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on Cognitive and Behavioural Economics |
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Issue of 2025–06–16
four papers chosen by Marco Novarese, Università degli Studi del Piemonte Orientale |
| By: | Carlos Alos Ferrer; Johannes Buckenmaier; Michele Garagnani |
| Abstract: | Economic decisions are noisy due to errors and cognitive imprecision. Often, they are also systematically biased by heuristics or behavioral rules of thumb, creating behavioral anomalies which challenge established economic theories. The interaction of noise and bias, however, has been mostly neglected, and recent work suggests that received behavioral anomalies might be just due to regularities in the noise. This contribution formalizes the idea that decision makers might follow a mixture of rules of behavior combining cognitively- imprecise value maximization and computationally simpler shortcuts. The model delivers new testable predictions which we validate in two experiments, focusing on biases in probability judgments and the certainty effect in lottery choice, respectively. Our findings suggest that neither cognitive imprecision nor multiplicity of behavioral rules suffice to explain received patterns in economic decision making. However, jointly modeling (cognitive) noise in value maximization and biases arising from simpler, cognitive shortcuts delivers a unified framework which can parsimoniously explain deviations from normative prescriptions across domains. |
| Keywords: | Cognitive Imprecision, Strength of Preference, Noise, Decision Biases, Belief Updating, Certainty Heuristic |
| JEL: | D01 D81 D87 D91 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:lan:wpaper:423483206 |
| By: | Dickinson, David L. (Appalachian State University); Villeval, Marie Claire (CNRS) |
| Abstract: | We investigate how group identity affects belief updating about moral norms. Using a Belief Updating task, we found that individuals follow a cautious version of Bayesian updating. Group identity itself does not directly affect belief updating. However, when given an information signal about the truthfulness of a normative statement that is dissonant with one’s perceived norm, individuals differ in their resistance to updating beliefs. This difference depends on whether the statement reflects moral norm judgments from people with the same or different political affiliation, and whether the signal supports or opposes honesty. This highlights the importance of understanding how one updates beliefs regarding moral norms, and how the group identity of those making normative judgments can be an important consideration. |
| Keywords: | online experiment, group identity, belief updating, social norms, cheating |
| JEL: | C91 D83 D91 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17892 |
| By: | Samiha Tariq |
| Abstract: | This paper examines the impact of cognitive biases on financial decision-making through a static Bayesian game framework. While traditional economic theory assumes fully rational investors, real-world choices are often shaped by loss aversion, overconfidence, and herd behavior. Integrating psychological insights with economic game theory, the model studies strategic interactions among investors who allocate wealth between risky and risk-free assets. Solving for the Bayesian Nash Equilibrium reveals that each bias distorts optimal portfolios and alters aggregate market dynamics. The results echo Herbert Simon's notion of bounded rationality, showing how biases can generate market inefficiencies, price bubbles, and crashes. The findings highlight the importance of incorporating psychological factors into economic models to guide policies that foster market stability and more informed financial decision-making. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.18835 |
| By: | Tomoharu Mori (College of Comprehensive Psychology, Ritsumeikan University); Katsuya Takii (Osaka School of International Public Policy, Osaka University) |
| Abstract: | This study examines whether people are inattentive to once-in-a-lifetime events. Using data from Japanese entrance examinations, we show that, even in situations where there appears to be little difference in the actual admissions probability, students change their school of choice simply because the coarse label describing admissions probability has changed. To understand the mechanism behind this result, we model students’ application decisions by incorporating inattention. The results suggest that, in once-in-a-lifetime situations, students do observe information more carefully than usual, but they still cannot be completely attentive. We also find that people with better information processing skills and who are accustomed to processing more information daily pay greater attention to information. |
| Keywords: | Inattention, college application, regression discontinuity, score labels |
| JEL: | C21 D91 I23 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:osp:wpaper:25e002 |