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on Cognitive and Behavioural Economics |
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Issue of 2021‒04‒26
seven papers chosen by Marco Novarese Università degli Studi del Piemonte Orientale |
| By: | Ronayne, David (European School of Management and Technology (ESMT)); Sgroi, Daniel (University of Warwick); Tuckwell, Anthony (University of Warwick) |
| Abstract: | We provide experimental evidence of behavior consistent with the sunk cost effect. Subjects who earned a lottery via a real-effort task were given an opportunity to switch to a dominant lottery; 23% chose to stick with their dominated lottery. The endowment effect accounts for roughly only one third of the effect. Subjects' capacity for cognitive reflection is a significant determinant of sunk cost behavior. We also find stocks of knowledge or experience (crystallized intelligence) predict sunk cost behavior, rather than algorithmic thinking (fluid intelligence) or the personality trait of openness. We construct and validate a scale, the "SCE-8", which encompasses many resources individuals can spend, and offers researchers an efficient way to measure susceptibility to the sunk cost effect. |
| Keywords: | sunk cost effect, sunk cost fallacy, endowment effect, cognitive ability, fluid intelligence, crystallized intelligence, reflective thinking, randomized controlled trial, online experiment, online survey, psychological scales, scale validation, Raven’s progressive matrices, international cognitive ability resource, cognitive reflection test, openness |
| JEL: | D91 C83 C90 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp14257&r=all |
| By: | Benjamin Enke; Uri Gneezy; Brian Hall; David C. Martin; Vadim Nelidov; Theo Offerman; Jeroen van de Ven |
| Abstract: | Despite decades of research on heuristics and biases, empirical evidence on the effect of large incentives – as present in relevant economic decisions – on cognitive biases is scant. This paper tests the effect of incentives on four widely documented biases: base rate neglect, anchoring, failure of contingent thinking, and intuitive reasoning in the Cognitive Reflection Test. In laboratory experiments with 1,236 college students in Nairobi, we implement three incentive levels: no incentives, standard lab payments, and very high incentives that increase the stakes by a factor of 100 to more than a monthly income. We find that response times – a proxy for cognitive effort – increase by 40% with very high stakes. Performance, on the other hand, improves very mildly or not at all as incentives increase, with the largest improvements due to a reduced reliance on intuitions. In none of the tasks are very high stakes sufficient to de-bias participants, or come even close to doing so. |
| JEL: | D01 D03 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28650&r=all |
| By: | Markus Dertwinkel-Kalt; Holger Gerhardt; Gerhard Riener; Frederik Schwerter; Louis Strang |
| Abstract: | Many intertemporal trade-offs are unbalanced: while the advantages of options are concentrated in a few periods, the disadvantages are dispersed over numerous periods. We provide novel experimental evidence for “concentration bias”, the tendency to overweight advantages that are concentrated in time. Subjects commit to too much overtime work that is dispersed over multiple days in exchange for a bonus that is concentrated in time: concentration bias increases subjects’ willingness to work by 22.4% beyond what standard discounting models could account for. In additional conditions and a complementary experiment involving monetary payments, we study the mechanisms behind concentration bias and demonstrate the robustness of our findings. |
| Keywords: | attention, focusing, bounded rationality, intertemporal choice, future bias, present bias, framing |
| JEL: | D01 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9011&r= |
| By: | Gibbs, Michael (University of Chicago) |
| Abstract: | According to psychologists and neuroscientists, a key source of intrinsic motivation is learning. An economic model of this is presented. Learning may make work less onerous, or the employee may value it in and of itself. Multitasking generates learning: performing one task increases productivity on related tasks. Intrinsic motivation generates a new multitask incentive problem if the rate of learning varies across tasks. With no incentive pay, employee autonomy complements learning because expected output increases as the employee uses his or her knowledge to enhance learning. The second part of the paper adds a simple incentive. Incentive pay does not "crowd out" intrinsic motivation, but it does rebalance effort away from learning and towards output. Learning has complex interactions with performance measurement. A higher rate of learning tends to reduce performance measure distortion, especially for a very distorted measure. It also tends to reduce the potential for manipulation, as does multitasking. However, if job design is strongly imbalanced towards a few key tasks, or learning varies significantly across tasks, a higher rate of learning may increase the employee's ability to manipulate the measure. In that case the firm might prefer an incentive with no autonomy, or autonomy with no incentive. |
| Keywords: | intrinsic motivation, learning, job design, incentives, performance measurement |
| JEL: | M5 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp14285&r=all |
| By: | Kamal Bookwala (niversity of California Irvine, Department of Economics); Caleb Gallemore (Lafayette College, Department of International Affairs); Joaquín Gómez-Miñambres (Lafayette College, Department of Economics and Chapman University, Economic Science Institute.) |
| Abstract: | We report results from a randomized field experiment conducted at two food festivals. Our primary aim is to assess the impact of two types of recommendations commonly observed in food settings: most popular and chef’s choice. Subjects select a cupcake from a binary menu. The two options, offered by the same bakery, are the best seller in the bakery and the baker’s recommended cupcake. Our treatments manipulate whether the recommendation is disclosed in tandem with the cupcakes in the menu. We find that the most popular is the only recommendation that statistically significantly increased consumers’ demand relative to a baseline without recommendations. Furthermore, we find that this effect only holds for subjects from outside the local region. Our results are consistent with laboratory studies indicating information on peers’ choices is a powerful influence on consumers’ decisions, especially in the absence of prior knowledge. |
| Keywords: | Recommendations; Social learning; Herd behavior; Peer effects |
| JEL: | C93 D12 D83 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:21-06&r= |
| By: | Nika Haghtalab; Nicole Immorlica; Brendan Lucier; Markus Mobius; Divyarthi Mohan |
| Abstract: | We study a model of social learning and communication using hard anecdotal evidence. There are two Bayesian agents (a sender and a receiver) who wish to communicate. The receiver must take an action whose payoff depends on their personal preferences and an unknown state of the world. The sender has access to a collection of n samples correlated with the state of the world, which we think of as specific anecdotes or pieces of evidence, and can send exactly one of these samples to the receiver in order to influence her choice of action. Importantly, the sender's personal preferences may differ from the receiver's, which affects the seller's strategic choice of which anecdote to send. We show that if the sender's communication scheme is observable to the receiver (that is, the choice of which anecdote to send given the set they receive), then they will choose an unbiased and maximally informative communication scheme, no matter the difference in preferences. Without observability, however, even a small difference in preferences can lead to a significant bias in the choice of anecdote, which the receiver must then account for. This can significantly reduce the informativeness of the signal, leading to substantial utility loss for both sides. One implication is informational homophily: a receiver can rationally prefer to obtain information from a poorly-informed sender with aligned preferences, rather than a knowledgeable expert whose preferences may differ from her own. |
| JEL: | G4 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28661&r=all |
| By: | Marta Serra-Garcia (University of California, San Diego); Nora Szech (Karlsruher Institut für Technologie) |
| Abstract: | Willingness to vaccinate and test are critical in the COVID-19 pandemic. We study the effects of two measures to increase vaccination and testing: "choice architecture" and monetary compensations. Choice architecture has the goal of "nudging" people into a socially desired direction without affecting their choice options. Compensations reward vaccine takers and are already in use by some organizations. Yet there is the concern that compensations may decrease vaccination if compensations erode intrinsic motivation to vaccinate. We show that both approaches, compensations and choice architecture, significantly increase COVID-19 test and vaccine demand. Yet, for vaccines, low compensations can backfire. |
| Keywords: | choice architecture, incentives, COVID-19, vaccine hesitancy, test avoidance |
| JEL: | D01 D04 I12 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2021-020&r= |