nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2021‒06‒14
seven papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. Time Pressure and Regret in Sequential Search By Felix Klimm; Martin G. Kocher; Timm Optiz; Simeon Andreas Dermot Schudy
  2. Digital nudges as conversion enhancers in profit-oriented and non-profit oriented digital business models By Schneider, David
  3. Emotions and Risk Attitudes By Armando N. Meier
  4. The Effect of Self-Control and Financial Literacy on Impulse Borrowing: Experimental Evidence By Antonia Grohmann; Jana Hamdan
  5. Children's Patience and School-Track Choices Several Years Later: Linking Experimental and Field Data By Angerer, Silvia; Bolvashenkova, Jana; Glätzle-Rützler, Daniela; Lergetporer, Philipp; Sutter, Matthias
  6. Does Overconfidence Lead to Bargaining Failures? By Luis Santos Pinto; Paola Colzani
  7. Behavioral Anomalies and Fuel Efficiency: Evidence from Motorcycles in Nepal By Massimo Filippini; Nilkanth Kumar; Suchita Srinivasan

  1. By: Felix Klimm; Martin G. Kocher; Timm Optiz; Simeon Andreas Dermot Schudy
    Abstract: Perceived urgency and regret are common in many sequential search processes; for example, sellers often pressure buyers in search of the best offer, both time-wise and in terms of potential regret of forgoing unique purchasing opportunities. Theoretically, these strategies result in anticipated and experienced regret, which systematically affect search behavior and thereby distort optimal search. In addition, urgency may alter decision-making processes and thereby the salience of regret. To understand the empirical relevance of these aspects, we study the causal effects of regret, urgency, and their interaction on search behavior in a pre-registered, theory-based, and well-powered experiment. We find that urgency reduces decision times and perceived decision quality but does not alter search length. Only very inexperienced decision-makers buy earlier when pressured. Anticipated regret does not affect search length (neither with nor without time pressure), while experienced regret leads to systematic adjustments in search length. Thus, we recommend that consumer protection policies should particularly focus on markets with inexperienced first-time buyers.
    Keywords: sequential search, time pressure, regret, anticipated regret, experienced regret
    JEL: C91 D01 D03 D18 D83
    Date: 2021
  2. By: Schneider, David
    Abstract: The growing use of digital technologies between consumers and businesses has led to a shift of transactions from an offline context into the online world. These developments have disrupted entire industries, including music, travel, accommodation, and financial services, and created new value pools. A great extent of the value creation can be attributed to profit-oriented business models, as shown by the growing valuation of large platform operators (e.g., Airbnb and Uber). At the same time, significant value is unlocked in non-profit oriented business models such as in the context of non-commercial online sharing economy platforms or the digital government space. However, the online space also brought new challenges to digital platform operators, such as greater rivalry resulting from increasing transparency. As the Internet has largely removed the barriers to information access, website visitors have been enabled to shop around and gather plenty of information before committing to a binding transaction. Therefore, converting visitors to actual customers or users remains a critical task, both for profit-oriented and non-profit oriented digital business model operators, as they need to ensure value is truly captured. Previous research in the Information Systems (IS) space around conversion rate optimization in digital business models has primarily focused on the concept of perceived benefits and associated costs when engaging in a particular transaction. While benefits are often related to the product or service, costs are frequently associated with the lack of trust in the digital platform or website operator due to potential misuse of personal information. In addition to the cost-benefit perspective, website design features have been shown to influence user behavior in both profit-oriented and non-profit oriented digital business models. While the intention of certain design feature elements such as banners or ads is directly visible to users, some design elements are aimed at influencing customer behavior inconspicuously – without the users' notice. The use of visual user interface elements to subtly influence consumer behavior in digital decision environments by leveraging psychological biases are called digital nudges. The literature on digital nudging shows promising results in driving conversion rates in digital business models. However, the use of digital nudges has been mainly limited to research in profit-oriented digital business models. At the same time, traditional, non-digital nudges have been mainly researched in the non-profit oriented context, especially in the government space, which simultaneously represents the origin of nudging theory. By assessing digital nudges in both non-profit and profit-oriented digital business models, three studies attempt to close this gap. The first study investigates the effect of prosociality nudges on conversion rates on a fictional non-profit oriented online sharing economy platform. Results show that while prosociality increases conversion likelihood, excessive prosociality may also reduce the transaction likelihood. The second study shows how two separately framed communication arguments – one promotion-focus argument conveying convenience and a prevention-focus argument aiming to reduce privacy concerns – increase online verification conversion rate in a fictional profit-oriented digital carsharing platform if data supports the claims. While the prevention-focus claim is stronger than the promotion-focus claim if data is added, the prevention-focus claim's conversion rate without data is weaker than no claim. The third study is positioned in the non-profit oriented e-government space, leveraging social proof cues and default options as nudges to increase the adoption rate of electronic identification (eID). Both nudges increase eID adoption, but default options are a double-edged sword. They simultaneously fuel privacy concerns towards the government, which attenuates the effect of the default option on eID adoption. These concerns can be mitigated by adding social proof cues. This thesis contributes to our understanding of how digital nudges may be applied to increase conversion rates within profit-oriented and non-profit oriented digital business models. Specifically, this study demonstrates that digital nudges designed to leverage stability biases and perception biases may be used to increase conversion rates in both profit-oriented and non-profit oriented digital business models. The aforementioned first and third study have contributed to a better understanding of how digital nudges may enhance user conversion in non-profit oriented organizations by leveraging the emotional bias and status quo bias to increase conversion. These studies also provided insights on the combined effect of social proof cues and default options on conversion rates: While default options may be used to increase conversion rates, they are ambidextrous as they increase privacy concerns. However, this can be mitigated by adding social proof cues. The second study contributed to a better understanding of how framing and loss aversion can be leveraged to increase conversion rate in profit-oriented business models. Additionally, this study provided some insights into combining theory on communication arguments with third-party assurance seals as supporting data to enhance the effect of nudges further. From a practical point of view, digital business model operators may leverage these findings to redesign their website by employing digital nudges to drive conversion rates and thus increase profitability.
    Date: 2021
  3. By: Armando N. Meier
    Abstract: Previous work has shown that preferences are not always stable across time, but surprisingly little is known about the reasons for this instability. I examine whether variation in people’s emotions over time predicts changes in risk attitudes. Using a large panel data set, I identify happiness, anger, and fear as significant correlates of within-person changes in risk attitudes. Robustness checks indicate a limited role of alternative explanations. An event study around the death of a parent or child further confirms a large relationship between emotions and risk attitudes.
    Keywords: Emotions, happiness, risk attitudes, risk preferences, preference stability, SOEP
    JEL: D01 D90 D91
    Date: 2021
  4. By: Antonia Grohmann; Jana Hamdan
    Abstract: This paper examines the effect of reduced self-control on impulsive borrowing in a laboratory experiment. We manipulate self-control using an ego depletion task and show that it is effective. Following the ego depletion task, participants can anonymously buy hot drinks on credit. We find no significant average effects, but find that treated individuals that have low financial literacy are more likely to borrow impulsively. We complement our experimental analysis with survey evidence that suggests that people with low self-control have more problems with the repayment of consumer debt. This relationship is, in line with the experimental results, weaker for individuals with high financial literacy.
    Keywords: Debt, consumption, borrowing, self-control, ego depletion
    JEL: D14 G51 C91
    Date: 2021
  5. By: Angerer, Silvia (IHS Carinthia); Bolvashenkova, Jana (University of Munich); Glätzle-Rützler, Daniela (University of Innsbruck); Lergetporer, Philipp (Ifo Institute for Economic Research); Sutter, Matthias (Max Planck Institute for Research on Collective Goods)
    Abstract: We present direct evidence on the link between children's patience and educational-track choices years later. Combining an incentivized patience measure of 493 primary-school children with their high-school track choices taken at least three years later at the end of middle school, we find that patience significantly predicts choosing an academic track. This relationship remains robust after controlling for a rich set of covariates, such as family background, school-class fixed effects, risk preferences, and cognitive abilities, and is not driven by sample attrition. Accounting for middle-school GPA as a potential mediating factor suggests a direct link between patience and educational-track choice.
    Keywords: patience, education, school track choice, children, lab-in-the-field experiment
    JEL: C91 D90 I21 J2
    Date: 2021–05
  6. By: Luis Santos Pinto; Paola Colzani
    Abstract: We use a laboratory experiment to study the causal impact of self-confidence on bargaining with joint production. We exogenously manipulate the self-confidence of subjects regarding their relative performance by employing easy and hard tasks. Subjects are randomly matched into pairs and each pair bargains over a joint surplus which can be either high or low. The size of the joint surplus depends on the pair’s relative performance on the task. Our main experimental findings are as follows. First, the percentage of bargaining failures when subjects perform the easy task is more than triple than when they perform the hard task. Second, there is a remarkably high percentage of bargaining failures when subjects perform the easy task and bargain over a low surplus. Third, when subjects perform the easy task and bargain over a high surplus, all pairs reach an agreement and most settle on the equal split. Our findings shed light on the conditions and mechanisms under which overconfidence causes bargaining failures.
    Keywords: Overconfidence, Bargaining, Joint Production, Laboratory Experiment
    JEL: C79 C91 C92 D91
    Date: 2021–02
  7. By: Massimo Filippini (CER–ETH – Center of Economic Research at ETH Zurich and Università della Svizzera italiana, Switzerland); Nilkanth Kumar (CER–ETH – Center of Economic Research at ETH Zurich, Switzerland); Suchita Srinivasan (CER–ETH – Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: Air pollution is a grave problem in urban areas of developing countries, with the transport sector being one of the largest contributors to emissions. A possibility to reduce carbon dioxide emissions would be for individuals to switch to more fuel-efficient vehicles. However, a gamut of behavioral anomalies and market failures have been known to inhibit individuals from investing in fuel-efficiency (due to the well-known ‘energy-efficiency gap’). In this study, we use novel data from Kathmandu, Nepal to understand the socio-economic and psychological determinants of three behavioral anomalies, namely present bias, loss aversion, risk aversion, as well as time preferences. In a second step, we evaluate the effect of these anomalies on the energy-efficiency gap in the choice of motorcycles of individuals. We find that present-biased individuals are less likely to invest in fuel-efficient motorcycles, and thus more likely to buy motorcycles having relatively high total lifetime costs. We also find that other factors such as income, as well as having applied for loans, play an important role in determining these choices. Our results suggest that behavioral anomalies may indeed pose as a hindrance to individuals making cost-minimizing (and also environmentally sound) investment decisions.
    Keywords: Behavioral anomalies, Present bias, Fuel efficiency, Energy-efficiency gap, Motorcycles, Nepal
    JEL: D1 D8 Q4 Q5
    Date: 2021–05

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