nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2020‒11‒09
five papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. An experimental test of some economic theories of optimism By Adrián Caballero; Raúl López-Pérez
  2. Promises and Opportunity Cost By Sengupta, Arjun; Vanberg, Christoph
  3. Identifying Rule-Based Rationality By Yoram Halevy; Guy Mayraz
  4. COVID-19 Enhanced Diminishing Sensitivity in Prospect-Theory Risk Preferences: A Panel Analysis By Shinsuke Ikeda; Eiji Yamamura; Yoshiro Tsutsui
  5. When Nudges Aren't Enough: Incentives and Habit Formation in Public Transport Usage By Christina Gravert; Linus Olsson Collentine

  1. By: Adrián Caballero; Raúl López-Pérez
    Abstract: Economic theories of optimism provide different rationales for the phenomenon of motivated reasoning, and a recent empirical literature has tested some of them, with mixed results. We contribute to this literature with a novel experimental test of two mechanisms, according to which optimism is respectively predicted when (1) the potential material losses due to the bias are relatively small or (2) the cognitive costs of the bias are small enough. In our design, these two accounts predict inflated expectations regarding some future payoff. Contrary to that, the average subject tends to (slightly) underestimate that financial prospect. Although a minority of the subjects overestimate systematically, the size of their errors is rather reduced, and they hardly differ in their personal characteristics from the rest of the subjects. In fact, optimism in our experiment is correlated with the sample observed, in that it is more likely when a subject observes relatively few good signals. This is again at odds with (1) and (2). These mechanisms, we conclude, do not appear to fully capture under which circumstances people fail into a positivity bias. Yet (1) seems to be empirically less relevant, in that we observe a similarly limited level of bias irrespectively of its monetary cost.
    Keywords: BBelief Updating; Biases; Motivated Beliefs; Optimism; Wishful Thinking
    JEL: D03 D80 D83 D84
    Date: 2020–10
  2. By: Sengupta, Arjun; Vanberg, Christoph
    Abstract: This paper experimentally investigates the hypothesis that promise-keeping behavior is affected by the opportunities that a counterpart foregoes by relying on the promise. We present two motivational mechanisms that could drive such an effect. One is that people dislike causing harm through a promise, and the natural way to measure such harm is to take into account what the counterpart would have received had she not relied on the promise. The other is that people may dislike causing regret in another person. We test these ideas in the context of an experimental trust game. The main treatment variable is the payoff that the first mover forgoes if he “trusts”. Consistent with our main hypothesis, we find that an increase in this foregone payoff increases promise-keeping behavior. The experiment is designed to rule out alternative explanations for such an effect. Our evidence suggests that the mechanism driving the effect may involve an aversion to causing regret in others.
    Date: 2020–10–27
  3. By: Yoram Halevy; Guy Mayraz
    Abstract: The revealed preference methodology allows an observer to infer preferences from choices. This paper extends this fundamental idea by experimentally identifying the preference for basing choices on simple decision rules. Subjects not only make case-by-case portfolio allocations but also design a simple investment rule for selecting portfolios. They then choose between these two decision modes for an additional set of problems. The majority opt for the rule interface, and in most cases, choose a simple investment rule that cannot be rationalized by any simple utility function or accounted for by reductions in decision time or cognitive costs.
    Keywords: bounded rationality, procedural rationality
    JEL: C91 D01 D81 D91 G11
    Date: 2020–10–25
  4. By: Shinsuke Ikeda; Eiji Yamamura; Yoshiro Tsutsui
    Abstract: Based on unique panel data from a five-wave internet survey in Japan, we show how the coronavirus disease 2019 pandemic affected people’s prospect-theory risk preferences, especially in the loss domain. The panel analysis indicates that with the spread of the pandemic, diminishing sensitivity becomes stronger for the participants’ value and probability weighting functions. Thus, due to the pandemic, (i) people become less sensitive to an increase in losses and feel less pain due to losses, especially large ones; and (ii) they become more pessimistic towards tail loss risks, and more optimistic towards non-tail loss risks. One implication is that people have become less cautious of the risks of suffering large non-tail losses, which might retard the recovery of society.
    Date: 2020–10
  5. By: Christina Gravert; Linus Olsson Collentine
    Abstract: In three large-scale field experiments with over 32,500 individuals, we investigate whether public transport uptake can be influenced by behavioral interventions and by economic incentives. Despite their effectiveness in other domains, we find a tightly estimated zero for social norms and implementation intentions on ridership. Increasing the economic incentive significantly increases uptake and long-term usage. This increase is sustained for months after removing the incentive. The effect is mainly driven by initial low users, which is evidence for habit formation and highlights the heterogeneous effects of the policy. While there is scope for long-term behavior change, nudging might not be the right approach.
    Keywords: transport, nudging, field experiment, habit formation
    JEL: C93 D04 D91 L91
    Date: 2020

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