nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2021‒05‒10
five papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. Are we strategically naïve or guided by trust and trustworthiness in cheap-talk communication? By Li, Xiaolin; Özer, Özalp; Subramanian, Upender
  2. Covid-19 Pandemic and the role of behavioral economics By Kumar B, Pradeep
  3. The Influence of Anger on Strategic Cooperative Interactions By Sergio Alessandro Castagnetti; Sebastiano Massaro; Eugenio Proto
  4. Epidemics in modern economies By Heinrich, Torsten
  5. Why Are Rational Expectations Violated in Social Interactions? By Mohsen Foroughifar

  1. By: Li, Xiaolin; Özer, Özalp; Subramanian, Upender
    Abstract: Cheap-talk communication between parties with conflicting interests is common in many business and economic settings. Two distinct behavioral economics theories, the trust-embedded model and the level-k model, have emerged to explain how cheap talk works between human decision makers. The trust-embedded model considers that decision makers are motivated by nonpecuniary motives to be trusting and trustworthy. In contrast, the level-k model considers that decision makers are purely self-interested but limited in their ability to think strategically. Although both theories have been successful in explaining cheap-talk behaviors in separate contexts, they point to contrasting drivers for human behaviors. In this paper, we provide the first direct comparison of both theories within the same context. We show that, in a cheap-talk setting that well represents many practical situations, the two models make characteristically distinct and empirically distinguishable predictions. We leverage past experiment data from this setting to determine what aspects of cheap-talk behavior each model captures well and which model (or combination of models) has better explanatory power and predictive performance. We find that the trust-embedded model emerges as the dominant explanation. Our results, thus, highlight the importance of investing in systems and processes to foster trusting and trustworthy relationships in order to facilitate more effective cheap-talk interactions.
    Keywords: behavioral economics; bounded rationality; cheap talk; level-k thinking; trust; trustworthiness
    JEL: J50
    Date: 2021–03–22
  2. By: Kumar B, Pradeep
    Abstract: The New Normal has become a buzzword thank to the Covid-19 pandemic. The realization that the pandemic is to persist has tended people to redesign their livelihood opportunities to realize not only a New Normal but a Better or Different Normal. Behavioral Economics, a new branch in economics that mixes economics with other disciplines in an attempt to present real economic behavior of man, has been found to be relevant in explaining the behavior of economic agents in times of Covid. This paper intends to focus on the certain aspects in behavioral economics which the policy makers find useful to design their strategies in dealing with the spreading of the Covid-19 pandemic.
    Keywords: New Normal, Better Normal, Different Normal, Rationality, Present Bias, Status Quo Bias, Optimum Bias, Framing effect, Affect heuristic, Herding Behavior, Infodemic
    JEL: I00
    Date: 2020–08–06
  3. By: Sergio Alessandro Castagnetti; Sebastiano Massaro; Eugenio Proto
    Abstract: We investigate the effect of anger on performance and strategic cooperative interactions. In a laboratory experiment, we induced anger in participants playing an indefinite repeated Prisoner's Dilemma game against each other, showing resulting declines in performance and individual profit. We assess the dynamics of strategic cooperative decisions and behaviors, revealing that anger-induced subjects used suboptimal strategies. We further describe the underpinning mechanism of automatic emotional regulation by analyzing participants' heart rate variability indexes. Finally, we extend our findings in an online experiment with an independent sample, increasing generalizability and helping explain how anger influences participants' ways of strategizing. Altogether, our contribution advances theoretical and practical implications regarding the impact of discrete emotions on strategic outcomes.
    Keywords: anger; behavioral strategy; heart rate variability; indefinite repeated Prisoner’s Dilemma; strategic cooperative interactions
    JEL: C7 C9 D9
    Date: 2021–04
  4. By: Heinrich, Torsten
    Abstract: How are economies in a modern age impacted by epidemics? In what ways is economic life disrupted? How can pandemics be modeled? What can be done to mitigate and manage the danger? Does the threat of pandemics increase or decrease in the modern world? The Covid-19 pandemic has demonstrated the importance of these questions and the potential of complex systems science to provide answers. This article offers a broad overview of the history of pandemics, of established facts, and of models of infection diffusion, mitigation strategies, and economic impact. The example of the Covid-19 pandemic is used to illustrate the theoretical aspects, but the article also includes considerations concerning other historic epidemics and the danger of more infectious and less controllable outbreaks in the future.
    Keywords: epidemics and economics; public health; complex systems; SIR models; Agent-based models; mean-field models; Covid-19
    JEL: C63 I10 N30
    Date: 2021–04–30
  5. By: Mohsen Foroughifar
    Abstract: Individuals often interact with each other through observation -- they observe the choices of other people who possess private information. In such social interactions, it is typically assumed that decision makers have rational expectations, therefore they can infer what other decision makers know via observation of their choices. In this study, I assess the validity of the rational expectations assumption in a social interaction experiment. I use a simple and transparent experimental setting to show that decision makers often fail to exhibit rational expectations in social interactions and this behavior is independent of commonly documented errors in statistical reasoning: subjects exhibit a higher level of irrationality in the presence than in the absence of social interaction, even when they receive informationally equivalent signals across the two conditions. A series of treatments aimed at identifying mechanisms suggests that the behavior of other people are often "ambiguous" to a decision maker who observes their choices. So, the decision maker behaves as if she has limited ability to infer the relationship between what other people choose and what they know.
    Date: 2021–05

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