue investing in a project. Moreover, whether or not subjects are responsible for the initial investment, does not affect their additional investment. More waste averse individuals also do not react more strongly to sunk cost whereas being in the loss domain decreases additional investment. Importantly, we replicate the sunk cost bias when using hypothetical scenarios. Surprisingly, the reverse sunk cost bias also holds for those participants who exhibit a strong sunk cost bias in the hypothetical scenarios.
    Keywords: sunk cost bias, incentivized experiment, hypothetical scenario, cognitive dissonance, loss aversion, waste aversion
    JEL: C91 D01 D90 D91
    Date: 2020
  2. By: Gill, David (Purdue University); Rosokha, Yaroslav (Purdue University)
    Abstract: The indefinitely repeated prisoner’s dilemma (IRPD) captures the trade-off between the short-term payoff from exploiting economic partners and the long-term gain from building successful relationships. We aim to understand more about how people form and use beliefs about others in the IRPD. To do so, we elicit beliefs about the supergame strategies chosen by others. We find that initial beliefs match behavior quite well and that most subjects choose strategies that perform well given their beliefs. Motivated by belief clustering, we use beliefs to estimate a level-k model of boundedly rational thinking. We analyze how beliefs and behavior evolve with experience: beliefs become more accurate over time, and we use beliefs to provide new evidence about the mechanism that underlies learning from experience. Finally, we find that a survey measure of trust predicts cooperative behavior and optimism about others’ cooperation, which helps to explain how trust underpins successful economic exchanges.
    Keywords: Indefinitely repeated prisoner’s dilemma; infinitely repeated prisoner’s dilemma; cooperation; optimism; beliefs; belief elicitation; supergame strategies; level-k; bounded rationality; clustering; learning; best response; experimentation; strategy revision; personality; agreeableness; anxiety; cautiousness; kindness; manipulativeness; trust; factor analysis; Raven test; Quadratic Scoring Rule; game theory; experiment. JEL Classification: C72; C73; C91; D91
    Date: 2020
  3. By: Utteeyo Dasgupta; Subha Mani; Smriti Sharma; Saurabh Singhal
    Abstract: Hierarchies in social identities have been found to be integrally related to divergences in economic status. In India, caste is one such significant social identity where continued discriminatory practices towards the lower castes have resulted in poor outcomes for them. While there is considerable work on such divergence on many economic outcomes along caste lines, there is no work on behavioral preferences and personality traits that can also be adversely affected by such identity hierarchies, and that are important determinants of educational attainments and labor market performances. We combine rich data from incentivized tasks and surveys conducted among a large sample of university students in a Seemingly Unrelated Regression framework and find that the historically marginalized Scheduled Castes and Scheduled Tribes (SCSTs) and Other Backward Classes (OBCs) fare worse than the upper castes along several dimensions of economic behavior such as competitiveness and confidence and personality traits such as grit, locus of control, and conscientiousness. Further, we find that parental investments only have limited compensatory effects on these gaps. This suggests a need for redesigning the structure of affirmative action policies in India as well as targeting interventions with an aim to improving soft skills among the disadvantaged.
    Keywords: Behavioral Preferences, Personality, Caste, Experiments, India
    JEL: I23 C9 C18 J24 O15
    Date: 2020
  4. By: Edward Cartwright; Michalis Drouvelis
    Abstract: We experimentally study the impact of framing effects in a repeated sequential social dilemma game. Our between-subjects design consists of two group level (“Wall Street” vs. “Community”) and two individual level (“First (Second) Movers” vs. “Leaders (Followers)”) frames. We find that average contributions are significantly higher when the game is called the Wall Street game than when it is called the Community game. However, the social framing effect disappears when we control for players’ first-order and second-order beliefs. Overall, our evidence indicates that social frames enter people’s beliefs rather than their preferences.
    Keywords: framing, public good, experiment, beliefs
    JEL: H41 C72 C92
    Date: 2020
  5. By: Ahmed Maged Nofal (emlyon business school); Gabriella Cacciotti; Nick Lee
    Abstract: During the past 6 months, the world has lost almost 950,000 lives because of the outbreak of COVID-19, with more than 31 million individuals diagnosed with COVID-19 worldwide. In response, lockdowns, and various other policies have been implemented. Unfortunately, many individuals are violating those policies and governments have been urging people to comply with the behavioral guidelines. In this paper, we argue that personality traits need to be considered to understand and encourage more effective public compliance with COVID 19 transmission mitigation behavioral guidelines. Using a sample of 8,548 individuals from Japan, we show that certain personality traits are related to the tendency to comply with COVID-19 transmission mitigation behavioral guidelines. We emphasize the importance of understanding why people respond differently to the same authority's messages and provide actionable insights for government policy makers and those who implement policies.
    Keywords: covid-19,Personality Traits
    Date: 2020–10–08

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