nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2021‒10‒25
four papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. Rational expectations and why they matter By Kakkar, Shrey
  2. The Cost of Worrying About an Epidemic: Ebola Concern and Cognitive Function in the US By Christian Apenbrink
  3. Evolutionary Foundation for Heterogeneity in Risk Aversion By Yuval Heller; Ilan Nehama
  4. The Cognitive Load of Financing Constraints: Evidence from Large-Scale Wage Surveys By Clémence Berson; Raphaël Lardeux; Claire Lelarge

  1. By: Kakkar, Shrey
    Abstract: This article discusses existing behavioral economics theory, focused on Rational Expectations. Macroeconomic and market consequences are considered, especially monetary policy on inflation.
    Keywords: Rational Expectations, Expectations, Behavioral Economics
    JEL: B25 C60
    Date: 2021–07–25
  2. By: Christian Apenbrink (Bonn Graduate School of Economics, University of Bonn)
    Abstract: Do emotional responses to the spread of an infectious disease affect the quality of economic decision-making? In the context of an episode of heightened public concern about Ebola in the US in October 2014, I document that worrying about the possibility of an epidemic can impair cognitive function. My analysis relies on data from cognitive tests administered as part of a wave of survey interviews by a large US panel study, which I combine with measures of local concern about Ebola based on internet search volume. For identification, I exploit temporal and spatial variation in Ebola concern caused by the emergence of four cases of Ebola that were diagnosed in the US. Using proximity to the US cases as an instrumental variable, I show that the local level of Ebola concern individuals are exposed to at the time and place of the interview reduces their scores on the cognitive test. In additional analyses, I find no indication of fear-induced selection effects that could plausibly explain these results. Moreover, proximity to subsequent Ebola locations is unrelated to test scores for interviews conducted before the emergence of the first US case. My findings indicate that emotional responses to epidemics can entail a temporary cognitive cost even for individuals for whom the actual health risk never materializes.
    Keywords: Worry, Fear, Emotions, Ebola, Epidemics, Cognitive Function
    JEL: D91 D80 D01
    Date: 2021–10
  3. By: Yuval Heller; Ilan Nehama
    Abstract: We examine the evolutionary basis for risk aversion with respect to aggregate risk. We study populations in which agents face choices between aggregate risk and idiosyncratic risk. We show that the choices that maximize the long-run growth rate are induced by a heterogeneous population in which the least and most risk averse agents are indifferent between aggregate risk and obtaining its linear and harmonic mean for sure, respectively. Moreover, approximately optimal behavior can be induced by a simple distribution according to which all agents have constant relative risk aversion, and the coefficient of relative risk aversion is uniformly distributed between zero and two.
    Date: 2021–10
  4. By: Clémence Berson; Raphaël Lardeux; Claire Lelarge
    Abstract: In this paper, we take advantage of the implicit cognitive exercise available in standard Labor Force Surveys to propose a new indicator of financing constraints which is based on the cognitive load they generate (Mullainathan and Shafir, 2013). Survey respondents are requested to report their monthly wages, which we compare to their administrative, fiscal counterparts. We propose a well-defined index of worker-level uncertainty, which filters out their potential rounding behavior and reporting biases. We estimate it using unsupervised ML/EM techniques and find that workers tend to perceive their own wages with a degree of uncertainty of around 10%. Through the lens of a simple rational signal extraction model, this amounts to estimates of workers' attention ranging from 30% to 84% depending on their wage, education, tenure and gender. Most importantly, we show that the attention of the lowest paid 30% of workers is cyclical and increases steadily by 17 percentage points in the ten days preceding payday, before immediately dropping on that day, which, through the lens of a simple model, is indicative of end-of-month financing liquidity constraints. Furthermore, this pattern reveals that the cognitive cost induced by these financing constraints arises from the not too concave (or convex) costs of achieving high levels of attention, and the convex costs of maintaining it over time.
    Keywords: Behavioral Inattention, Cognitive Costs, Wage Volatility, Poverty and Financing Constraints
    JEL: C83 D14 I32 J31
    Date: 2021

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