nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2023‒10‒30
four papers chosen by
Marco Novarese, Università degli Studi del Piemonte Orientale

  1. Quantifying Lottery Choice Complexity By Benjamin Enke; Cassidy Shubatt
  2. Cognitive Limitations: Failures of Contingent Thinking By Niederle, Muriel; Vespa, Emanuel
  3. Overconfidence and Gun Preferences: How Behavioral Biases Affect Your Safety By Cafferata, Fernando G.; Domínguez, Patricio; Scartascini, Carlos
  4. Choice-induced Sticky Learning By Gergely Hajdu; Balázs Krusper

  1. By: Benjamin Enke; Cassidy Shubatt
    Abstract: We develop interpretable, quantitative indices of the objective and subjective complexity of lottery choice problems that can be computed for any standard dataset. These indices capture the predicted error rate in identifying the lottery with the highest expected value, where the predictions are computed as convex combinations of choice set features. The most important complexity feature in the indices is a measure of the excess dissimilarity of the cumulative distribution functions of the lotteries in the set. Using our complexity indices, we study behavioral responses to complexity out-of-sample across one million decisions in 11, 000 unique experimental choice problems. Complexity makes choices substantially noisier, which can generate systematic biases in revealed preference measures such as spurious risk aversion. These effects are very large, to the degree that complexity explains a larger fraction of estimated choice errors than proximity to indifference. Accounting for complexity in structural estimations improves model fit substantially.
    Keywords: complexity, choice under risk, cognitive uncertainty, experiments
    Date: 2023
  2. By: Niederle, Muriel; Vespa, Emanuel
    Abstract: In recent years, experiments have documented a new mechanism that leads to failures of profit maximization: the failure of contingent thinking (FCT). This article summarizes key experimental findings, clarifies what constitutes an FCT, and outlines how FCTs can be tested in other environments. Subsequently, we relate FCTs to recent theoretical work on cognitive limitations in behavioral economics. Finally, we connect FCTs to suboptimal behavior documented in applied environments.
    Keywords: Economics, Applied Economics, Economic Theory, Behavioral and Social Science, Clinical Research, Basic Behavioral and Social Science, Applied economics, Economic theory
    Date: 2023–09–13
  3. By: Cafferata, Fernando G.; Domínguez, Patricio; Scartascini, Carlos
    Abstract: Overconfidence leads to risky behavior, including when people are around guns. Does overconfidence also shape attitudes about gun ownership and use? We evaluate this possibility by conducting nationally representative surveys in six countries in the Americas, including the United States. Results show that overconfident individuals are more willing to accept the use of guns and more likely to declare their willingness to use guns. These results indicate that overconfidence is a significant behavioral trait correlated with attitudes toward weapons handling, ownership, carrying, and use. Overall, over-confidence could lead, in equilibrium, to lower regulation than optimal and a higher amount of guns, even before considering the effect of the electoral system, lobbying, and campaign contributions. Efforts to correct the biases of individuals confronted with making decisions about guns should be a priority, especially in regulatory contexts. Information about actual performance and the risks entailed by wrong choices is a must. Obliging individuals to reflect on their choices may also help correct observed biases.
    Keywords: Overconfidence;Gun attitudes;Gun behavior;Crime;behavioral biases
    JEL: D91 K40 D72
    Date: 2023–04
  4. By: Gergely Hajdu (Department of Economics, Vienna University of Economics and Business); Balázs Krusper (Lidl Stiftung & Co. KG)
    Abstract: Consumers are constantly exposed to new information that compels them to update their beliefs about products, thereby influencing future buying and selling decisions. This process does not simply stop with a product choice. We study how choosing a product affects learning about products in the choice set after the choice has been made. We design an experiment, where we have control over the objective ranking of the options in the choice set. Specifically, participants learn about the fundamental quality of financial investments by observing price changes in multiple rounds. Participants either choose some of the investments themselves (Choice condition) or have some of the investments assigned to them (Allocation condition). We find that learning is stickier after making a choice: participants respond less to price changes in the Choice condition than in the Allocation condition. This result holds for both own and non-owned investments and for both good news and bad news. The effect is unlikely to be driven by attention: we find no difference between the conditions in the amount of attention paid to the investments. We estimate a structural model and show that learning aligns closely with the Bayesian benchmark after exogenous product allocation, while it is too sticky after making a choice. Our model characterizes sticky learning in a tractable way that is easily portable, making it simple to analyze its consequences in other contexts.
    Keywords: biased beliefs, attention, sticky learning, choice effect
    JEL: D9 D12 G4
    Date: 2023–09

This nep-cbe issue is ©2023 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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