nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2021‒11‒22
eight papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. Contingent Reasoning and Dynamic Public Goods Provision By Evan M. Calford; Timothy N. Cason
  2. Crime as Conditional Rule Violation By Christoph Engel
  3. Reference Points and the Tradeoff between Risk and Incentives By Dohmen, Thomas; Non, Arjan; Stolp, Tom
  4. Passive or Active? Behavioral changes in different designs of search experiments By Yuta Kittaka; Ryo Mikami; Natsumi Shimada
  5. Why is Algorithmic Theory a Necessary Basis of Economics? By Li, Bin
  6. Early-Life War Experiences and Corporate Financial Outcomes By Arman ESHRAGHI; TAKAHASHI Hidetomo; XU Peng
  7. Rational play in games: A behavioral approach By Giacomo Bonanno
  8. "COVID-19 and Economics" By Yasushi Iwamoto

  1. By: Evan M. Calford; Timothy N. Cason
    Abstract: Individuals often possess private information about the common value of a public good. Their contributions toward funding the public good can therefore reveal information that is useful to others who are considering their own contributions. This experiment compares static and dynamic contribution decisions to determine how hypothetical contingent reasoning differs in dynamic decisions. The timing of individuals’ sequential contribution decisions is endogenous. Funding the public good is more efficient with dynamic than static decisions in equilibrium, but this requires decision-makers to understand that in the future they can learn from past events. Our results indicate that a substantial fraction of subjects appreciate the benefits of deferring choice to learn about and condition their behavior on the contribution decisions of others. Many subjects, however, exhibit a bias away from rational choices in the direction of Cursed equilibrium, and some appear to extract information only from prior, and not concurrent, behavior.
    Keywords: Cursed equilibrium; Voluntary contributions; Club goods; Laboratory experiment
    JEL: C91 D71 D91 H41
    Date: 2021–11
  2. By: Christoph Engel (Max Planck Institute for Research on Collective Goods)
    Abstract: Most of the time most individuals do not commit crime. Why? One explanation is deonto-logical. People abide by legal rules just because these are the rules. In this perspective, the power of normativity is critical. It is supported by experimental evidence. To an im-pressive degree, participants even abide by arbitrary, costly rules, in the complete absence of enforcement. Yet do they also do that if they learn that some of their peers violate the rule? The experiment shows that rule following is conditional on social information. The more peers violate the rule, the more participants are likely to do so as well, and the more severely the violation. This main finding replicates in a vignette study. The effect is most pronounced with speeding, weaker with tax evasion, and absent with littering. In the lab, social information has an effect whether it is framed as the incidence of rule violation or of rule following. If they have no explicit social information, participants condition choices on their beliefs. Even merely knowing that they are part of a group, without knowing how others behave, has an effect.
    Keywords: decision to engage in criminal behavior, normativity, deontological motives, rule following, social context, social information, conditional rule following
    Date: 2021–11–10
  3. By: Dohmen, Thomas (University of Bonn and IZA); Non, Arjan (Erasmus University Rotterdam); Stolp, Tom (SEO Amsterdam)
    Abstract: We conduct laboratory experiments to investigate basic predictions of principal-agent theory about the choice of piece rate contracts in the presence of output risk, and provide novel insights that reference dependent preferences affect the tradeoff between risk and incentives. Subjects in our experiments choose their compensation for performing a real-effort task from a menu of linear piece rate and fixed payment combinations. As classical principal-agent models predict, more risk averse individuals choose lower piece rates. However, in contrast to those predictions, we find that low-productivity risk averse workers choose higher piece rates when the riskiness of the environment increases. We hypothesize that reference points affect piece rate choice in risky environments, such that individuals whose expected earnings would exceed (fall below) the reference point in a risk-free environment behave risk averse (seeking) in risky environments. In a second experiment, we exogenously manipulate reference points and confirm this hypothesis.
    Keywords: incentive, piece-rate, risk, reference point, laboratory experiment
    JEL: D81 D91 M52
    Date: 2021–11
  4. By: Yuta Kittaka; Ryo Mikami; Natsumi Shimada
    Abstract: While search experiments are available in several designs, accumulating experimental evidence suggests that individual search behavior depends on design details. This paper reports the first classification and comparison of several search experiment designs widely accepted in search studies. These designs can be categorized as passive, quasi-active, and active. We found individual- and aggregate-level significant differences in the results across designs, despite identical models. In the passive design, subjects tended to be more reluctant to search than in the active design, and risk-averse subjects quickly terminated their search. Our results highlight the importance and potentials of designing search environments in practice.
    Date: 2021–11
  5. By: Li, Bin
    Abstract: This paper is a complementary explanation of the World Economics Association (WEA) 2019 “Going Online” conference paper “How Could Cognitive Revolution Happen To Economics? An Introduction to the Algorithm Framework Theory”.
    Keywords: Bounded Rationality; Instructions; Algorithm; Combinatorial Explosion; Subjectivity; Mental Distortion
    JEL: A10 B00 C63 Z10
    Date: 2020–06–30
  6. By: Arman ESHRAGHI; TAKAHASHI Hidetomo; XU Peng
    Abstract: This paper examines early-life exposure to war experiences among a comprehensive sample of corporate managers and their subsequent tendency towards leverage, cash-holding, investments and M&A activity. Drawing data from the well-document and severe Japanese experience in WW2, we show managers who survived such experiences in their pre-adolescence demonstrate distinct behavioral patterns of financial decision-making in later life. Specifically, they tend to borrow more, hold less cash, invest more in capital expenditure but engage less in M&A deals. This can be understood in the context of ‘what doesn’t kill you makes you stronger' and in this case, more risk-seeking. Extended analyses confirm that the tendency could be driven by managerial traits of being locally altruistic. In the economic significance tests, we find that the tendency is welcomed by stock market participants.
    Date: 2021–10
  7. By: Giacomo Bonanno (Department of Economics, University of California Davis)
    Abstract: We argue in favor of a departure from the standard equilibrium approach in game theory in favor of the less ambitious goal of describing only the actual behavior of rational players. We investigate the notion of rationality in behavioral models of extensive-form games (allowing for imperfect information), where a state is described in terms of a play of the game instead of a strategy profile. The players' beliefs are specified only at reached decision histories and are modeled as pre-choice beliefs, allowing us to carry out the analysis without the need for (objective or subjective) counterfactuals. The analysis is close in spirit to the literature on self-confirming equilibrium, but it does not rely on the notion of strategy. We also provide a characterization of rational play that is compatible with pure-strategy Nash equilibrium.
    Keywords: Rationality, extensive-form game, self-confirming equilibrium, Nash equilibrium, behavioral model
    JEL: C7
    Date: 2021–11–17
  8. By: Yasushi Iwamoto (Faculty of Economics, The University of Tokyo)
    Abstract: This paper points out the importance of two perspectives on preventive measures against COVID-19 as contributions of economics: (1) clarifying the trade-off between health and economy and implementing cost-effective measures, and (2) understanding people's behavior. Policy makers will choose among the trade-offs, which are drawn by economists. If a measure is not on the efficient frontier, economics can suggest an improvement. Restraints on individual behavior and on business operations led to the trade-off between health and freedom. In order to succeed in restricting activities based on requests without legal enforcement, we need to consider two questions: why do people comply with requests for restraints (it is not selfish behavior), and why did people no longer comply with the requests (why was the effect of emergency declarations weakened)? Then, the economic perspective that "if the altruistic behavior becomes expensive, altruistic behavior will not be taken" becomes important. Actual countermeasures against COVID-19 may create problems because of the lack of understanding of people's behavior behind these two questions. They raised the cost of cooperating with the countermeasures, and some people became reluctant to do so. By introducing penalties in the amendment of the law, the government gave the selfish incentive and tried to secure the cooperation that was once lost, but this may crowd out people's altruistic behavior and undermine the social order.
    Date: 2021–11

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