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on Cognitive and Behavioural Economics |
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Issue of 2024‒03‒11
seven papers chosen by |
| By: | Julia M. Puaschunder (Columbia University, USA) |
| Abstract: | Behavioral economics is an innovative applied science. In the 1950s economic rational choice models came under scrutiny. A theoretical critique emerged that not all human beings strive for efficiency and rationality all the time. Behavioral economics first drew attention to deviations from rationality and discussed the non-applicability of rational choice models for depicting the actual behavior of humans. During the 1970s, Amartya Sen formalized the rational choice critique and published powerful examples of how economics needs a reality check and backtesting of its core axioms of rationality, efficiency and time consistency for actual real-world relevancy and external validity of the standard rational choice claims. By 1979, the two psychologists Daniel Kahneman and Amos Tversky presented a line of laboratory experiments at universities that proved the rational choice theory to be inaccurate to explain the real-world decision-making patterns of individuals. The following behavioral economics revolution rewrote economics for accuracy and predictability for actual human day-to-day choices and behavior. Sociologists, political scientists, psychologists created a line of research to describe how individuals actually decide during the first decade of the 2000s. Behavioral insights were then used to find ways how to ‘nudge’ individuals, communities and leaders to help others make better choices in different domains, for instance such as finance, marketing, health and well-being. Around the world, governmental officials and governance experts adopted behavioral nudges and winks to create better choice architectures and decision-making patterns. This paper describes the history of behavioral economics with attention to North American roots and European interpretations in order to then prospect future trends in behavioral economics. First, given the enormous popularity behavioral economics has enjoyed in the most recent decades, a general knowledge has formed about behavioral nudges. Libertarian paternalism is – by now – limited when it comes to implicitly tricking people into making choices based on well-known insights. A common body of knowledge on behavioral aspects of choice patterns may lead to reactance if people notice manipulation. The general population should therefore be trained to make self-empowered choices that meet their individual principles, needs and wants based on their behavioral expertise. Behavioral economists should move from manipulating nudges to educating trainings of the layperson. Second, the field of behavioral sciences has experienced a deep replication crisis given major data cheating scandals and contemporary fraud allegations. General oversight mechanism between co-authors, backtesting of effects for validity and their general applicability is therefore warranted. he general population should be trained to be critical of behavioral insights presented to them and be encouraged by behavioral economists to feedback on the potential non-applicability of p-hacked results. Third, online searchplace distortion of behavioral economics results has become a sad reality for young behavioral economists in the strategic search engine results manipulation through Search Engine Disoptimization (SEDO). This implicit internet harassment calls for a democratization of information and whole-rounded inclusion of thoughts online. Behavioral economists should raise awareness for this negative competitive behavior and work together with global governance institutions, regulatory bodies but also industry professionals to curb negative internet search engine manipulation and empower the upcoming generation of behavioral economists to speak up when this is happening. Professional bodies should be informed to help those whose career has been hit by competitive internet manipulation. All these trends are speculated to lead to a revamped behavioral economics revolution that demands for behavioral economics for all. The future of behavioral economics is believed to lie in self-empowered leadership, not manipulation. A democratization of behavioral economics information leading to a general knowledge basis on actual behavioral patterns will guide a self-empowered decision-making cadre within the general population. Search for true and credible behavioral insights can lift the entire field to a more helpful stage to become a standing guidepost for wise quality decision-making. The digital millennium calling for fair internet use will hopefully prosper an inclusive and diversified information on behavioral insights to be accessible, useful and meaningful for all. |
| Keywords: | Behavioral Economics, Behavioral Finance, Behavioral Insights |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:smo:raiswp:0293&r=cbe |
| By: | Johannes Carow (Johannes Gutenberg University Mainz); Niklas M. Witzig (Johannes Gutenberg University Mainz) |
| Abstract: | We study the impact of time pressure on strategic risk-taking of professional chess players. We propose a novel machine-learning-based measure for the degree of strategic risk of a single chess move and apply this measure to the 2013-2023 FIDE Chess World Cups that allow for plausibly exogenous variation in thinking time. Our results indicate that time pressure leads chess players to opt for more risk-averse moves. We additionally provide correlational evidence for strategic loss aversion, a tendency for risky moves after a mistake/ in a disadvantageous position. This suggests that high-proficiency decision-makers in highstake situations react to time pressure and contextual factors more broadly. We discuss the origins and implication of this finding in our setting. |
| Keywords: | Chess, Risk, Time Pressure, Loss Aversion, Machine Learning |
| JEL: | C26 C45 D91 |
| Date: | 2024–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:jgu:wpaper:2404&r=cbe |
| By: | Pietro Battiston; Simona Gamba; Sharon G. Harrison |
| Abstract: | We run an experiment where subjects play a standard repeated two player public good game looking at the effect of being matched to a subject with different endowment - and keeping fixed the overall distribution of endowments. Differently from the existing literature, all subjects are aware of the existing heterogeneity in endowments, regardless of whether they are assigned to a homogeneous or heterogeneous group. Moreover, since in modern societies financial heterogeneity typically correlates with many other forms of heterogeneity, including habits, tastes and membership in given social groups, we look at how financial heterogeneity interacts with in-group vs. out-group feeling, using randomly formed groups. While neither economic integration nor group membership alone significantly affect overall contributions, and hence welfare, the two strongly interact: being matched to a partner with a different endowment and from the other group results in particularly low contributions. Similarly, being matched to a partner who is from the other group and has low endowment results in particularly low contributions. |
| Keywords: | public good game, economic segregation, in-group effect, laboratory experiment |
| JEL: | C90 H41 C92 D31 |
| Date: | 2024–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2024/305&r=cbe |
| By: | Michael Thaler |
| Abstract: | People often receive good news that makes them feel better about the world around them, or bad news that makes them feel worse about it. This paper studies how the valence of news affects belief updating, absent functional and ego-relevant factors. Using experiments with over 1, 500 participants and 5, 600 observations, I test whether people engage in motivated reasoning to overly trust good news versus bad news on valence-relevant issues like cancer survival rates, others’ happiness, and infant mortality. The estimate for motivated reasoning towards good news is a precisely-estimated null. Modest effects, of one-third the size of motivated reasoning in politics and performance, can be ruled out. Complementary survey evidence shows that most people expect good news to increase happiness, but to not systematically lead to motivated reasoning. These results suggest that belief-based utility is not sufficient in leading people to distort belief updating in order to favor those beliefs. |
| Keywords: | motivated reasoning, belief-based utility, experimental economics |
| JEL: | C91 D83 D91 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10915&r=cbe |
| By: | Cassidy Shubatt; Jeffrey Yang |
| Abstract: | Some choice options are more difficult to compare than others. This paper develops a theory of what makes a comparison complex, and how comparison complexity generates systematic mistakes in choice. In our model, options are easier to compare when they 1) share similar features, holding fixed their value difference, and 2) are closer to dominance. We show how these two postulates yield tractable measures of comparison complexity in the domains of multiattribute, lottery, and intertemporal choice. Using experimental data on binary choices, we demonstrate that our complexity measures predict choice errors, choice inconsistency, and cognitive uncertainty across all three domains. We then show how canonical anomalies in choice and valuation, such as context effects, preference reversals, and apparent probability weighting and present bias in the valuation of risky and intertemporal prospects, can be understood as responses to comparison complexity. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.17578&r=cbe |
| By: | Julia M. Puaschunder (Columbia University, USA) |
| Abstract: | One of the most studied behavioral economics effects is the endowment effect. If people are asked to pay for a normal good (e.g., like a mug or pen), the price they offer tends to be lower than if they are given the same good and asked for what price they are willing to sell the good. The endowment effect is believed to stem from the value imbued in possession and the expectation to hold onto the possession once a good is acquired. The psychological effect of self-determination on the motivation of people has been studied in psychology for a long time. Self-determined decisions hold positive advantages of people getting a positive boost from their own volition. Self-determined people tend to follow with through their plans and work longer and better on tasks than those who just fulfill externally-imposed goals. The endowment effect and self-determined decisions may underlie the fascination of co-creation online. Online luxury worlds have been booming in the last decade. Virtual co-creation in homepages, blogs, social online media and video self-streaming platforms has created a new source of social and monetary value as never before in the history of humankind. Social online media influencers are now one of the most prominent career choices in the upcoming generation. This paper attempts to connect the endowment effect with self-determined co-creation online effects, which appears to take the economy over by storm. The paper offers a first glimpse of the new phenomenon. Human rights online and ethical predicament in internet markets will be discussed, as well as future research avenues on the topic. |
| Keywords: | Co-creation online, Economics, Endowment Effect, Law & Economics, Luxury, Online, Self-determined Decisions, Virtual Markets |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:smo:raiswp:0318&r=cbe |
| By: | Begoña Cabeza;; Koen Decancq; |
| Abstract: | We propose an easily implemented method to compare the level of altruism of non-parametric social preferences over one’s own and another person’s monetary pay-off. The method was used in an online survey experiment with 573 decision makers to compare the level of altruism of their social preferences and study how much it is affected by randomized information about the effort and luck level of the other person. We find evidence supporting the hypothesis that decision makers become more altruistic when they learn that the other person exerted a high level of effort, and become less altruistic when they learn that the other person was lucky. |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:hdl:wpaper:2305&r=cbe |