nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2021‒09‒06
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. Relative Risk Taking and Social Curiosity By Jeremy Celse; Alexandros Karakostas; Daniel John Zizzo
  3. Endowment effects at different time scenarios: the role of ownership and possession By Domenico Colucci; Chiara Franco; Vincenzo Valori
  4. Overcoming coordination failure in games with focal points: An experimental investigation By David Rojo-Arjona; R. Stefania Sitzia; Jiwei Zheng
  5. A decision-making model with anticipation of surprise for explaining irrational economic behaviors By Ho Ka Chan; Taro Toyoizumi

  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: Jeremy Celse (School of Management ESSCA); Alexandros Karakostas (School of Economics, University of Queensland, Brisbane, Australia); Daniel John Zizzo (School of Economics, University of Queensland, Brisbane, Australia)
    Abstract: We present an experiment providing (a) a horse race among different models combining social preferences and risk preferences, and (b) a test of whether agents are socially curious, that is wanting to know about the risk taking of others and the outcomes of their risk taking. We distinguish outcome driven models (that is, models where agents care about the earning outcomes for themselves and others) from action driven models (that is, models where agents care about one’s risk taking actions relative to the actions of others). We embed outcome and action driven competitive preferences, inequality aversion, conformism, and social loss aversion, within a single general theoretical framework. We find that competitive preferences models best explain investment decisions in our setting, with almost 50% of subjects influenced both by their co-participants’ actions and outcomes. About 90% of subjects seek social information when it is free. When it is costly, 30% of subjects seek social information if the information is instrumental for their own investment decision and about 15% seek social information even if it is not. Competitive preferences can help explain social curiosity.
    Keywords: Risk, curiosity, peer effects, social preferences, competitive preferences, social comparison.
    JEL: C91 D81 D91 G11 G22
    Date: 2021–08–26
  3. By: Domenico Colucci; Chiara Franco; Vincenzo Valori
    Abstract: The central issue of the wide literature about the endowment effect is the search for an explanation of the fact that the selling price of a good will be higher than that at which a person is willing to buy that same good, once they own it. The experimental evidence is not unanimous in replicating the results found by Kahneman et al. (1990 and 1991). The challenge is that of disentangling the several determinants that may be at work in generating the final effect, as the loss aversion is not considered the only explanation. We dig deeper by examining two of these likely determinants which remain understudied: the first is the impact that the amount of time of ownership can have on the endowment effect. The second is the type of item (non-material good and exchange goods) used to test the effect. Through an online questionnaire we investigate these aspects by using three different goods: a mug, an Amazon Gift Card and a quarterly subscription to Spotify. We also test whether the endowment effect occurs in different time scenarios, that is if participants imagine to own the good for one day, one week or one month. We find that the endowment effect clearly appears for all types of goods while less clear results take shape when considering the duration of the ownership.
    Keywords: WTA/WTP gap, endowment effect, ownership experience, fungible goods, services, exchange goods
    JEL: D12 D91
    Date: 2021–08–01
  4. By: David Rojo-Arjona (The George L Argyros School of Business and Economics, Chapman University.); R. Stefania Sitzia (School of Economics and Centre for Behavioural and Experimental Social Science, University of East Angle, Norwich.); Jiwei Zheng (School of Economics and Centre for Behavioural and Experimental Social Science, University of East Anglia, Norwich)
    Abstract: Focal points (Schelling, 1960) have shown limitations as coordination devices in games with conflict, such as the battle of the sexes games. We experimentally test whether an increase in their salience can counteract the negative impact of conflict on coordination. The intuition is that, in the presence of conflict, the solution to the coordination dilemma offered by the focal point loses importance. Increasing its salience increases its relevance and therefore coordination success. Our results provide strong support for this conjecture. Furthermore, when games feature outcomes with different degrees of payoffs’ inequality (i.e. the difference of players’ payoffs) and efficiency (i.e. the sum of players’ payoffs), increasing salience does not lead to an obvious increase in coordination, unless the salience of the focal point is maximal.
    Keywords: coordination games, focal points, salience, conflict of interests, battle-of-thesexes, intermixed-blocked effect.
    JEL: C72 C78 C91 D91
    Date: 2021–08
  5. By: Ho Ka Chan; Taro Toyoizumi
    Abstract: Many experimental observations have shown that the expected utility theory is violated when people make decisions under risk. Here, we present a decision-making model inspired by the prediction of error signals reported in the brain. In the model, we choose the expected value across all outcomes of an action to be a reference point which people use to gauge the value of different outcomes. Action is chosen based on a nonlinear average of anticipated surprise, defined by the difference between individual outcomes and the abovementioned reference point. The model does not depend on non-linear weighting of the probabilities of outcomes. It is also straightforward to extend the model to multi-step decision-making scenarios, in which new reference points are created as people update their expectation when they evaluate the outcomes associated with an action in a cascading manner. The creation of these new reference points could be due to partial revelation of outcomes, ambiguity, or segregation of probable and improbable outcomes. Several economic paradoxes and gambling behaviors can be explained by the model. Our model might help bridge the gap between theories on decision-making in quantitative economy and neuroscience.
    Date: 2021–08

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