nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2021‒08‒30
five papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. The Formation of Risk Preferences through Small-Scale Events By Silvia Angerer; E. Glenn Dutcher; Daniela Glätzle-Rützler; Philipp Lergetporer; Matthias Sutter
  2. Complexity and Choice By Yuval Salant; Jörg L. Spenkuch
  3. Perceived Relative Wealth and Risk Taking By Dietmar Fehr; Yannick Reichlin
  4. Conflict in the Pool: A Field Experiment By Balafoutas, Loukas; Faravelli, Marco; Sheremeta, Roman
  5. Noisy neural coding and decisions under uncertainty By Ferdinand Vieider

  1. By: Silvia Angerer; E. Glenn Dutcher; Daniela Glätzle-Rützler; Philipp Lergetporer; Matthias Sutter
    Abstract: Large, macroeconomic shocks in the past have been shown to influence economic decisions in the present. We study in an experiment with 743 subjects whether small-scale, seemingly negligible, events also affect the formation of risk preferences. In line with a reinforcement learning model, we find that subjects who won a random lottery took significantly more risk in a second lottery almost a year later. The same pattern emerges in another experiment with 136 subjects where the second lottery was played more than three years after the first lottery. So, small-scale, random, events affect the formation of risk preferences significantly.
    Keywords: reinforcement learning, risk preferences, preference formation, experiment
    JEL: C91 D01 D83
    Date: 2021
  2. By: Yuval Salant; Jörg L. Spenkuch
    Abstract: We study two dimensions of complexity that may interfere with individual choice. The first one is object complexity, which corresponds to the difficulty in evaluating any given alternative in a choice set. The second dimension is composition complexity, which increases when suboptimal alternatives become more similar to optimal ones. We develop a satisficing-with-evaluation-errors theory that incorporates both dimensions and delivers sharp empirical predictions about their effect on choice behavior. We confirm these predictions in a novel data set with information on hundreds of millions of decisions in chess endgames. First, as the object complexity of an optimal (suboptimal) alternative increases, it becomes less (more) likely to be chosen. Second, even highly experienced decision-makers are more likely to make mistakes when choosing from sets with higher composition complexity. These findings help to shed some of the first light on the effect of complexity on choice behavior outside of the laboratory.
    Keywords: complexity, choice, satisficing, bounded rationality
    JEL: D91
    Date: 2021
  3. By: Dietmar Fehr; Yannick Reichlin
    Abstract: We show that perceptions of relative rank in the wealth distribution shape individuals’ willingness to take risks. Using a representative large-scale survey, we manipulate perceptions of relative standing by randomly varying response categories when asking respondents about their wealth level. Respondents who are induced to perceive their relative position as low display more tolerance towards risk in a subsequent incentivized lottery task. This effect is mainly driven by individuals who more firmly believe that life outcomes are beyond their control. This interaction between risk preferences and underlying beliefs spotlights the benefits of incorporating personality traits into economic analysis.
    Keywords: relative wealth, risk taking, survey, experiment, locus of control
    JEL: D31 D63 D81 D91 E21 I31
    Date: 2021
  4. By: Balafoutas, Loukas; Faravelli, Marco; Sheremeta, Roman
    Abstract: We conduct a field experiment on conflict in swimming pools. When all lanes are occupied, an actor joins the least crowded lane and asks one of the swimmers to move to another lane. The lane represents a contested scarce resource. We vary the actor’s valuation (high and low) for the good through the message they deliver. Also, we take advantage of the natural variation in the number of swimmers to proxy for their valuation. Consistent with theoretical predictions, a swimmer’s propensity to engage in conflict increases in scarcity (incentive effect) and decreases in the actor’s valuation (discouragement effect). We complement the results with survey evidence.
    Keywords: conflict; conflict resolution; field experiment
    JEL: C72 C91 D74 D91
    Date: 2021–08–25
  5. By: Ferdinand Vieider (-)
    Abstract: I derive a noisy neural coding model (NCM ) and pit its performance against prospect theory plus additive noise (PT) using some prominent recent datasets collected to measure PT parameters. The NCM is based on the premise that choice patterns observed under uncertainty may originate from noisy perceptions of choice stimuli, which are optimally combined with mental priors to obtain actionable decision parameters. This contrast with PT, which models preferences as deterministic, but adds a noise term for empirical implementations. I show how the parameters emerging from the NCM naturally map into PT parameters. The NCM can thus be seen as a generative model for PT. At the same time, the NCM departs from PT in that it is inherently stochastic. This results in novel predictions about systematic correlations between PT parameters, as well as pointing to instances under which PT will be violated. Using Bayesian hierarchical models to fit the data, I find substantial support for these predictions. The NCM further consistently outperforms PT in terms of predictive ability. These results contribute to the nascent literature documenting the role played by imprecise cognition in economic decisions.
    Keywords: risk taking, prospect theory, noisy cognition, efficient coding
    JEL: C93 D03 D80 O12
    Date: 2021–08

This nep-cbe issue is ©2021 by Marco Novarese. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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