nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2022‒10‒17
eight papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. The Effect of Self-Control on Borrowing: Experimental Evidence By Grohmann, Antonia; Hamdan, Jana S.
  2. Cognitive Imprecision and Stake-Dependent Risk Attitudes By Mel Win Khaw; Ziang Li; Michael Woodford
  3. Decisions and Performance Under Bounded Rationality: A Computational Benchmarking Approach By Zegners, Dainis; Sunde, Uwe; Strittmatter, Anthony
  4. Attitudes Towards Success and Failure By Larbi Alaoui; Antonio Penta
  5. The Banker's Oath And Financial Advice By Utz Weitzel; Michael Kirchler
  6. How Do Humans Respond to Huge Financial Losses? By Mujcic, Redzo; Powdthavee, Nattavudh
  7. The Effect of Chosen or Given Luck on Honesty By Diogo Geraldes; Franziska Heinicke; Duk Gyoo Kim
  8. Nudging in the workplace: increasing participation in employee EDI wellness events By Diane Pelly; Orla Doyle

  1. By: Grohmann, Antonia (Aarhus University and DIW Berlin); Hamdan, Jana S. (HU Berlin and DIW Berlin)
    Abstract: This paper examines the effect of reduced self-control on debt-taking 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 buy drinks. We complement our experimental analysis with survey evidence that suggests that people with low self-control have more problems with the repayment of consumption debt, but 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: 2020–12–22
  2. By: Mel Win Khaw; Ziang Li; Michael Woodford
    Abstract: In an experiment that elicits subjects’ willingness to pay (WTP) for the outcome of a lottery, we confirm the fourfold pattern of risk attitudes described by Kahneman and Tversky. In addition, we document a systematic effect of stake sizes on the magnitude and sign of the relative risk premium, holding fixed both the probability that a lottery pays off and the sign of its payoff (gain vs. loss). We further show that in our data, there is a log-linear relationship between the monetary payoff of the lottery and WTP, conditional on the probability of the payoff and its sign. We account quantitatively for this relationship, and the way in which it varies with both the probability and sign of the lottery payoff, in a model in which all departures from risk-neutral bidding are attributed to an optimal adaptation of bidding behaviour to the presence of cognitive noise. Moreover, the cognitive noise required by our hypothesis is consistent with patterns of bias and variability in judgments about numerical magnitudes and probabilities that have been observed in other contexts.
    Keywords: prospect theory, fourfold pattern, endogenous precision, cognitive noise
    JEL: C91 D03 D81 D87
    Date: 2022
  3. By: Zegners, Dainis (Erasmus University Rotterdam); Sunde, Uwe (LMU Munich); Strittmatter, Anthony (CREST-ENSAE)
    Abstract: This paper presents a novel approach to analyze human decision-making that involves comparing the behavior of professional chess players relative to a computational benchmark of cognitively bounded rationality. This benchmark is constructed using algorithms of modern chess engines and allows investigating behavior at the level of individual move-by-move observations, thus representing a natural benchmark for computationally bounded optimization. The analysis delivers novel insights by isolating deviations from this benchmark of bounded rationality as well as their causes and consequences for performance. The findings document the existence of several distinct dimensions of behavioral deviations, which are related to asymmetric positional evaluation in terms of losses and gains, time pressure, fatigue, and complexity. The results also document that deviations from the benchmark do not necessarily entail worse performance. Faster decisions are associated with more frequent deviations from the benchmark, yet they are also associated with better performance. The findings are consistent with an important influence of intuition and experience, thereby shedding new light on the recent debate about computational rationality in cognitive processes.
    Keywords: cognitively bounded rationality; benchmark computing; artificial intelligence; decision quality; decision time;
    JEL: D01
    Date: 2020–12–22
  4. By: Larbi Alaoui; Antonio Penta
    Abstract: Individuals often attach a special meaning to obtaining a certain goal, and getting past a threshold marks the difference between what they consider a success or a failure. In this paper we take a standard von Neumann-Morgenstern Expected Utility setting with an exogenous reference point that separates success from failure, and define attitudes towards success and failure as features of preferences over lotteries. The distinctive feature of our definitions is that they all concern a local reversal of the decision maker's risk attitude between riskaversion and risk-lovingness across the reference point. Our findings provide a unified view of several well-known models of reference-dependent preferences in economics, finance and psychology, and also include novel representations. Moreover, we introduce orderings over the primitive space of preferences to define different attitudes with which each attitudes can be displayed, and characterize them in terms of the representation, with indices analogous to the well-known Arrow-Pratt index of risk aversion. Our findings shed new light on frequently used notions of reference-dependent preferences, and suggest that new comparative statics analyses be conducted in these settings. Finally, we argue that our framework may prove useful to incorporate, within a standard economic model, behavioral manifestations of personality traits that have received increasing attention within the empirical economics literature.
    Keywords: expected utility, loss aversion, aspirations, Risk Aversion, reference-dependence
    JEL: D01 D81
    Date: 2022–03
  5. By: Utz Weitzel; Michael Kirchler
    Abstract: Financial misbehavior is widespread and costly. The Dutch government legally requires every employee in the financial sector to take a Hippocratic oath, the so-called "banker's oath." We investigate whether nudges that (in)directly remind financial advisers of their oath affect their service. In a large-scale audit study, professional auditors confronted 201 Dutch financial advisers with a conflict of interest. We find that when auditors apply a nudge that directly refers to the banker's oath, advisers are less likely to prioritize bank's interests. In additional prediction tasks, we find that Dutch regulators expect stronger effects of the oath than observed.
    Keywords: experimental finance, audit study, banker's oath, nudges, financial advice
    JEL: C92 D84 G02 G14
    Date: 2022
  6. By: Mujcic, Redzo (University of Warwick); Powdthavee, Nattavudh (University of Warwick)
    Abstract: In a controlled field setting, in which the majority of people in our sample lose more than £90,000 ($120,000), we examine how human beings respond to major financial losses. University ethics boards would not allow this kind of huge-loss phenomenon to be studied with normal social-science experiments. Yet the scientific and practical issues at stake are unusually important ones. In our setting, individuals are handed £100,000 in cash. They then have to make risky decisions. Facing a sequence of seven questions, individuals are required to distribute their cash endowment over a set of possible answers. Participants lose any cash placed on a wrong answer. We find evidence of risk reduction after people suffer a loss in the previous decision round. A prior financial loss of £10,000 is estimated to increase the propensity to fully diversify by 6 percentage points. In terms of proportional losses, a loss of 50% or more of the remaining cash endowment increases diversification rates by approximately 13 percentage points. The fixed-effects panel data estimates are robust to the remaining cash endowment, previous diversification strategy, relative difficulty of questions, the ability level of participants, and other personal traits. The findings support a prospect theory-based model with a coefficient of loss aversion that is increasing in past losses. Our study appears to be the first to be able to calculate systematically how human beings react to enormous and unrecoverable financial losses.
    Keywords: risk taking, prior losses, diversification, large stakes, field evidence
    JEL: D81 G11 G40 G41
    Date: 2022–09
  7. By: Diogo Geraldes; Franziska Heinicke; Duk Gyoo Kim
    Abstract: Does being lucky (or unlucky) affect honest decision-making? We examine (1) whether luck-based income strengthens or erodes the moral value of honesty; (2) whether the perceived level of agency over an uncertain event affects the relationship between luck and honesty; and (3) whether accumulated luck affects honesty. To this end, we conducted a lab experiment where participants self-report a dice roll outcome, which is associated with effort-based income, after having received luck-based income. We manipulated the participants’ perceptions regarding their influence on luck-based income. In the exogenous luck treatment, computerized coin tosses determines the luck-based income, whereas in the endogenous luck treatment, the participants choose the coin’s winning side before the computerized coin toss. Our results are as follows: (1) lying behaviour increases when contemporaneous luck-based income is high, (2) lying is not affected by the perceived level of agency, and (3) lying is not affected by the previous outcomes of the luck-based income. Our observations challenge the relative importance of context that may render moral justification. Therefore, our findings indicate that differences in dishonest behavior may be largely due to individual-specific heterogeneity.
    Keywords: laboratory experiment, lying, luck, honesty, agency
    JEL: C91 D03 D82
    Date: 2022
  8. By: Diane Pelly; Orla Doyle (University College Dublin School of Economics, and Geary Institute for Public Policy)
    Abstract: Organisations are investing significant resources in promoting the physical, emotional, and psychological well-being of their employees. In hybrid working environments, virtual worker wellness events are increasingly being used to combat social isolation and boost employee morale. Yet attendance at such events is often low. Using a randomised control trial, this study tests whether four behaviourally informed nudges (i) simplification, (ii) changing the messenger, (iii) using social proof and (iv) setting a default, can increase the registration and attendance rates of 6,998 public sector employees at three EDI (Equality Diversity Inclusion) wellness events. We find evidence that defaults matter. Pre-registering employees more than trebles the attendance rate, from 2.8% to 9.5%. While providing social proof and changing the messenger increase registration rates, they have no impact on attendance. We find little evidence of treatment heterogeneity, suggesting that defaults may have wide applicability. Our results have important implications for organisations seeking to enhance the impact and return on investment of their worker wellness initiatives.
    Keywords: behavioural economics; nudge; RCT; worker well-being; defaults
    JEL: D91 I31 C93 M14
    Date: 2022–10–04

This nep-cbe issue is ©2022 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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