nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2023‒02‒20
seven papers chosen by
Marco Novarese
Università degli Studi del Piemonte Orientale

  1. Cognitive biases and historical turns. An empirical assessment of the intersections between minds and events in the investors’ decisions By Lorenzo Esposito; Letizia Malara
  2. Loss Aversion and Tax Evasion: Theory and Evidence By Sanjit Dhami; Narges Hajimoladarvish; Pavan Mamidi
  3. Strategic Behavior with Tight, Loose and Polarized Norms By Eugen Dimant; Michele Gelfand; Anna Hochleitner; Silvia Sonderegger
  4. Cognitive Ability and Perceived Disagreement in Learning By Piotr Evdokimov; Umberto Garfagnini
  5. Do different people report the same social norms? By Geoffrey Castillo; Lawrence Choo; Veronika Grimm
  6. Are groups always more dishonest than individuals? The case of salient negative externalities By Geoffrey Castillo; Lawrence Choo; Veronika Grimm
  7. When do Default Nudges Work? By Carl Bonander; Mats Ekman; Niklas Jakobsson

  1. By: Lorenzo Esposito (Dipartimento di Politica Economica, DISCE, Università Cattolica del Sacro Cuore, Milano, Italy – Banca d'Italia, Milano, Italy); Letizia Malara (DISCE, Università Cattolica del Sacro Cuore, Milano, Italy)
    Abstract: Mainstream theory of finance is based on the assumptions that markets are efficient and economic agents are rational, in the sense that they use optimally the information they have in order to maximize their utility. At least since the “Allais paradox”, countless experiments have shown that this is not the case and investors’ decisions are often inconsistent. In particular, the researches by Kahneman and Tversky have highlighted that investor behaviors are not rational and sometimes are inconsistent with the logic of the traditional finance theory, due to numerous cognitive biases, which interfere with the choice process of investors. In this paper we investigate some of the most well-known cognitive biases: framing effect, loss aversion, endowment effect, decoy effect and disposition effect. In addition, the availability and representativeness heuristics and their associated biases (confirmation bias, accessibility bias, and conjunction fallacy) are examined. Our experimental methodology is based on a questionnaire consisting of 23 questions and organized into 6 sections, each referring to the various biases examined. The answers obtained differ somewhat from the huge literature on cognitive biases. We understand these differences as mainly connected to the unheard situation created by the Covid-19 pandemic, showing that personal experiences do have an effect on risk preferences.
    Keywords: cognitive biases, behavioral economics, prospect theory, pandemic
    JEL: G41
    Date: 2023–01
  2. By: Sanjit Dhami; Narges Hajimoladarvish; Pavan Mamidi
    Abstract: We consider income-source-dependent tax evasion and show that this is a generalization of the well-known endowment effect. We show that loss aversion, moral costs, mental accounting, and risk preferences play a key role in explaining key features of source-dependent tax evasion. We provide evidence of the first direct link between subject-specific loss aversion and tax evasion, which is central to most successful modern theoretical accounts of tax evasion. We provide some evidence that risk aversion strengthens the cautionary effect of loss aversion and risk loving behavior attenuates, or reverses, it. However, the underlying effect is also influenced by the source of income. Evasion is increasing in the tax rate and decreasing in the audit penalty, as predicted. Our paper provides novel theoretical insights; proposes new methods in the estimation of the underlying behavioral parameters; and confirms the central predictions of the theory, while pointing out challenges for further developments that existing theory is unable to account for.
    Keywords: tax evasion, endowment effect, loss aversion, morality, mental accounting, prospect theory, risk aversion
    JEL: C91 C92 D82 D91 G21
    Date: 2023
  3. By: Eugen Dimant; Michele Gelfand; Anna Hochleitner; Silvia Sonderegger
    Abstract: Descriptive norms – the behavior of other individuals in one’s reference group – play a key role in shaping individual decisions. When characterizing the behavior of others, a standard approach in the literature is to focus on average behavior. In this paper, we argue both theoretically and empirically that not only averages but also the shape of the whole distribution of behavior can play a crucial role in how people react to descriptive norms. Using a representative sample of the U.S. population, we experimentally investigate how individuals react to strategic environments that are characterized by different distributions of behavior, focusing on the distinction between tight (i.e., characterized by low behavioral variance), loose (i.e., characterized by high behavioral variance), and polarized (i.e., characterized by u-shaped behavior) environments. We find that individuals indeed strongly respond to differences in the variance and shape of the descriptive norm they are facing: loose norms generate greater behavioral variance and polarization generates polarized responses. In polarized environments, most individuals prefer extreme actions – which expose them to considerable strategic risk – to intermediate actions that minimize such risk. Importantly, we also find that relative to tight environments, in polarized and loose environments, personal traits and values play a larger role in determining actual behavior. This provides important insights into how individuals navigate environments that contain strategic uncertainty.
    Keywords: cooperation, descriptive norms, variance, peer effects
    JEL: C91 D01
    Date: 2023
  4. By: Piotr Evdokimov (HU Berlin); Umberto Garfagnini (University of Surrey)
    Abstract: Do agents believe to be agreeing more with others in the long-run? This paper designs an experiment to study how cognitive abilities affect actual and perceived disagreement in a standard sequential belief updating task with public signals. We document a persistent gap in the perception of disagreement as a function of cognitive ability. Higher cognitive ability is associated with less perceived disagreement, although the average subject underestimates the extent of actual disagreement regardless of cognitive ability. Learning about the state of the world has little effect on the evolution of perceived disagreement when controlling for cognitive ability. Providing subjects with information about their partner’s cognitive ability affects perceived disagreement only when the partner is less cognitively able.
    Keywords: cognitive ability; disagreement; learning;
    JEL: C90 D83 D89
    Date: 2023–02–06
  5. By: Geoffrey Castillo (VCEE - Vienna Center for Experimental Economics, University of Vienna); Lawrence Choo (China Center for Behavioral Economics and Finance, Southwestern University of Finance and Economics); Veronika Grimm (FAU - Friedrich-Alexander Universität Erlangen-Nürnberg)
    Abstract: If the Krupka-Weber (2013) norm-elicitation task captures pre-existing social norms, then the elicited norms should be independent of one's role in a game or one's social preferences. We test this idea in a complex game that features rich interactions. We find that different people, even when they have conflicting incentives, report the same social norms. Our results further validate the use of the Krupka-Weber task to measure social norms.
    Keywords: social norms, norm elicitation, laboratory experiment, methodology, ultimatum game
    Date: 2022–07–08
  6. By: Geoffrey Castillo (VCEE - Vienna Center for Experimental Economics, University of Vienna); Lawrence Choo (China Center for Behavioral Economics and Finance, Southwestern University of Finance and Economics); Veronika Grimm (FAU - Friedrich-Alexander Universität Erlangen-Nürnberg)
    Abstract: A common finding of the literature on dishonesty is that groups are more dishonest than individuals. We revisit this finding by replacing the experimenter, implicitly hurt by subjects' dishonesty, with an explicit third-party: a local charity. With the charity we do not find groups to be more dishonest than individuals. Instead, groups can even help moderate the extent of the dishonesty.
    Keywords: Dishonesty, Group decisions, Communication, Social norms
    Date: 2022–06
  7. By: Carl Bonander; Mats Ekman; Niklas Jakobsson
    Abstract: Nudging is a burgeoning topic in science and in policy, but evidence on the effectiveness of nudges among differentially-incentivized groups is lacking. This paper exploits regional variations in the roll-out of the Covid-19 vaccine in Sweden to examine the effect of a nudge on groups whose intrinsic incentives are different: 16-17-year-olds, for whom Covid-19 is not dangerous, and 50-59-year-olds, who face a substantial risk of death or severe disease. The response is strong in the younger but absent in the older age group, consistent with the theory that nudges work best for choices that are not meaningful to the individual.
    Date: 2023–01

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